COVID-19 | Sneakerboy The Sequel: A Practical Application of the NSW COVID-19 Regulation and Leasing Regime

In the second instalment of Sneakerboy, the Court applies various aspects of the NSW COVID-19 leasing regime and addresses the forthcoming repeal of the NSW COVID-19 Regulation, currently scheduled for 24 October 2020.

The Sneakerboy Decisions

The recent NSW Supreme Court decision of Sneakerboy Retail Pty Ltd trading as Sneakerboy v Georges Properties Pty Ltd (No 2) [2020] NSWSC 1141 follows the earlier decision granting relief against forfeiture to luxury streetwear brand Sneakerboy following termination of its lease in Temperance Lane, Sydney. Our commentary on the earlier decision can be found here.

It presents as the first opportunity across all States and Territories for a Court to apply COVID-19 related legislation and has therefore attracted a lot of attention, as landlords and tenants of all shapes and sizes struggle to navigate negotiations in an uncertain climate. However for those based outside NSW, it is important to note that:

• for the purposes of granting relief in equity, the facts of Sneakerboy are unique because they are the first to be impacted by the COVID-19 pandemic and COVID-19 related legislation; and
• the decisions relate specifically to the NSW COVID-19 leasing regime, which requires parties to an impacted lease to have regard to the National Cabinet Mandatory Code of Conduct. This approach can be distinguished from other jurisdictions that have enacted their own interpretation of the Code and does not compel parties to have regard to the Code itself.

As a condition of the relief against forfeiture, the Court ordered the tenant to provide a new bank guarantee to replace the original which had been drawn down by the landlord and applied in part towards full rent payments accruing during part of the prescribed period.

In most cases for relief in equity, an order of this nature is uncontroversial. However in this case, the NSW COVID-19 regime was to impact rent payments following reinstatement of the lease, consequently varying the amount of the replacement bank guarantee required. Failing agreement by the parties, the Court applied the NSW COVID-19 regime to the facts to determine the amount of the replacement bank guarantee and the appropriate timing for production by the tenant.

Noteworthy Findings

Commentary in the judgement resulted in the following noteworthy findings:

• Repeal of the NSW Regulation

The NSW Regulation is scheduled for repeal on 24 October 2020 (unless it is extended by a new regulation).

The Court confirmed it does not have jurisdiction to make orders varying the terms of commercial leases that are subject to the NSW COVID-19 regime, other than to compel the parties meet for the purpose of attempting to renegotiate in good faith. Rather, it is for the parties to renegotiate the terms and, failing agreement, parties may refer the dispute to mediation by the Registrar.

Once the parties reach agreement, renegotiated rent and lease terms take effect even after the NSW Regulation is repealed. However, for cases where parties fail to finalise an agreement by 24 October 2020 the consequence is unclear.

The judgment poses many relevant questions. Can parties be compelled to initiate or continue renegotiating terms after 24 October 2020? It seems that if parties do not initiate and agree a renegotiation of rent and lease terms under the NSW Regulation prior to its repeal, then the right to do so may be lost.

In the absence of agreement, can landlords demand full rent payments for the prescribed period following the repeal? It seems to be a less than perfect outcome for tenants whose landlords are dragging their feet.

• Determining relief by reference to a ‘tenant’s trade’

The Code’s leasing principle 3 calls for landlords to grant proportionate relief to tenants based on the reduction in the tenant’s trade during the COVID-19 pandemic period and a subsequent reasonable recovery period.

The Court confirmed it will generally be the case that the ‘tenant’s trade’ will not be limited to the tenant’s turnover from the leased premises. Rather, the term should be applied more broadly to the whole of the particular tenant’s turnover including any turnover derived from internet sales, as well as costs and profit, from all locations at which the tenant conducts its business.

However, the Court cautioned against the unilateral application of this interpretation. Regard must still be had to NSW Regulation 4 and to the fact that the Code intends for landlords and tenants to agree tailored arrangements that address individual circumstances.

• A ‘subsequent reasonable recovery period’

The Court did not consider the concept of a subsequent reasonable recovery period at length.

It accepted the tenant’s submission that it should be no less than six months and in doing so, the Court noted that six months was all the tenant had asked for in this case, and that six months ‘does not seem to be a long time for [the tenant’s] trade to recover’.

In view of the Court’s opinion, is likely that the subsequent reasonable recovery period as stipulated in the Code will be determined on the facts of each case and could easily exceed a period of six months if the circumstances warrant it.

• NSW Regulation to apply retrospectively

In the context of leasing principle 3, the Court considered rent and outgoings payable under the NSW COVID-19 regime. It held that insofar as the terms of the NSW Regulation require application of the leasing principles set out in the Code, those terms had retrospective effect from 1 April 2020, despite that the NSW Regulation did not come into effect until 24 April 2020.

The Court confirmed that the term ‘the COVID-19 pandemic period’ referred to in leasing principle 3 was defined in the Code’s own statement of purpose as being ‘the period during which the JobKeeper program is operational’. The start date for the JobKeeper program was 1 April 2020 however the program’s recent extension means an end date (and commencement of a subsequent reasonable recovery period) is more uncertain.

It is important to note however that terms of the NSW Regulation which do not require application of the Code’s leasing principles (that do not consequently refer to the COVID-19 pandemic period) may not apply retrospectively.

• Prohibition on ‘prescribed actions’

The Court also addressed the prohibition on landlords from enforcing certain rights (for example, terminating a lease) for circumstances occurring during the prescribed period.

The Court confirmed that the prohibition is not intended to be temporary, prohibiting landlords from taking prescribed actions until after the prescribed period ends. Rather, the NSW Regulation is intended to prohibit landlords from taking prescribed actions at any time – even after expiry of the prescribed period – if the relevant circumstances occurred during the prescribed period.

The Court queried whether repeal of the NSW Regulation would impact this prohibition, but the question was left unanswered.

The judgment delivers welcomed guidance to parties for renegotiating rent and lease terms under the NSW COVID-19 regime but by no means provides a clear and complete picture. With serious questions surrounding the effect of the NSW COVID-19 regime following 24 October 2020 and the Court powerless to vary lease terms on behalf of parties, those in NSW are encouraged to finalise negotiations prior to 24 October 2020 to achieve maximum certainty in an uncertain future.

For details of all our COVID-19 tips and updates, visit the Gadens COVID-19 Hub.

Authored by:

Archie Smith, Partner
John Nicolas, Partner
Lui Scipioni, Partner
Alexandra Walker, Special Counsel