Update: NSW’s COVID-19 retail and commercial leasing laws

The NSW Government has now passed laws affecting retail leases in NSW (see regulation here). This includes a schedule in the Conveyancing Act’s regulations that also applies to commercial leases more generally^[1].  

The laws are a bit dense and the following should help unpacking them. To navigate, there are some questions you may have at front of mind. No doubt more to follow.

Summary

For the next six months, landlords cannot take enforcement action against JobKeeper-qualifying retail shop tenants for not paying rent or not trading, with mirror provisions for commercial leases more generally.

If a landlord wants to ensure that the tenant pays some rent, the landlord needs to engage in good faith negotiations with the tenant to agree a rent reduction. Once done, the tenant becomes liable, with broadly usual consequences, for not paying the reduced amount in accordance with the lease.

Of the reduced portion, at least 50 per cent must be waived and the balance repaid over at least 24 months.

When does the legislation begin and end?

It runs for six months, beginning on 24 April 2020 and automatically ending on 23 October 2020, unless amended.

Which leases does the legislation apply to?

The legislation applies to most “retail shop leases”, that is leases for retail shops falling under the Retail Leases Act. It also applies to commercial leases – or leases of land for commercial purposes – as defined in a new provision of the Conveyancing Act’s regulation^[2].

The legislation does not apply to:

• leases entered after 24 April 2020 (besides options to renew)
• commercial leases that do not fall under Schedule 5 of the Conveyancing Act, such as agricultural leases
• agreements reached, after the legislation commences, between the landlord and tenant.

What about 11 May 2020 recall of parliament?

The 11 May 2020 NSW parliamentary recall may be an occasion for some fine-tuning.

What tenants do the laws apply to?

The laws only to “impacted lessees”. These are tenants under relevant leases (described above) who satisfying the following:

• the tenant must qualify for the Commonwealth’s JobKeeper payment scheme
• the tenant’s 2018-2019 turnover must be less than $50 million.

Regarding turnover itself:

• the turnover of a corporate group counts toward a subsidiary tenant or related party tenant
• turnover includes internet sales, which can be significant for tenants, or corporate groups who have significant online business.

What breaches does the legislation apply to?

The legislation only applies to particular breaches, including:

• the tenant not paying pay rent or other money owed;
• the business not opening; or
• where the tenant is breaching the lease in order to comply with a Commonwealth or State COVID-19 law.

What is the landlord unable to do?

Subject to some exceptions below, if one of the above breaches occurs and the tenant is an impacted lessee, the landlord cannot:

• terminate the lease or take possession;
• call on a bank guarantee; or
• pursue a guarantor.

Essentially, enforcement is prohibited.

What other restrictions are placed on a landlord?

The legislation also:

• prevents an impacted tenant’s rent increasing during the six-month period
• requires a landlord to proportionally pass on a reduction in fixed costs for land tax, statutory charges and insurance.

Some exceptions – can a landlord insist on any amounts being paid?

Landlords may well worry. If a tenant is not paying rent, the landlord’s own obligations to financiers, investors, employees, etc. may become affected. The legislation endeavours to address this:

• clause 7 of the legislation says that a landlord “must not take … any prescribed action” (i.e. seek possession, etc.) for the tenant not paying “rent during the prescribed period” unless the parties have engaged in a good faith negotiation to “renegotiate the rent payable under, and other terms of the commercial lease”
• the renegotiation is to have regards to the economic impact of COVID-19 and the principles in the code. This includes:
  • landlord offering proportionate reductions based on the impact of the coronavirus. These reductions never need to exceed 100 percent. Though this may sound silly, but the concept seems to be that a tenant cannot pass on the loss of a business to a landlord
  • reductions require apportioning by at least a 50 per cent waiver of the reduction and the balance of the reduction being gradually repayable (or amortised) over at least 24 months.

If rent is renegotiated and reduced, but the tenant does not pay the reduced amount (and is not subject to a waiver and deferral), can the landlord take action?

