NSW is the first State or Territory to make legislation giving effect to the Mandatory Code of Conduct, with the Retail and Other Commercial Leases (COVID-19) Regulation 2020 taking effect on Friday 24 April 2020, and applying for six months until 24 October 2020.
Here, leading Australian law firm Clayton Utz explain the changes, and what considerations both tenants and landlords should make when revewing their options.
Landlords and tenants are now fully armed to begin talking about their arrangements over the next six months; if discussions have already commenced, then they will need to check that they are complying with the Regulation. Either way, any changes must be documented and monitored.
Other States will follow (we’ll keep you updated on this hub and you can also check out Clayton Utz’s cumulative resource on COVID-19 real estate changes here, which will detail changes as they happen).
What leases are covered by the Regulation?
The Regulation covers “commercial leases”, being:
- a retail shop lease; and
- any agreement relating to the leasing of premises or land for commercial purposes, by virtue of Schedule 1 of the Regulation which amends the Conveyancing (General) Regulation 2018
“Retail shop lease” will have the same meaning as in the Retail Leases Act 1994. Accordingly, if the Retail Leases Act applies to the agreement, then the protections under the Regulation will apply. Accordingly, licences which are included as “retail shop leases” for the purpose of the Retail Leases Act will be caught by the Regulation.
Are any leases not covered by the Regulation?
The following leases are not covered:
- a lease entered into after 24 April 2020, other than a lease entered into by means of an option to extend or renew on the same terms; and
- a lease under the Agricultural Tenancies Act 1990.
Things to consider: If you are currently negotiating a new lease, tenants will need to expressly negotiate any rent relief or other rights required due to the impact of COVID-19 as tenants will not be entitled to the protections afforded by the Regulation.
What tenants are entitled to protection?
An “impacted lessee” is entitled to protection under the Regulation. An impacted lessee is a lessee who:
- qualifies for the JobKeeper Scheme; and
- had turnover for the 2018-2019 financial year which was less than $50 million:
- if the lessee is a franchisee, in relation to the turnover at the subject premises;
- if the lessee is a corporate member of a group (i.e. related bodies corporate), in relation to the turnover of the group; or
- in any other case, the turnover of the business conducted by the lessee.
Turnover includes turnover from internet sales or services. It is important to note that, in the case of retail leases, this approach to calculating turnover deviates from clause 20 of the Retail Leases Act which provides that turnover does not include “the amount of revenue from online transactions, other than online transactions where the goods or services concerned are delivered or provided from or at the retail shop (or the retail shopping centre of which the shop forms part) or where the transaction takes place while the customer is at the retail shop (whether or not the goods or services concerned are delivered from or at the retail shop)”.
Tenants will need to demonstrate to landlords that both limbs of the definition of “impacted lessee” are met in order to be entitled to protection under the Regulation.
Restrictions on landlords if a tenant is an “impacted lessee”
The restrictions and prohibitions in the Regulation only apply if the tenant is an “impacted lessee”. In those circumstances:
- The landlord must not:
- exercise a right of re-entry, take possession of the premises, terminate the lease or take any other similar action to evict the tenant;
- seek an order for damages;
- require interest to be paid on unpaid rent;
- recover a security bond;
- require a guarantor to perform the obligations of the tenant;
- seek any other remedy available at law.
if the tenant does not pay rent, outgoings or fails to keep the business open for the hours specified in the lease while the Regulation is in force.
2. The landlord must not increase the rent (other than rent which is determined by reference to turnover) while the Regulation is in force.
3. After the Regulation ends, the landlord must not take action against the tenant for a failure to pay the increased rent.
4. If a landlord is entitled to a reduction in land tax or other statutory charge (such as council rates) or insurance, the tenant is entitled to pay reduced amounts under its lease in the same proportion as the landlord’s reduction.
Irrespective of whether the tenant is an “impacted lessee”, if a tenant is required to act in a certain manner as a result of a law in response to the COVID-19 pandemic, the tenant is not in breach of the lease and the landlord may not take action.
Notwithstanding any of the above, the parties can agree that the landlord may take any of the above prohibited actions (such as calling on a security bond or terminating the lease).
In relation to rent reviews, if a rent review arises while the Regulation is in force, the landlord can increase the rent once the Regulation ends but cannot “back date” the rent review and seek to recover the increased rent for the period the Regulation was in force.
What is the position regarding rent negotiations?
If the tenant is an “impacted lessee”, either party may request a renegotiation of the rent and other terms of the lease. The negotiation must be conducted in good faith.
