The NSW COVID Regulation adopts the principles contained in the Commonwealth Code of Conduct, which intends to provide tenants and landlords in commercial leases with guidance in finding a commercial and amicable solution to the financial detriment caused by the pandemic.
The primary principle is:
“Landlords must offer tenants proportionate reductions in rent payable in the form of waivers and deferrals… of up to 100% of the amount ordinarily payable, on a case by case basis, based on the reduction in the tenant’s trade during the COVID 19 Pandemic Period and a subsequent reasonable recovery period.”
Whilst it is accepted that tenants are entitled to rent relief during the Pandemic Period which started on 1 April 2020 and ends on 24 October 2020, the tenant’s right to rent relief during a subsequent reasonable recovery period was not tested until the Sneakerboy case was brought before the Supreme Court of NSW.
In the case the Supreme Court accepted Sneakerboy’s submission that a “subsequent reasonable recovery period” should be no less than six months after the Pandemic Period ends, and commented that six months does not seem to be a long time for trade to recover. These final words suggest that the recovery period could be even longer.
Sneakerboy was granted relief against forfeiture for what the Landlord considered to be breaches which preceded the commencement of the COVID Leasing Regime. In making its decision the Supreme Court accepted, and in part relied on, Sneakerboy’s submission that revenue had declined as early as February 2020 as a consequence of the pandemic.
Takeaways for Landlords and Tenants
Relief after 24 October 2020…
Whilst it is not clear if the NSW COVID Regulation will be extended beyond 24 October 2020, what is clear is that rent relief can continue for a reasonable recovery period after 24 October 2020 so long as an agreement is reached prior to that date.
Relief against forfeiture…
Landlords should adopt a cautious approach when considering taking action in respect of breaches that occurred prior to 1 April 2020 given the willingness of the Supreme Court to take into account consequences of the COVID 19 pandemic which occurred prior to 1 April 2020.
Whilst Sneakerboy maintained that only its turnover in the premises should be taken into account, the Supreme Court determined that the whole of the tenant’s turnover from all locations at which the tenant conducts its business should be taken into account.
What happens if no agreement is reached by end of the Pandemic Period?
The Supreme Court in the Sneakerboy case acknowledged that it is not entirely clear what will happen if the parties to a lease to which the NSW COVID Regulation regime applies do not prior to 24 October 2020 renegotiate the lease, or a party refuses to enter into renegotiation.
What is clear however is that the parties have an obligation to negotiate in good faith. Ideally the parties should complete the negotiation of rent and lease terms prior to 24 October 2020.
If you are a tenant that is struggling to find a reasonable solution with your landlord, as a result of the financial impact on trade due to the pandemic, or a landlord that is unsure of your obligations when negotiating with your tenant, please do not hesitate to contact Andrew McIntyre.
Andrew is a leasing expert with over 20 years’ experience in the industry, who will be able to guide you through any negotiations, and help you achieve a satisfactory and sustainable outcome. He can be contacted on firstname.lastname@example.org or by calling (02) 9279 4888.