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Retail and commercial lease regulations around COVID-19 take effect in NSW

05 May 2020
Read Time 4 mins reading time

The Retail and Other Commercial Leases (Covid-19) Regulation 2020 (Regulations) commenced in New South Wales on 24 April 2020 to give effect to the National Cabinet Mandatory Code of Conduct (Code).

who do the regulations apply to?

The Regulations apply to an Impacted Lessee. An Impacted Lessee is a Lessee who:

  1. qualifies for the JobKeeper Scheme; and
  2. has a turnover of less than $50 million for the 2019 financial year, determined as follows:

i) if the lessee is a franchisee – by the turnover of the business conducted at the premises;

ii) if the lessee is a member of a group – by the turnover of the group; and

iii) if any other case – by the turnover of the business conducted by the lessee.

how long do the regulations apply for?

The Regulations apply for the Prescribed Period, being from 24 April 2020 to 24 October 2020.

what actions must a lessor not take against a lessee?

A Lessor must not take any Prescribed Action against an Impacted Lessee for:

  1. the failure to pay rent;
  2. the failure to pay outgoings; or
  3. for not operating the business during the hours specified in the lease.

What is a “Prescribed Action”?

A Prescribed Action includes any of the following:

  1. evicting the Lessee;
  2. exercising a right of re-entry;
  3. recovering the premises/land;
  4. the distraint of goods;
  5. forfeiture;
  6. damages;
  7. requiring payment of interest on unpaid rent;
  8. recovering a security bond;
  9. taking possession;
  10. terminating the lease; or
  11. any other remedy available to a Lessor at common law or under the law of NSW.

what further prohibitions and restrictions have been enforced by the regulations?

  1. Rent payable by Impacted Lessees cannot be increased. This does not include rent that is determined by reference to turnover.
  2. Lessors must not take a Prescribed Action against an Impacted Lessee after 24 October 2020 if an Impacted Lessee fails to pay an amount equal to the rent increase referred to above.
  3. If an Impacted Lessee is required under the lease to pay an amount for land tax (or other statutory charge) or insurance, if the amount payable by the Lessor for land tax or insurance is reduced, the Impacted Lessee is exempted from the lease provision to the extent of the reduction.
  4. An act or omission of a Lessee required under a Commonwealth or State Law in response to COVID-19 will not constitute a breach of the lease, will not give rise to grounds for termination or allow a Lessor to take a Prescribed Action against a Lessee.

The parties are however free to take any action in respect of the lease if they mutually agree to do so. For example, the parties may agree to terminate the lease during the Prescribed Period.

what must a lessor do before they take a prescribed action against a lessee?

A Lessor must not take or continue a Prescribed Action against an Impacted Lessee for a breach of the lease due to a failure of the Impacted Lessee to pay rent unless they have:

  1. requested for the parties to renegotiate the rent and other terms of the lease; and
  2. renegotiated in good faith, having regard to:

i) the economic impacts of the pandemic; and

ii) the leasing principles of the Code.

what if the lessor and lessee cannot reach agreement?

If a Lessor and Lessee cannot reach agreement, the matter must be referred to mediation.

can a lessor take a prescribed action against a lessee for non-Covid-19 related reasons?

Yes, Lessors can take a Prescribed Action on grounds that are not related to the economic impacts of COVID-19.

The Regulations provide examples of Prescribed Actions Lessors may take, such as terminating the lease if a Lessee has damaged the premises, or if a Lessee fails to vacate after the expiry of a fixed term of the lease.

do the regulations only apply to an impacted lessee?

We consider that there is currently a degree of ambiguity in the drafting of the Regulations in respect of whether the Regulations apply to Lessees who are not an Impacted Lessee.

Specifically, we note that section 7(3) of the Regulations currently state that “a party to a commercial lease must, if requested, renegotiate in good faith the rent payable under, and other terms of, the commercial lease.” On this basis, we consider that there is room to argue that any Lessee, whether an Impacted Lessee or not, can request provisions of the lease to be renegotiated, and if so, a Lessor is required to renegotiate.

We anticipate that the Government will provide clarification on whether the Regulations do apply to all Lessees shortly.

Please contact our Property team if you have any questions.

