What is the Legal Status of Retail and Commercial Leases during COVID-19?

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May 13, 2020
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By Alex Bentancor Senior Associate: HOLMANWEBB LAWYERS

A wide range of articles and government announcements have been published concerning the status of retail and commercial leases in the wake of the government mandated restrictions on trade and business operations that have come about as a response to the evolving COVID-19 crisis.

Despite this, many tenants, especially commercial tenants who were not subject to the Retail Leases Act 1994 (NSW), were still uncertain as to what these announcements (and subsequent changes) meant for them.

Thankfully, these uncertainties have now been removed in New South Wales, through the proclamation of the Retail and Other Commercial Leases (COVID-19) Regulation 2020 (NSW) (‘the Regulations’).  The regulations apply from 24 April 2020 until 24 October 2020 (a period of 6 months).

This article sets out the legal status of both retail and commercial leasesduring the COVID-19 pandemic, and outlines what you should do if you are a small to medium-sized enterprise (i.e. turnover of $50 million per year or less) to ensure that you are as protected as possible.

To put the regulations into context, this article considers the COVID-19 Legislation Amendment (Emergency Measures) Act 2020, the JobKeeper Scheme and the ‘National Cabinet Mandatory Code of Conduct‘.  Each of these mark a step in the process of clarifying commercial tenants’ rights during the pandemic, culminating in the Regulations.

COVID-19 Legislation Amendment (Emergency Measures) Act 2020

On 25 March 2020, the NSW Government passed the COVID-19 Legislation Amendment (Emergency Measures) Act 2020 (NSW) (‘Emergency Measures Act’), Schedule 2 of which added:

  1. a new section 227 to the Residential Tenancies Act 2010 (NSW); and
  2. a new section 87 to the Retail Leases Act 1994 (NSW).

These new sections are in similar terms, and essentially allow the making of regulations to protect tenants who are financially vulnerable due to the impact of COVID-19, from eviction and termination of lease.

Significantly, the change to the Retail Leases Act defines a “relevant Act” as including “any other Act relating to the leasing of premises or land for commercial purposes“, creating scope for the protections to extend beyond just residential and retail leases, to general commercial leases.

This was the NSW Government’s first step toward binding regulation.

JobKeeper Scheme

Before moving onto the Regulations, it is worthwhile first outlining the qualifying features of the JobKeeper scheme created by the Coronavirus Economic Response Package (Payments and Benefits) Rules 2020 (Cth) (‘the Rules’), pursuant to which qualifying entities can receive federal subsidy payments of $1,500 per employee, per fortnight (‘JobKeeper’).  The significance of the JobKeeper definition becomes apparent when considering the mandatory Code, below.

Under section 7 of the Rules, a person or company qualifies for JobKeeper if it:

  1. was not:
    1. an authorised deposit-taking institution over which a levy was imposed under the Major Bank Levy Act 2017 (Cth) for any quarter ending on 1 March 2020;
    2. government entity, a local government body (or a wholly owned subsidiary of either);
    3. a sovereign entity; or
    4. a company or individual over which a liquidator, provisional liquidator or trustee in bankruptcy has been appointed;
  2. carried on business, or was a not-for-profit entity in Australia on 1 March 2020; and
  3. satisfies the “Decline in Turnover test” in section 8.

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Section 8 of the Rules provides that an entity satisfies the “Decline in Turnover Test” if:

  • its projected GST turnover for a turnover test month of between 1 October 2020 and 1 October 2020, or the 1 April 2020 to 1 July 2020 quarter, falls short of the entity’s current GST turnover for the relevant comparison period from 2019; and
  • the shortfall, expressed as a percentage of the comparison turnover, equals or exceeds:

National Cabinet Mandatory Code of Conduct

On 4 April 2020, the Federal Government’s ‘National Cabinet Mandatory Code of Conduct – SME Commercial Leasing Principles during COVID-19‘ (‘the Code’) came into effect.

The Code provides a framework for the mandatory provision (by landlords) of rent relief to complying small to medium enterprise (‘SME’) commercial and retail tenants with annual turnovers of up to $50 million who:

  1. are in “financial stress or hardship …as a direct result of the COVID-19 pandemic (including government-mandated trading restrictions)“; and where
  2. the financial stress “…causes the tenant to be unable to meet its financial and/or contractual (including retail leasing) commitments“.

