On 14 July 2021, the NSW Government passed the Retail and Other Commercial Leases (COVID-19) Regulation 2021 ('2021 Regulations') which limited the exercise of certain rights by a lessor under retail and other commercial leases for a breach of the lease if:
- the lessee is a business that qualifies for certain grants due to the impact of the COVID-19 pandemic; and
- the breach is a prescribed breach that occurs between 13 July 2021 and 20 August 2021 ('Prescribed Period').
Despite this, the 2021 Regulations did not initially provide for rent relief (waiver or deferrals of rent), or prohibit the increasing of rent under a lease as the Regulations made in 2020 did - they only prohibited landlords from taking certain "Prescribed Action" against a tenant between 13 July 2021 and 20 August 2021. A list of Prescribed Actions is set out below.
On 13 August 2021, in response to the surge of COVID-19 cases, the NSW Government passed the Retail and Other Commercial Leases (COVID-19) Amendment Regulation 2021 ('2021 Regulations') which:
- extended the Prescribed Period to 13 January 2022 (so that the Prescribed Period became the 6 month period from 13 July 2021 to 13 January 2022) ('New Prescribed Period'); and
- re-introduced the requirement for landlords and tenants to renegotiate the rent payable under Impacted Leases, in order to take into account the impact of the COVID-19 pandemic and the leasing principles set out in the Code.
NB. The Code has not changed, but has now been re-activated.
The Code, which was announced by the Federal Government Cabinet on 4 April 2020, imposed a number of "Leasing Principles" required to be followed by landlords - including the requirement that landlords grant the following relief and protections to tenants whose businesses had been impacted by COVID-19.
Under the Code, landlords were:
- required to offer tenants rent concessions in the form of waivers and deferrals of rent proportionate to the reduction in the tenant's trade (up to 100% of the amount payable under the lease). This reduction is called a tenant's "Decline in Turnover".
Rent waivers and deferrals are required to include at least:
- a rent waiver equivalent to 50% of a tenant's Decline in Turnover (that is, the rent is never required to be paid); and
- a rent deferral equivalent to 50% of a tenant's Decline in Turnover (to be repaid over the balance of the lease term, or 24 months, whichever is greater); but
"should" constitute a greater proportion of waiver where failure to do so would compromise the tenant's ability to fulfil its ongoing obligations under the lease;
- prohibited from taking any Prescribed Action;
- required to freeze all rent increases (except for retail leases, whose rent is based on turnover rent);
- required to pass onto tenants any entitlements they receive to reductions in land tax, council rates and other statutory charges; and
- prohibited from imposing fees, interest or other charges.
To avail themselves of the relief afforded by the Code, tenants must provide their landlord with evidence sufficiently demonstrating the extent of their Decline in Turnover - and must remain committed to complying with all other terms of their lease.
The following is a list of the Prescribed Actions by landlords that are prohibited by the Code:
- evicting a tenant;
- exercising a right of re-entry;
- recovering possession of the premises;
- seizing a tenant's goods to recover money owed;
- forfeiting (terminating) the lease;
- seeking damages from the tenant;
- requiring a payment of interest on, or a fee or charge for, unpaid rent;
- recovering the whole or part of a security bond (including calling upon a bank guarantee);
- pursuing the tenant or any other person who has given a personal guarantee under a lease; and/or
- any other remedy that might have been available to a landlord at common law or under another law of NSW.
The 2020 Regulations
Retail and Commercial tenants in NSW are likely familiar with the operation of the provisions Code and 2020 Regulations, so this article will not canvass the 2020 Regulations, but summaries of their operation can be found at:
- What is the Legal Status of Retail and Commercial Leases during COVID-19?; and
- Retail and Commercial Leases During COVID-19: A History and 2021 Update
The 2021 Regulations
As set out in the second article above, the 2021 Regulations made by the NSW Government on 14 July 2021 were stated to operate from 13 July 2021 to 20 August 2021 ('Prescribed Period') to both retail and commercial lease tenants:
- that are party to leases commenced before 26 June 2021, or which were entered into on or after 26 June 2021, pursuant to an option under a lease entered into before 26 June 2021;
- that have annual turnover during the 2020-21 financial year of less than $50 million (including internet sales);
- that qualify for 1 or more of:
Tenants whose leases satisfy the above criteria are considered to be "Impacted Lessees".