The wording of the law is not as precise as it might be. However, the answer seems to be yes – a landlord can claim this rent and take action for a breach. But this would only be for the portion of the rent that is not reduced by the waiver or deferral. And any dispute must be referred to the tenancy tribunal, NCAT, or a court.

For example, if rent was $100 a month and reduced in a good faith negotiation to $60 a month:

• the tenant must pay $60 under the lease in accordance with its terms
• at least 50 per cent of the reduction must be waived
• the balance of the reduction must be deferred as gradual payments over at least 24 months
• if the tenant does not pay the $60, then the landlord could take action. However, the landlord would progress this through NCAT – including a mediation, not change the locks.

What if the tenant’s breach has nothing to do with COVID-19?

The landlord can take action for this breach. This is important because a landlord can:

• terminate a lease as of right at the end of a fixed term, or holdover period (e.g., month-to-month tenancy)
• take action for other breaches such as damaging premises or not insuring premises.

Can a landlord just sit out the six months and then claim the rent that would have been payable during COVID-19?

No. It seems difficult to read the laws this way (see ‘teething problems’ section below).

Financial information

The laws do not oblige a tenant to provide financial information as part of any good faith negotiation. However, it may be ‘bad faith’ not to do so. Landlords would not, in our opinion, be acting in bad faith in requesting financial information to show how COVID-19 has impacted a tenancy, and such requests will be commonplace.

Also, if a tenant was permitted to trade during COVID-19 but chose not to, this will need weighing in any negotiation. For example, a landlord may be entitled to apportion an amount of turnover a tenant would have earned had it traded.

Documenting agreements

Any agreements on responding to COVID-19, including reductions in rent, etc., should be properly, even if briefly, documented. This would importantly include terms such as:

• when the arrangement begins and ends
• how further laws may impact the arrangement
• what rent must be paid during the six months
• apportionment between waiver and deferral
• deferral repayment timetables
• what information was relied on in entering the agreement
• the possibility of auditing tenant financial information
• confidentiality.

Teething problems

Like other COVID-19 laws, legislating on the run has difficulties. This legislation lacks some clarity that may come to be tested.

In the meantime – or at least initially – prudence is recommended. Here are some issues to note:

• the legislation provides a motivation to renegotiate rent. Once renegotiated, the landlord can at least claim a portion. However, the prohibitions on recovery are not said as being ‘subject to these other provisions’. This seems that the legislation should be read as the prohibitions not applying after a renegotiation, to that portion of the original rent that remains payable. However, NCAT needs to be approached before enforcement
• some of the wording is ambiguous. The legislation adopts the approach of a section saying, firstly, that a landlord cannot take an action. Secondly, it then says that the action cannot be taken in response to specified conduct by the tenant. The ambiguity arises where the sentence ends with the words “during the prescribed period”. In other words, it is not clear if:
  • the landlord cannot take the action only during the six-month period, but can do so after the six-month period ends (i.e., the landlord can sit-out the COVID-19 period and then sue for all rent, etc.); or
  • if the landlord cannot take the action at any time so long as the tenant’s breach occurred during the six-month period. This option seems more reasonable and sits more easily with the incentive to renegotiate.
• the Conveyancing Regulation’s schedule brings in commercial leases that are not retail leases. This schedule is not mentioned elsewhere in that Act, and the retail lease laws are brought in under an amendment to the retail leasing legislation. However, the Interpretation Act^[3] suggest that the Conveyancing Regulation makes itself (and the above regime) applicable to commercial leases more generally. The regulation says “this Schedule applies to the exercise or enforcement of rights under a commercial lease in relation to circumstances occurring during the prescribed period”^[4].

We will continue to monitor for updates.

^[1] https://www.legislation.nsw.gov.au/#/view/regulation/2018/424/sch5
^[2] https://www.legislation.nsw.gov.au/#/view/regulation/2018/424/sch5
^[3] https://www.legislation.nsw.gov.au/#/view/act/1987/15/whole
^[4] https://www.legislation.nsw.gov.au/#/view/regulation/2018/424/sch5

Disclaimer
The information in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, we do not guarantee that the information in this newsletter is accurate at the date it is received or that it will continue to be accurate in the future.

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