In undertaking the negotiations, the parties must have regard to the economic impacts of the COVID-19 pandemic and the leasing principles set out in the Mandatory National Code of Conduct.
Concepts set out in the Code – such as the proportionality principle, rent deferral/waiver (and the floor on rental waivers) and the principles which will apply to leases that are due to expire or in holding over – have not been incorporated into the Regulation. Instead, the Regulation relies on the parties having regard to these principles as part of the negotiation.
If a landlord does not negotiate in good faith in these circumstances, the landlord is prohibited from taking action for a failure to pay rent.
Things to consider: Notwithstanding the protections in the Regulation, we recommend that the agreed position is documented so that the position is clear going forward (particularly as to what rent is deferred and what rent is waived) and to ensure that the protection continues once the Regulation ends.
What happens if no agreement is reached?
In the case of retail shop leases, the dispute resolution provisions under the Retail Leases Act extends to any dispute concerning the liabilities or obligations under a retail shop lease to which an impacted lessee is a party, including a dispute regarding renegotiation of rent.
In the case of commercial leases, a landlord must not take action to recover possession, terminate the lease or exercise any other rights under the lease, unless and until the Small Business Commissioner has certified in writing that mediation offered to be conducted by the Small Business Commissioner has failed to resolve the dispute and given reasons for the failure. In other words, the parties must seek to mediate before the landlord can take action.
What is the status of the Code?
The Mandatory Code of Conduct has not been attached to the Regulation and is not law. However, the Courts and Tribunal (in the case of retail shop leases) may have regard to the Mandatory Code of Conduct when considering orders for recovery of possession, termination of the lease or the exercise of any other right of the landlord.
In addition, the principles set out in the Mandatory Code of Conduct will remain relevant in interpreting the Regulation and guiding discussions between landlords and tenants.
What about non-COVID 19 pandemic related breaches?
The landlord is not prevented from taking action on grounds not related to the economic impacts of the COVID-19 pandemic.
For example, a landlord may terminate the lease if the tenant has damaged the premises and not remedied the breach after notice has been given or a landlord may take action to recover possession if the tenant has not vacated the premises after expiry of the term.
What happens if the tenant is not an “impacted lessee” but still seeks relief?
In these circumstances, the landlord and tenant will need to negotiate an agreed position – there is no entitlement to protection under the Regulation. The parties should continue to comply with the lease until there is an agreement otherwise. The principles set out in the Mandatory Code of Conduct will be helpful to guide this discussion.
However, tenants should be aware that landlords are not obliged to provide rent relief in these circumstances and there is no automatic protection if rent is simply not paid.
What happens if the tenant is insolvent?
The Regulation does not address whether the landlord may take action in circumstances where the tenant is insolvent. Similarly, the Mandatory Code of Conduct simply provides that “due regard should be given to whether the tenant is in administration or receivership, and the application of the Code modified accordingly”. It will be a question of whether the insolvency is related to the economic impacts of the COVID-19 pandemic. If it is not, then the landlord will not be prevented from taking action.
In these circumstances, particularly if there is a doubt as to whether the insolvency was triggered by the economic impacts of the COVID-19 pandemic or whether the tenant is an “impacted lessee” in the first instance, the best course of action is to have an open discussion with the relevant insolvency practitioner.
Things to consider: Courts may exercise discretion to grant relief under the Corporations Act in relation to the personal liability of administrators for the payment of rent particularly where the requested changes are for the purpose of facilitating the underlying aims of the administration.
What happens if the tenant was not paying rent before the Regulation commenced?
There may be many tenants who have not paid rent for March and April due to the economic impacts of the COVID-19 pandemic.
The landlord is only prohibited from taking action for non-payment of rent during the period the Regulation is in force where the tenant is an “impacted lessee”. Non-payment of rent for March and most of April is outside the period covered by the Regulation.
However, if the tenant continues to not pay rent for subsequent rental periods, the landlord may not take action unless and until there has been a negotiation regarding rent. We would expect that these negotiations would also cover these earlier periods, even though they are outside the period covered by the Regulation.
If the non-payment of rent did not arise because of the economic impact of the COVID-19 pandemic, then the landlord may take action, including termination.
Things to consider: Landlords and tenants will need to have open discussions (including providing financial records) so that landlords can understand whether the lessee is an “impacted lessee” and the economic impact of the COVID-19 pandemic on the tenant. The Regulation is not a panacea to absolve the parties from the need for open and honest discussions.
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