NB:  An SME that is “eligible” for JobKeeper is automatically considered to be in financial distress for the purposes of the Code.

The Code will operate for as long as the JobKeeper program continues and, even though the Code only requires that an SME be “eligible” for JobKeeper, any tenant who wishes to ensure that it has the benefit of the protections in the Code (these are set out in detail below), should register for the JobKeeper scheme without delay.

While the Code remains in force, it requires that:

  1. landlords must:
    1. not terminate leases due to non-payment of rent;
    2. offer to tenants a reduction in rent 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) and specifically:
      1. must include at least 50% rent waiver (that is, the rent is never required to be paid); but
      2. “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;
    3. freeze all rent increases (except for retail leases whose rent is based on turnover rent);
    4. pass onto tenants any entitlements they receive to a reduction in land tax, council rates and other statutory charges;
    5. not impose fees, interest or other charges; and that
  2. tenants must remain committed to the terms of their lease and comply with its terms.  Importantly, a tenant will forfeit any protections provided under the Code if it “materially” fails to abide by the “substantive” terms of its lease.

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The tenant has the responsibility to demonstrate that it has suffered “financial stress or hardship” in order to fall within the scope of the Code, and to show the extent of any reduction in turnover as a result.

The easiest way to ensure that the Code applies is for SMEs to enrol in the JobKeeper program and keep clear trade records to demonstrate that actual decline in turnover is consistent with the “projected decline in turnover” required for JobKeeper eligibility.

The Regulations

Although the Code was said to be “binding”, it had not (until now), been given legislative force.

However, on 24 April 2020, the Retail and Other Commercial Leases (COVID-19) Regulation 2020 (NSW) (‘the Regulations’) was made under sections 87 and 202 of the Retail Leases Act (so as to apply to retail leases), as well as under section 202 of the Conveyancing Act (so as to also apply to other commercial leases).

The Regulations apply for a period of 6 months, from 24 April 2020 until 24 October 2020 (‘the Prescribed Period’).

The Regulations, however, only apply to the following retail and commercial leases:

  1. a lease entered into before 24 April 2020;
  2. a lease entered into after 24 April 2020, but only if it was entered into pursuant to an option under a lease entered into before 24 April 2020;
  3. the lease is to a tenant who qualifies for the JobKeeper;
  4. a lease to a tenant whose turnover in the 2018/19 financial year was less than $50 million (including internet sales), noting that:
    1.  in the case of a tenant who is a franchisee, the turnover is of the business conducted at the particular premises concerned;
    2. in the case of a corporate tenant which is a member of a group (as defined in the Corporations Act 2001 (Cth)), the turnover is of the whole group;
    3. in the case of any other tenant, the turnover is of the business conducted by the lessee (this would include the total of a tenant’s turnover across multiple locations).

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If a lease meets the above criteria, clause 4 of the Regulations prohibits a landlord from taking any of the following action against the lessee for a failure to pay rent or outgoings, or for not keeping the premises open during the business hours required by the lease (if any):

  • increasing the rent, or even pursing the tenant for a failure to pay such increased rent after the Prescribed Period ends;
  • evicting a tenant (clause 4[1] and definition of “prescribed action” in clause 1);
  • 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 an individual who has given a personal guarantee under a lease; or
  • seeking to enforce any further or other remedy that might otherwise have been available to the landlord under the lease.

Additionally, if a lease requires a tenant to pay a fixed amount by way of a contribution to land tax, council rates, insurance payable by the landlord, or any other statutory charge that applies to leased premises, and the cost to the landlord of any of those charges is reduced, then the lessee cannot be required to pay more than the reduced amount.

Importantly, the Regulations require the parties to renegotiate the rent payable under a retail or commercial lease based upon:

  1. the economic impacts of the COVID-19 pandemic, and
  2. the leasing principles set out in the National Code of Conduct.

Finally, any dispute concerning the application of either the Regulations or the Code must first be referred to the Small Business Commissioner for mediation.

Now that the Code has been given legislative force, the take away for complying SMEs is that, whether you are a commercial or retail tenant, you should enrol in the Commonwealth government’s JobKeeper program, and then negotiate a rent waiver and deferral in accordance with the Code without delay.

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.

Holman Webb Lawyers

 

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