Commercial and Retail Leases during COVID-19

19 May Commercial and Retail Leases during COVID-19

On 24 April 2020, the Retail and Other Commercial Leases (COVID-19) Regulation 2020 (NSW) (‘the Regulations’) was enacted to give binding effect to the leasing principles set out in the National Cabinet Mandatory Code of Conduct – SME Commercial Leasing Principles During COVID-19 (‘the National Code’).

Is my lease covered by the Regulations?

The Regulations apply to retail leases, agricultural tenancies and commercial leases provided that the tenant is an ‘impacted lessee’.

To be eligible as an ‘impacted lessee’  your business must:

1. Be eligible for the JobKeeper scheme in accordance with the Federal Government eligibility requirements (these are set out at clauses 7 and 8 of Coronavirus Economic Response Package (Payments & Benefits) Rules 2020 (‘the Rules’); and
2. Be a small-medium enterprise such that your business turnover in the 2018-2019 financial year was less than $50 million.

What is the effect of the Regulations?

During the period 24 April 2020 – 24 October 2020, the following provisions apply to leases where the lessee is an impacted lessee:

• A lessor must not take action against an eligible tenant for failure to pay rent or  outgoings;
• A lessor cannot increase the rent payable under the commercial lease (unless determined by reference to turnover) and the lessor must not take action against the lessee for failure to pay an amount representing such an increase;
• Reductions in land tax, council rates or other statutory charges should be passed on to the lessee.

A party must, if requested, make attempts to renegotiate the terms of the lease, and any rent payable. Any negotiations between the parties must be made in good faith.

In engaging in such negotiations, the parties should have reference to the economic impacts of the pandemic and the principles established in the National Code. This includes an obligation on lessors to offer reductions in rent proportionate to the downturn suffered by the business. At least 50% of the reduction should be in the form of a waiver with the balance deferred over a period of no less than 24 months or the balance of the lease term.

In respect of any arrears which remain owing during the period, the lessor cannot commence proceedings against an impacted lessee unless they can first show that they have undertaken steps to renegotiate the  rent payable under the lease. In the event that the lessor seeks to take action to recover possession of the premises, terminate the lease or enforce any other right under the lease, they must also demonstrate that an attempt mediation before the Small Business Commissioner has failed.

Nothing under the Regulations prohibits a lessor from taking action against a lessee in respect of breaches of a lease which are not related to COVID-19 such as failure to vacate premises at the end of a fixed lease or failure to maintain premises in a good tenantable condition.

If you are eligible for the JobKeeper scheme the Regulations will likely provide some financial relief and security during the pandemic period. If you are a landlord whose tenant may be eligible for the JobKeeper scheme it is important to be aware of the impact of the regulations on your rights of enforcement under the lease and your obligations when it comes to negotiation of rent.

It is important that all parties to a leasing arrangement seek to negotiate in good faith and to seek legal advice if you are unsure about your rights in light of the new regulations.

Harris & Company Solicitors act on a wide variety of leasing matters for both lessors and lessees. If you require assistance in respect of a leasing matter, or a dispute in relation to your obligations in light of the new COVID-19 regulations, please contact Alexandra Tzavellas 02 9261 8533 atzavellas@harrisco.com.au