Long term effects of COVID-19 for landlords – decision of the NSW Supreme Court
- Published 08.10.2020
The recent decision of the NSWSC in Sneakerboy Retail Pty Ltd trading as Sneakerboy v Georges Properties Pty Ltd (No 2) (NSWSC 2020) (‘Sneakerboy’) provides an insight into how the courts may interpret the National Cabinet Mandatory Code of Conduct for SME Commercial Leasing Principles during COVID-19 (‘the Mandatory Code’) and Retail and Other Commercial Leases (COVID-19) Regulation 2020 (NSW) (‘the Regulations’) introduced earlier this year.
The legislative changes attempt to support commercial tenants impacted by the pandemic by, among other things, setting up a regime for rent relief and deferrals and limiting a landlord’s ability to terminate leases.
If the Court’s interpretation in Sneakerboy is followed, there may be significant financial and legal consequences for landlords long after the Regulations are lifted.
COVID-19 specific legislative amendments
On 7 April 2020, the Prime Minister released the Mandatory Code which applies to commercial tenancies including retail, office and industrial properties.
The Regulations were subsequently passed and commenced on 24 April 2020. The Regulations adopt the Mandatory Code for applications in NSW.
The Mandatory Code introduced various conditions and limitations on landlords during a ‘prescribed period’ of six months from the commencement date.
Significantly, landlords must negotiate in good faith, rent and other terms before they may take any actions under the provisions of the lease or institute proceedings.
The Mandatory Code applies where the tenant is an ‘impacted tenant’ with a turnover of less than $50 million and the tenant is eligible for the Federal Government’s JobKeeper payments.
The parties must act in accordance with the leasing principles set out in the Mandatory Code in their negotiations.
In Sneakerboy, the tenant applied for relief against forfeiture following termination of the lease by the landlord.
The landlord terminated the lease on the basis of the tenant’s history of late rent payments prior to the pandemic, and the alleged abandonment of the premises at the beginning of COVID-19.
In exercising its discretion to impose conditions on the relief against forfeiture, the Court considered the operation of the COVID-19 legislative changes as the effect of providing relief would retrospectively reinstate the lease.
The court’s interpretation of the Regulations and Mandatory Code raise several issues for landlords and tenants. In particular, some of the significant findings of the Court include:
Meaning of ‘tenants trade’ in the reduction of rent
The third leasing principle in the Code requires landlords to offer tenants proportionate rent reductions based on the reduction of the tenant’s trade.
The Court determined that in calculating the reduction of trade generally the overall turnover from all business locations should be considered rather than that of the leased premises in question. The tenant’s trade should be considered as a whole so that all costs, and all profits are taken into account.
Consequently, where a tenant operates their business from multiple premises, a landlord may be obliged to provide relief on the average of the tenant’s trade, even if operations from their particular premises is performing well.
However, landlords will be able to take into account relief and cost cutting measures received and implicated by the tenant and also take into account profits from online sales.
Subsequent reasonable recovery period
The decision also provides that any negotiated rental waivers and deferrals may continue to apply for ‘a subsequent reasonable recovery period’ as provided by the Mandatory Code which may extend beyond the six month period prescribed by the COVID-19 specific legislation.
The Court indicated that the length of the period in which the rental waivers and deferrals apply will be determined on a case by case basis.
Landlord actions after the prescribed period
The Court also confirmed that the restrictions against landlords in relation to initiating proceedings or taking action under the lease, including drawing down on bank guarantees, may not automatically end at the expiry of the six month prescribed period.
The Court indicated that the key consideration is the timing and circumstances of the tenant’s breach. If the breach is by an impacted tenant during the prescribed period, the landlord will be barred from such actions without first complying with the Regulations.
This interpretation effectively means that the protections of the Regulations will continue to apply long past the end date of the legislation in some cases.
Timing of negotiations
The Court considered the effect of the repeal date of the Regulations on negotiations between the parties. The Court commented on the potential for negotiations to be affected if they are finalised by such repeal date as the obligations under the Regulations will fall away.
Whilst this is the first determination by the SC which considers the impact of the COVID-19 specific provisions, the decision in Sneakerboy indicates that landlords must exercise great care in their negotiations with impacted tenants and prioritise resolving negotiations with them. Landlords must exercise caution in undertaking any recovery action in light of the potential ongoing application of the COVID-19 legislation, even after its repeal.
It is also a reminder for tenants to ensure that they finalise any negotiations with landlords and have them documented prior to the repeal of the COVID-19 legislation.