September 2020

Sneakerboy - Running headfirst into COVID-19 lease issues

Bartier Perry recently acted on behalf of Sneakerboy Retail Pty Ltd in two decisions of the Supreme Court of New South Wales in:

  • Sneakerboy Retail Pty Ltd trading as Sneakerboy v Georges Properties Pty Ltd [2020] NSWSC 996 (Sneakerboy No 1); and

  • Sneakerboy Retail Pty Ltd trading as Sneakerboy v Georges Properties Pty Ltd (No 2) [2020] NSWSC 1141 (Sneakerboy No 2).

These matters provide valuable insight into the practical application of the Retail and Other Commercial Leases (COVID-19) Regulation 2020 (Regulations) and the National Cabinet Mandatory Code of Conduct (Code) (COVID-19 Regime).

The key facts giving rise to the proceeding were as follows:

  • It was a term of the lease that the lessor had right of re-entry to the premises if rent was in arrears for 14 days.

  • The lessee had a history of paying rent late.

  • The lessee was in the business of selling luxury sneakers and streetwear from the premises.

  • Commencing in February 2020, the lessee experienced a sudden decline in revenue, which it attributed to the COVID-19 pandemic.

  • On 12 March 2020, the lessee informed the lessor that due to market uncertainty, the February and March 2020 rent would not be paid on time.

  • On 20 March 2020, the Federal Government placed mandatory restrictions upon “non-essential indoor gatherings” which included the lessee’s store.

  • On or about 23 March 2020, the lessee temporarily ceased trading from the premises. Stock was directed to the lessee’s warehousing facility in an attempt to mitigate the potential loss caused by the temporary closure of the premises by focusing on online sales.

  • On 25 March 2020, the lessor brought the lease to an immediate end by way of re-entry and termination on the basis that rent was late and the lessee had abandoned the premises.

Summary of the issues and findings of Sneakerboy No 1

In Sneakerboy No 1 the Court ultimately found that Sneakerboy was entitled to an order for relief against forfeiture of the lease that occurred on 25 March 2020 in circumstances where the outstanding rent had been paid by virtue of Georges Properties calling on the entirety of the bank guarantee.

The Court further acknowledged that the decision to grant relief against forfeiture was justified to some degree by the fact that the defaults in payment of rent that immediately led to the lessors’ decision to terminate the lease were, to some degree, caused by the initial consequences of the COVID-19 pandemic and that although there was some delay in bringing the application for injunctive relief, given the COVID-19 pandemic, the delay was justified.

The granting of the abovementioned relief in Sneakerboy No 1 had the immediate effect of reinstating the lease. As a result, the amount of rent (which had already been applied by Georges Properties from the bank guarantee) then became subject to the COVID-19 Regime.

As a result, the Court was then required to determine a number of factors including whether it should make orders concerning the compliance with the COVID-19 Regime and the reinstatement of the bank guarantee, which would ultimately require an analysis on the likely outcome of the good faith negotiations between the parties.

Key takeaways from Sneakerboy No 2

There are a number of key takeaways from Sneakerboy No 2 which include the following:

Retrospective Application of the COVID-19 Regime - Leasing principle 3 contained in the Code requires landlords to offer tenants proportionate reductions in rent "based on the reduction in the tenant's trade during the COVID-19 pandemic period and a subsequent reasonable recovery period". The Court found that even though the Regulation came into effect at a later date, its terms had retrospective effect to 1 April 2020 in relation to rent and outgoings for the period from that date.

Meaning of Tenant’s Trade - The Court formed the view that when considering the “tenant’s trade”, consideration should be given to the particular tenant's turnover, as well as costs and profit, from all locations at which the tenant conducts retail businesses rather than the individual locations.

Reasonable subsequent recovery period - The Court accepted that the reasonable subsequent recovery period would be at the minimum 6 months. As such, renegotiated rent may remain at the reduced rate for at least a 6-month period after 24 October 2020, being that date that the Regulation is meant to cease effect.

Flexibility is required for business with seasonal trade - The Court acknowledged that the process of renegotiation may not be problematic in some circumstances, but difficult in others. If a tenant’s business is regular and consistent, the Court suggested that a “substantial decline in turnover following the onset of the COVID-19 pandemic may reasonably be accepted as being representative of the tenant’s likely turnover for the period of the pandemic…”. On the other hand, seasonal businesses may need to compare the turnover for a month or so in 2020 with a longer trading period before the onset of the COVID-19 pandemic.

Protection afforded if negotiations completed prior to 24 October 2020 - So long as negotiations are concluded prior to 24 October 2020, being the date that the Regulation will currently cease to have effect, any renegotiated terms of the lease will continue to apply, even after the requirement for renegotiation is repealed.

Risk for negotiations not completed by 24 October 2020 -  Any renegotiations that are not completed by 24 October 2020, being that date that the Regulation will currently cease to have effect, may not be enforceable. The Court did not explore, in detail, its ability to assist if parties do not succeed in renegotiating a lease by this date.

Conclusion

While Sneakerboy No 2 has provided guidance on some issues arising out of the renegotiation of commercial leases pursuant to the COVID-19 Regime, the biggest takeaway appears to be that good faith commercial negotiations are essential during this time.

While it is still unclear whether the Regulations will be extended prior to 24 October 2020, parties to a commercial lease should endeavour to deal with any issues as soon as they arise.

Authors: Gavin Stuart, Adam Cutri & Max Mikha

Related articles