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COVID-19 Retail and Commercial Leasing Update. What did I miss? and what do I need to know?

In response to the ongoing economic impacts of the COVID-19 pandemic, the New South Wales Government has updated its COVID-19 rental relief laws by re-introducing the principles prescribed by the National Cabinet’s Mandatory Code of Conduct for Commercial Leasing (the Code). This was done by passing, and implementing on 14 July 2021, the Retail and Other Commercial Leases (COVID-19) Amendment Regulation 2021 (NSW) (the Regulation).

We set out the key aspects of the Regulation is below.

1. Which leases do the Regulation apply to?

The Regulation applies to retail and commercial leases entered into before 26 June 2021, including option leases entered into after 26 June 2021 where the original lease commenced before 26 June 2021.

 

2. Who is an “impacted lessee” and what must an impacted lessee do to access their rights under the Regulation?

A tenant is an “impacted lessee” if both (a) and (b) are satisfied below:

(a) the tenant qualifies for one or more of the following:

(i) 2021 COVID-19 Micro-business Grant;

(ii) 2021 COVID-19 Business Grant;

(iii) 2021 Job Saver Payment; and

 

(b) the following turnover in the 2020-2021 financial year was less than $50 million:

(i) if the tenant is a franchisee – the turnover of the business conducted at the premises or land concerned;

(ii) if the tenant is a corporation that is a member of a group – the turnover of the group;

(iii) in any other case – the turnover, including internet sales of goods or services, of the business conducted by the tenant.

 

An “impacted lessee” must provide the following information to its landlord before, or as soon as practicable after the “prescribed breach” occurs or within a reasonable time after being requested to do so by the landlord:

(a) a statement to the effect that the tenant is an “impacted lessee”; and

(b) evidence that the tenant is an “impacted lessee”.

 

3. What is a “prescribed breach”?

A “prescribed breach” of an “impacted lessee” means the:

(a) failure to pay rent; or

(b) failure to pay outgoings; or

(c) the business operating under the lease not being open for business during the hours specified in the lease.

 

4. Ramifications for landlords

The Regulation sets out the following ramifications for landlords during the period commencing 13 July 2021 and ending on 13 January 2022 (Prescribed Period):

(a) No increase in rent

Landlords must not, during the Prescribed Period, increase the rent payable by an “impacted lessee” (other than rent determined by reference to turnover).

(b) Compulsory mediation

Landlords must not, during the Prescribed Period, take “prescribed action” against an “impacted lessee” unless the matter has been referred for mediation with the Small Business Commissioner and the Registrar has certified in writing that the mediation has failed to resolve the dispute.

Similar to the 2020 COVID-19 leasing laws, “prescribed actions” include charging interest on unpaid rent, calling on bank guarantees / security deposits provided by tenant, terminating leases, evicting tenants from leased premises, exercising rights of re-entry, issuing proceedings in court for damages against the impacted lessee and any other remedy otherwise available to a landlord against a tenant as common law or under the law of the State of New South Wales.

This doesn’t mean a landlord is prevented from taking “prescribed actions”, provided the parties first undertake mediation. Of course, this will delay any recourse to the landlord.

(c) Obligation to renegotiate the rent payable

Either the landlord or the “impacted lessee” may request the other party to enter into negotiations regarding the rent payable under the lease. Please note that either party may make more than one request to renegotiate the rent payable.

If this occurs, both parties must:

(i) renegotiate in good faith, the rent payable under, and other terms of, the impacted lease (noting the good faith obligation also applies to the impacted lessee); and

(ii) commence renegotiations within 14 days of receiving the request (or another period agreed to by the parties).

Critically, the parties must renegotiate the rent having regard to the economic impacts of COVID-19 and the leasing principles set out in the Code. Accordingly, this requires landlords to provide:

(iii) rent relief in proportion with their tenant’s decline in turnover; and

(iv) at least half of the rental relief in the form of a waiver, and the balance as a deferral.

This also means that landlords will need to share any benefit they receive due to the deferral of mortgage repayments in a proportionate manner (as set out in the Code).

It’s important to note that the parties are at liberty to agree that a landlord is permitted to take a “prescribed action” without having the matter mediated or without the landlord complying with its renegotiation obligations.

 

5. Practical Guidance for Landlords

There is no doubt that landlords and property managers will receive numerous requests from different tenants to renegotiate the rent payable under their leases.

Below is a form of checklist that landlords may issue to tenants who wish to make a request for rental relief under the Regulation.

Have you provided the following information to support your request for rental relief:

1. a statement to the effect that you are an impacted lessee for the purposes of r 4 of the Retail and Other Commercial Leases (COVID-19) Regulation 2021 (NSW);

2. evidence that you are an impacted lessee, including:

(a) evidence that you qualify for one or more of the government protection measures (Micro-business COVID-19 Support Grant, COVID-19 NSW Business Grant, or Job Saver Payment);

(b) financial statements and accounting records indicating that your turnover was less than $50 million in the 2020-2021 financial year; and

(c) financial statements demonstrating the reduction in your turnover for the rent periods the subject of the request for rental relief, when compared with the relevant prior comparable period;

3. details of any other government relief packages you have applied for or seek to avail; and

4. details of how you propose to continue generating income for your business over the next three to six months.

Upon receiving the information above, we will seek to respond to your request for rental relief as soon as we can.

 

6. Land tax relief

Whilst not dealt with in the Regulation, Revenue NSW has introduced measures to provide relief to commercial and residential landowners, who provide a reduction in rent to a tenant who is experiencing financial distress as a result of COVID-19. See here.

To be eligible for the land tax relief, a landowner must:

(a) lease a parcel of land to either:

(i) a commercial tenant, who has an annual turnover of less than $50 million and is eligible for the 2021 COVID-19 Micro-business Grant, the 2021 COVID-19 Business Grant or the 2021 Job Saver Payment; or

(ii) a residential tenant who has a reduction in household income of 25% or more; and

(b) reduced the rent for their tenant for any period between 1 July 2021 and 31 December 2021; and

(c) for 2021, you have land tax attributable to that parcel of land that is leased to the tenant.

The land tax reduction is the lesser of the amount of rent reduction provided to the tenant for any period between 1 July 2021 and 31 December 2021, or 100% of the 2021 land tax attributable to the parcel of land leased to the tenant.

Further any rental relief must not be required to be paid back by the tenant at a later date. This is considered to be a deferral or rent, and not a reduction of rent.


For more information, please contact John Frangi