Unlike the 2020 Regulations, the 2021 Regulations did not import the provisions of the Code, which is why no rent relief was available to tenants under the 2021 Regulations, but they did prohibit the taking of a Prescribed Action by a landlord in the event of breach of lease for non-payment of rent (but not for failure to trade from premises if required by the lease).
The Amended Regulations extended the operation of the 2021 Regulations by reinstating the requirement for landlords and tenants to renegotiate rent and terms of leases to Impacted Lessees in accordance the leasing principles set out in the Code for the New Prescribed Period, the effect of which appears to be that Impacted Lessees are now again entitled to relief under the Code from 13 July 2021 to 13 January 2022 and are again protected from sanction for failing to trade from the premises as required by a lease during that period.
As was the case for the 2020 Regulations:
- nothing in the 2021 Regulations prohibits landlords from taking a Prescribed Action on grounds not related to the economic impacts of COVID-19; and
- a landlord under a retail or commercial lease can take a Prescribed Action if the matter has been referred for mediation under Part 8, Division 2 of the Retail Leases Act 1994 (NSW) and the Registrar of Retail Tenancy Disputes has certified in writing that the mediation has failed to resolve the dispute.
The Registrar of Retail Tenancy Disputes is part of the Office of the NSW Small Business Commissioner, though mediations concerning coronavirus relief legislation are usually referred to mediators from the NSW Civil and Administrative Tribunal.
To qualify for rent relief under the Amended Regulations, tenants must make a request for relief to their landlord during the New Prescribed Period (i.e. relief cannot be requested retrospectively).
Demonstrating a Decline in Turnover
Since the Code has now been reinstated, it is necessary for Impacted Lessees to demonstrate (by providing evidence to landlords) that they have suffered a Decline in Turnover of 30% or more.
During the operation of the 2020 Regulations, the commonly accepted method for demonstrating an Impacted Lessee's decline in turnover was for a tenant to provide its Business Activity Statements for a period in 2019, and compare it to its turnover for the same period in 2020 so as to express the decline as a percentage.
Since the Amended Regulations have only recently been passed, it may take a little time for landlords and tenants to settle on the best method to demonstrate an Impacted Lessee's Decline in Turnover, but the Decline in Turnover assessment criteria adopted for each of the 2021 COVID-19 Micro-Business Grant, the 2021 COVID-19 Business Grant and the Job Saver Payment schemes may serve as a guide - namely, the comparison of a minimum 2 week period from 26 June 2021 to 28 August 2021 to the same period in any of 2019 or 2020.
Accordingly, an appropriate method might be to continue to compare revenues for periods in 2019 or 2020 to corresponding periods in 2021 (presumably, tenants would choose to compare historical periods which demonstrated the greatest decline).
The percentage decline can then be applied to the rent payable under the lease for that particular period in 2021, and the landlord would then grant a waiver of at least 50% of the result, with the balance deferred over at least 24 months as required by the Code (even if the lease expired or is due to expire before 13 January 2022 when the Amended Regulations come to an end).
It might also be advisable for tenants in particular (but to a lesser extent, landlords) to negotiate rent concessions in stages until the true impact of the pandemic becomes apparent in the second half of 2021.
This is because, as for the period during which the 2020 Regulations applied, once rent and/or the terms of a lease are negotiated under the Amended Regulations for a particular period, the rent and terms cannot be re-negotiated for that period. So if concessions are negotiated too early, or for comparison periods which are too short, those agreed concessions may not be truly reflective of an Impacted Lessee's actual decline in turnover.
If you have any questions relating to the information in this article, or you would like to speak with a member of Holman Webb's Property Team with respect to a matter of your own, please don't hesitate to get in touch today.