Many of you would now know that the National Cabinet Mandatory Code of Conduct – SME Commercial Leasing Principles During COVID-19 (“the Code”), has now been incorporated in New South Wales in accordance with the Retail and Other Commercial Leases (COVID-19) Regulation 2020 (“the Regulations”). The Regulations came into force on 24 April 2020 and have an automatic repeal six months later.
So, what does this mean?
The regulations incorporate the Code together with some other obligations.
The basic obligations include:
- to fall under the regulations, a lessee needs to be an impacted lessee which is defined to mean a party that qualifies for the JobKeeper scheme, and for the 2018-2019 financial year has a turnover of less than $50,000,000.00;
- importantly for an impacted lessee, a lessor cannot take any action against the lessee on the grounds of a breach of commercial lease in relation to failure to pay rent, failure to pay outgoings, or not being open for business during the hours specified in the lease;
- rent must not be increased during the prescribed period, and a landlord cannot take any action for breach of the lease consisting of the failure to pay a rent increase;
- if an impacted lessee is required to pay a fixed amount of land tax or other statutory charge, such as council rates or insurance payable by a lessor, and such amounts have been reduced, then the impacted lessee is exempted from the operation of those provisions in the lease requiring them to pay to the extent of the reduction;
- the regulations also make it clear that an act or omission of a lessee required under law of the Commonwealth or the State in response to the COVID-19 pandemic is taken not to be a breach, and does not constitute grounds for termination or the taking of any prescribed action by the lessor; and,
- nothing prevents a lessor and lessee agreeing to the parties taking any action in relation to the commercial lease.
So, what are the rights of the tenant?
An impacted lessee may request the other parties to renegotiate the rent and other terms of the lease. Parties must renegotiate in good faith in relation to rent payable and any other terms under the lease and taking into account the economic impacts of the COVID-19 pandemic and the principles set out in the Code.
However, nothing prevents a lessor taking prescribed action on grounds not related to the economic impacts of the COVID-19 pandemic, for example, if the lessee breaches the lease by damaging the premises or if the lessee fails to vacate following the expiry of the fixed term of a commercial lease. Also, nothing in the new regulations excludes the rules of applying to the determination of a dispute concerning recovery of possession, termination of the lease or the exercise or enforcement of another right.
What I am seeing in my practice arising out of the Regulations?
- The Regulations are not clear whether rental relief is to be calculated on the basis of a fixed relief or an ongoing relief. The Code merely says that a tenant is entitled to rental relief on the basis of the proportion of reduction in their turnover and that at least 50% of that relief must be in the form of a rental waiver with the balance being a deferral. So, does that mean there is to be a fixed relief given or one based on an assessment of turnover on a monthly basis. This, in particular, is problematic for many clients – with landlords wishing to have accurate figures based on monthly turnover, whereas tenants prefer just one assessment.
- The Regulations are not clear on how long the relief is to be granted for and when does the deferral have to start to be repaid.
- The Regulations are not clear on how much information a landlord can ask for or a tenant is required to provide to establish the extent of the reduction in turnover.
- Parties are unsure on how to document any relief agreed. I have suggested a simple Deed be entered into.
This period of time has caused enormous pressure on landlords and tenants. It was hoped the Code and the Regulations would assist to relieve this pressure. It is my view that this has not been the case.
If you require assistance with any of the above discussed items, please do not hesitate to contact a lawyer in Coleman Greig’s Commercial Property team, who would be more than happy to assist you today.