How long will the provisions specified in the Regulation last?
The Regulation commenced on 24 April 2020, and will apply until 25 October 2020 (Regulation Period).
What sort of leases and lessees does the Regulation cover?
The Regulation applies to retail shop leases as well as other commercial (non-retail) leases. In order to come under the provisions of the Regulation, a lessee must meet the criteria for being an "impacted lessee" which requires it to:
- qualify for the National JobKeeper scheme; and
- demonstrate a turnover in the 2018-2019 financial year of less than $50 million.
Turnover will be calculated based on the business conducted at the premises concerned if the lessee is a franchisee. Turnover for a lessee that is a member of a corporate group will be calculated with reference to the whole corporate group. The Regulation provides that corporations constitute a group if they are related bodies corporate for the purposes of the Corporations Act 2001 (Cth).
What are the rights and obligations of lessors and lessees under the Regulation?
- Prohibited action: If during the Regulation Period, a lessee fails to pay rent or outgoings, or does not operate its business during the hours specified under the lease, the lessor is prohibited from taking a range of prescribed actions or seeking orders in a court or tribunal to enforce any such actions, including:
- terminating the lease;
- evicting the lessee;
- exercising a right of re-entry/recovery of the premises;
- claiming damages from the lessee;
- performance of obligations by the lessee or any other person under a guarantee under the lease;
- requiring a right of payment of interest on, or charge related to, unpaid rent;
- recovering the whole or part of a security bond under the lease; or
- claiming any other remedy otherwise available to the lessor against the lessee.
- No rent increase: A lessor is prohibited from increasing rent during the Regulation Period, and cannot following the Regulation Period take any prohibited action against a lessee for failure to pay any rent increased amount that would otherwise have been payable during the Regulation Period.
- Property outgoings reduction: A lessee is to benefit from and is not required to pay the amount by which any land tax, statutory charges or insurance costs payable by the lessor has been reduced.
- Other rights and obligations preserved: A lessor will still retain all its other rights, and a lessee is still required to comply with its other obligations, under the lease. For example, a lessor may terminate a lease for any reason not related to the economic impacts of the COVID-19 pandemic. This may include instances where a lessee has breached the lease by failing to repair damage to the premises or to vacate the premises following the expiry of a fixed term lease or as required at law.
Is there an obligation to renegotiate rent and other terms of the lease?
Yes. If requested by a party to a retail lease or commercial lease covered by the Regulation, the other party is required to renegotiate the terms of the lease in good faith having regard to the economic impacts of the COVID-19 pandemic, and the leasing principles set out in the National Code of Conduct.
Notably, a lessor may not take any prohibited action against the lessee, unless such good faith negotiation has occurred.
A number of key leasing principles in respect of rent negotiation set out in the National Code of Conduct are summarised below. It is important to note that the Regulation does not mandate the principles of the Code, but simply requires the parties to "have regard" to them.
|Lessors must offer lessees proportionate reductions in rent payable in the form of waivers and deferrals of up to 100% of the amount ordinarily payable (Rent Arrangement), on a case-by-case basis, based on the reduction in the lessee’s trade during the COVID-19 pandemic period and a subsequent reasonable recovery period. (Principle #3)
Rental waivers must constitute no less than 50% of the total reduction in rent except where the lessee agrees otherwise. (Principle #4)
|The National Code of Conduct is to apply for the period the Commonwealth JobKeeper program remains operational i.e., from 30 March 2020 to 27 September 2020, subject to further updates by the Australian Government.
|Payment of rental deferrals by the lessee must be amortised over the balance of the lease term or for a period of no less than 24 months, whichever is the greater, unless otherwise agreed by the parties. (Principle #5)
||If a lease expires prior to the end of the pandemic and there are repayment obligations on the lessee, then these may need to be recharacterised as debt obligations of the lessee that are to performed after the pandemic ends and a reasonable recovery period is factored in.
|No fees, interest or other charges should be applied with respect to rent waived in Principles #3 and #4 and no fees, charges nor punitive interest may be charged on deferrals in Principles #3, #4 and #5. (Principle #10)
||The restriction on punitive interest would not seem to prohibit:
- interest being payable on any deferred rent amount at the current market standard interest rate (or as set out in the lease); or
- interest being payable in the situation where the tenant has failed to pay a deferred rent payment on time.
|A lessee should be provided with an opportunity to extend its lease for an equivalent period of the rent waiver and/or deferral period outlined in Principle #3 above. (Principle #12)
||This is intended to provide the lessee additional time to trade, on existing lease terms, during the recovery period after the COVID-19 pandemic concludes.
What if a lessor refuses to renegotiate the terms of the lease, including rent payable under the commercial lease?
This would constitute a breach of the Regulation by the lessor. Impacted lessees can seek relief from the relevant Tribunal or Court in relation to such a breach, or where a dispute otherwise arises in relation to the negotiations between the parties. When considering a lessor's action for recovery of possession of premises, termination of a lease or enforcement of the lease, the Tribunal and any Court will have regard to the leasing principles outlined in the National Code of Conduct.
Disputes in relation to retail leases are to be dealt with under the Retail Leases Act 1994 as if they were retail tenancy disputes under the Act. For commercial (non-retail) leases, disputes must be submitted to the Small Business Commissioner for mediation and for the Commissioner to have certified mediation has failed and given reasons or the failure before Court proceedings can take place.
To view the Regulations on the NSW Government website, click here.
To view the National Cabinet Mandatory Code of Conduct - SME Commercial Leasing Principles During COVID-19, click here.