COVID-19 | Update: NSW Government introduces new regulations for retail and commercial leasing

Following the Mandatory Code of Conduct released by the National Cabinet on 7 April 2020 (Code), the New South Wales Government has introduced the Retail and Other Commercial Leases (COVID-19) Regulation 2020 (Regulations). The Regulations introduce temporary measures to provide urgent relief for retail and commercial tenants as a result of the COVID-19 pandemic. The Regulations are set out in 2 schedules, one relating to retail leases and the other to general commercial leases.

The Regulations commenced on 24 April 2020 and apply for 6 months (the prescribed period).

In line with the Code, the Regulations require that, if requested, landlords and tenants must in good faith negotiate the rent payable and other terms under a commercial lease. Landlords are required to offer rent reductions in the form of waivers and deferrals that are proportionate to the tenant’s reduction in turnover. During negotiations both landlords and tenants should have regard to:

• the economic impacts of the COVID-19 pandemic; and
• the leasing principles set out in the Code.

The Regulations are largely consistent with the Code, and provide some helpful clarification on issues such as the treatment of internet sales, Landlord’s rights for non-COVID-19 related default, terms agreed prior to introduction of the Regulations and freedom to agree terms outside of the Regulations.

Which tenancies do the Regulation apply to?

The Regulations apply to:

• retail shop leases under the Retail Leases Legislation; and
• commercial leases under the Conveyancing Legislation,

with a tenant that is defined as an “impacted lessee” being:

• a tenant that qualifies for the JobKeeper scheme; and
• that tenant has a turnover (including from internet sales of goods or services) in the 2018-2019 financial year that was less than $50 million, with the relevant turnover being:
  • if the tenant is a franchisee, the turnover of the business conducted at the individual premises level; or
  • if the tenant is a corporation within a group, that is related bodies corporate under the Corporations Act, for the turnover at the group level; or
  • in any other case, the turnover of the business conducted by the tenant.

What is prohibited by the Regulation?

The Regulations prohibit a landlord from taking a prescribed action against a tenant or terminating a retail shop or commercial lease if:

• the tenant fails to pay rent; or
• the tenant fails to pay outgoings; or
• the business is not open during the hours specified in the lease.

The Regulations also include:

• a prohibition on rent increases by landlords during the prescribed period;
• a prohibition on landlords taking any prescribed action for failure of a tenant to pay a rent increase after the Regulations expire; and
• a requirement to pass on any reduction in land tax, statutory charge or insurance payable under a Lease proportionate to any reduction received by the landlord.

What is a prescribed action under the Regulation?

Prescribed actions that cannot be taken against tenants for breach of a retail shop or commercial lease include:

• eviction of the tenant from the premises;
• exercising a right of re-entry to the premises;
• recovery of the premises;
• distraint (or seizure) of goods;
• forfeiture or possession;
• termination;
• damages;
• requiring a payment of interest on, or a fee or charge related to the unpaid rent;
• recovery of the whole or part of a security bond (including a bank guarantee);
• performance of obligations by the tenant or any other person pursuant to a guarantee under the commercial lease; or
• any other remedy otherwise available to a landlord against a tenant at common law or under legislation.

What is not prohibited by the Regulation?

The Regulations do not prohibit:

1. 1. a landlord and tenant agreeing to the parties taking any action, including any prescribed action or an agreement to terminate the retail shop or commercial lease; or
   2. a landlord taking prescribed action against a tenant on grounds not related to the economic impacts of COVID-19, for example:

• • where the tenant has breached the lease by damaging the premises or failing to make good; or
  • where the tenant fails to vacate following the expiry of a fixed term retail shop or commercial lease.

Which tenancies do the Regulation not apply to?

The Regulations do not apply to:

1. 1. a retail shop or commercial lease entered into after 24 April 2020, other than pursuant to an option of renewal;
   2. a lease under the Agricultural Tenancies Act 1990 (NSW); or
   3. a retail shop or commercial lease where tenant is not defined as an impacted leasee.

What is not included in the Regulation?

The Regulations do not include:

1. 1. a unilateral right for a tenant to terminate a retail shop or commercial lease as termination must be agreed on by both the landlord and the tenant; or
   2. how incentives are to be dealt with by landlords and tenants when calculating a reduction in rent.

Resolving Disputes

The Regulations extend the dispute resolution procedure under the Retail Legislation and creates a new dispute resolution forum under the Conveyancing Legislation.

Broadly, where a dispute arises from a retail shop or commercial lease to which the Regulations apply, the landlord and tenant must submit to mediation by the Office of the Small Business Commissioner before a landlord can recover possession, terminate a lease or exercise or enforce any right under the lease.

Going forward

With the Regulation now in force, landlords and tenants should familiarise themselves with the changes affecting tenancy laws.

At Gadens, our Property Team is well equipped to advise and assist clients as they navigate the current COVID-19 crisis. We are here to help, please contact us if you require assistance.

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

Authored by:

Archie Smith, Partner