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Retail and commercial lease regulations around COVID-19 take effect in NSW

05 May 2020

The Retail and Other Commercial Leases (Covid-19) Regulation 2020 (Regulations) commenced in New South Wales on 24 April 2020 to give effect to the National Cabinet Mandatory Code of Conduct (Code).

who do the regulations apply to?

The Regulations apply to an Impacted Lessee. An Impacted Lessee is a Lessee who:

  1. qualifies for the JobKeeper Scheme; and
  2. has a turnover of less than $50 million for the 2019 financial year, determined as follows:

i) if the lessee is a franchisee – by the turnover of the business conducted at the premises;

ii) if the lessee is a member of a group – by the turnover of the group; and

iii) if any other case – by the turnover of the business conducted by the lessee.

how long do the regulations apply for?

The Regulations apply for the Prescribed Period, being from 24 April 2020 to 24 October 2020.

what actions must a lessor not take against a lessee?

A Lessor must not take any Prescribed Action against an Impacted Lessee for:

  1. the failure to pay rent;
  2. the failure to pay outgoings; or
  3. for not operating the business during the hours specified in the lease.

What is a “Prescribed Action”?

A Prescribed Action includes any of the following:

  1. evicting the Lessee;
  2. exercising a right of re-entry;
  3. recovering the premises/land;
  4. the distraint of goods;
  5. forfeiture;
  6. damages;
  7. requiring payment of interest on unpaid rent;
  8. recovering a security bond;
  9. taking possession;
  10. terminating the lease; or
  11. any other remedy available to a Lessor at common law or under the law of NSW.

what further prohibitions and restrictions have been enforced by the regulations?

  1. Rent payable by Impacted Lessees cannot be increased. This does not include rent that is determined by reference to turnover.
  2. Lessors must not take a Prescribed Action against an Impacted Lessee after 24 October 2020 if an Impacted Lessee fails to pay an amount equal to the rent increase referred to above.
  3. If an Impacted Lessee is required under the lease to pay an amount for land tax (or other statutory charge) or insurance, if the amount payable by the Lessor for land tax or insurance is reduced, the Impacted Lessee is exempted from the lease provision to the extent of the reduction.
  4. An act or omission of a Lessee required under a Commonwealth or State Law in response to COVID-19 will not constitute a breach of the lease, will not give rise to grounds for termination or allow a Lessor to take a Prescribed Action against a Lessee.

The parties are however free to take any action in respect of the lease if they mutually agree to do so. For example, the parties may agree to terminate the lease during the Prescribed Period.

what must a lessor do before they take a prescribed action against a lessee?

A Lessor must not take or continue a Prescribed Action against an Impacted Lessee for a breach of the lease due to a failure of the Impacted Lessee to pay rent unless they have:

  1. requested for the parties to renegotiate the rent and other terms of the lease; and
  2. renegotiated in good faith, having regard to:

i) the economic impacts of the pandemic; and

ii) the leasing principles of the Code.

what if the lessor and lessee cannot reach agreement?

If a Lessor and Lessee cannot reach agreement, the matter must be referred to mediation.

can a lessor take a prescribed action against a lessee for non-Covid-19 related reasons?

Yes, Lessors can take a Prescribed Action on grounds that are not related to the economic impacts of COVID-19.

The Regulations provide examples of Prescribed Actions Lessors may take, such as terminating the lease if a Lessee has damaged the premises, or if a Lessee fails to vacate after the expiry of a fixed term of the lease.

do the regulations only apply to an impacted lessee?

We consider that there is currently a degree of ambiguity in the drafting of the Regulations in respect of whether the Regulations apply to Lessees who are not an Impacted Lessee.

Specifically, we note that section 7(3) of the Regulations currently state that “a party to a commercial lease must, if requested, renegotiate in good faith the rent payable under, and other terms of, the commercial lease.” On this basis, we consider that there is room to argue that any Lessee, whether an Impacted Lessee or not, can request provisions of the lease to be renegotiated, and if so, a Lessor is required to renegotiate.

We anticipate that the Government will provide clarification on whether the Regulations do apply to all Lessees shortly.

Please contact our Property team if you have any questions.