News & Insights

The recent decision of Sneakerboy Retail Pty Ltd trading as Sneakerboy v Georges Properties Pty Ltd (No 2) [2020] is the first of its kind in which the NSW Supreme Court has considered the effect COVID-19 legislation has had on struggling retailers during the COVID-19 pandemic.

The case considered whether the Landlord validly terminated the Lease on the grounds of abandonment and rental arrears. Sneakerboy went to the court seeking to stay the Landlord’s termination of the Lease on grounds that it had not abandoned the Lease despite being in breach of the Lease terms for rental arrears.

outcome for tenants

After determining that the Lease was not terminated on the grounds of abandonment despite qualifying for termination on the grounds of rental arrears, the Court found that the Lease  remained on foot, which brought it under the protection of the Australian Government’s Mandatory Code of Conduct. On that point, the Court ruled that retailers that received some form of rent relief from their Landlords following the implementation of the Code can now continue to enjoy further lease concessions for a ‘subsequent reasonable recovery period’.

In Sneakerboy, this was determined to be for a further six months after the prescribed period under the Code which otherwise is due to expire on 24 October 2020.

This will allow for Sneakerboy to continue trading well past Christmas; a time which is typically the most profitable and is the peak selling season for most retailers.

what does this mean for landlords?

Following the Court’s decision, Landlords may now be required to extend rent relief measures. This means that Landlords will be unable to increase the rental otherwise allowed for under their leases, nor exercise their rights of termination for a “reasonable subsequent recovery period” which the Court has determined to be calculated on a case by case basis.

Given that the Australian Government has extended the JobKeeper scheme, Courts will proceed on the basis that the Code too will likely be extended and may potentially extend or seek to stipulate a formula in defining what a “reasonable subsequent recovery period’ would be for each Tenant seeking to renegotiate their lease terms.

As this case relates to pre-Code breaches, this ruling will be particularly relevant to Landlords who seek to call on a Tenant’s default prior to the enactment of the Code.

Sneakerboy demonstrates the Court’s reluctance to further burden an impacted Tenant despite Landlords having clear express rights under a Lease agreement in the face of a Tenant’s breach.

disclosure

The Court was clear in confirming that it did not have the jurisdiction to make any orders to vary the terms of a commercial lease agreement that are subject to the Code and the Retail and Other Commercial Leases (COVID-19 Regulation) 2020 (COVID-19 Regime), other than requiring for both Landlords and Tenants to meet for the purpose of negotiating or renegotiating in good faith in an attempt to come to a mutually agreeable outcome.

Should the renegotiation of the lease terms occur prior to the expiry of the prescribed period of the Code, then the newly negotiated lease terms are to stand even following the expiry of the Code.

It is unclear whether parties lose their right to negotiate for rent relief under the terms of the Code if they fail to do so prior to 24 October 2020. Despite this, Landlords and Tenants are open to renegotiate the terms of their respective leases with the other party provided that an agreement is reached, and the outcome is documented in a variation of lease or an accompanying Deed to the lease.

going forward

Where Landlords and Tenants fail to renegotiate rent relief as a result of being impacted by COVID-19, the parties should not expect the Court to formulate an outcome for them. The Court has ruled that the COVID-19 Regime is unclear as to how matters are to be resolved should renegotiations fail to come to agreeable terms prior to 24 October 2020.

It would appear that such uncertainty will be deferred for further redress following the impending repeal of the Code on or before 24 October 2020.  It is recommended that all rent relief negotiations are finalised prior to 24 October 2020 given the uncertain environment that the pandemic has created.

Given the Code has been legislated in each state and territory in Australia, the Sneakerboy case will have an effect across other jurisdictions and influence the ruling of similar relief provisions nationwide.

The case has certainly provided struggling retailers with renewed hope in renegotiating terms of rent relief, and will provide impacted retailers with the potential security of trading throughout the Christmas period in an attempt to recover and generate further revenue to account for rental arrears, deferred rental, reduced wages and hopefully provide emotional relief during the festive season.

The ruling in Sneakerboy should be considered by both Landlords and Tenants in all lease negotiations going forward, in particular prior to the repeal of the Code and clear determination of how a “reasonable subsequent recovery period” would look like for each individual lease.

Landlords in particular will need to take care in ensuring the accuracy of their termination notices. Rental arrears alone may not provide sufficient grounds to allow for Landlords to terminate a Lease.

The test in ascertaining a genuine abandonment of the leased premises is not simple and cannot be relied solely by the lack of trade, stock or rental payments alone. Tenants who are able to provide credible reasoning for their supposed ‘defaults’ will be given the benefit of the doubt, as was considered in this case.

For assistance on lease negotiations or for further information on how the Sneakerboy decision may affect you, please do not hesitate to contact our Property Team.

The information contained in this article is general in nature and cannot be relied on as legal advice nor does it create an engagement. Please contact one of our lawyers listed above for advice about your specific situation.