NSW COVID-19 Update: Rent Reduction on Commercial Leases
Written by Luke Musto, Associate
As part of the Australian Federal and State governments’ financial response to the coronavirus pandemic we have seen various stimulus packages, temporary regulations and laws, and other announcements made. The latest addition in NSW in relation to commercial leases came on 25 April 2020, when the Retail and Other Commercial Leases (COVID-19) Regulation 2020 (the Regulations) was published, which gave effect to the National Cabinet Mandatory Code of Conduct – SME Commercial Leasing Principles during COVID‑19 (the Code).
These changes are all a bit dense, and even after someone has unpacked the Regulations it is likely they will have some questions. The purpose of today’s post is to discuss the new laws that have been introduced and their impact on commercial leases, while answering some common questions.
Overview of the changes
On 7 April 2020, the National Cabinet released a Mandatory Code of Conduct that, in broad terms, sets out good faith principles for the negotiation of commercial leases for tenants impacted by the coronavirus pandemic. The NSW Government, by way of the Regulations, has now endorsed this Code.
Under the NSW regulations, for the next six months landlords cannot take enforcement action against JobKeeper-qualifying tenants for not paying rent or not trading for reasons related to the economic impact of coronavirus, applicable to both retail and commercial leases.
This strongly encourages landlords to engage in good faith negotiations with their tenants to ensure that their tenants continue to pay rent, even if it is at a reduced amount. Once an agreement has been entered into, the tenant will become liable for not paying the reduced amount in accordance with the lease, with broadly “normal” consequences.
Of the agreed reduced amount, at least 50% of this must be waived with the balance to be repaid over a period of at least 24 months.
What do the Regulations prohibit?
In the event that a tenant captured by their regulations breaches their lease agreement for a reason relating to coronavirus, the landlord is prohibited from taking legal action against them during the six-month period, unless the landlord has complied with certain conditions under the Regulation. These breaches include:
- A failure to pay rent; or
- A failure to pay outgoings; or
- The business not being open for business during the prescribed hours specified in the lease.
Furthermore, if the tenant meets the definition of an impacted lessee, then the landlord cannot raise rent during the six-month period.
What obligations do the Regulations impose?
If a tenant meets the definition of “impacted lessee”, than either party to the lease may request that the parties renegotiate the rent payable of the lease, and other terms such as when it is due. If this is requested, then the parties are obligated to negotiate in good faith with each other, having regards to the economic impacts of the COVID-19 pandemic and the National Code of Conduct.
What lessees are captured under the Regulations?
So far, we have spoken about “impacted lessees”. It is important to understand what this means as per the new laws. “Impacted lessees” are captured under the Regulations if:
- They qualify for the JobKeeper scheme; and
- They have a turnover for the 2018-2019 financial year of less than $50 million (how this is determined will depend on if the lessee is part of a franchisee or group).
How long will the legislation remain in place?
Six months, having begun on 24 April 2020 and scheduled to end automatically on 23 October 2020 (unless the government decides to extend this).
What types of leases are affected?
The Regulation applies to commercial leases, including retail shop leases. It does not include:
- A lease entered into after 24 April 2020, but it will capture leases entered into by way of exercising an option or renewal after this date; or
- Leases under the Agricultural Tenancies Act 1990 (NSW).
What if the tenant breaches the lease but the breach is not related to COVID-19?
Importantly, the landlord is not prevented from taking action against the tenant on grounds not related to the coronavirus pandemic. This means that the landlord may take action against instances such as where the tenant damages the premises or if they do not vacate the premises at the end of a fixed-term lease.
What evidence should tenants give to prove their financial status?
The Regulations are not as clear on this point as they could be, however, on the face of it they do not require a tenant to provide financial information to their landlord as part of their good faith negotiations. This being said, tenants should consider that it would in bad faith to refuse to do this. On the other hand, we have already seen instances of landlords requiring very onerous financial records of the business before agreeing to rent reductions, including things like all BAS statements and other financial records for the past three years which is also unlikely to meet the “good faith” requirement. Tenants should provide as much information as possible to their landlords to show their status, but landlords should not be overly onerous and strict, while things like letters from accountants should also be taken into account if there are any gaps in information available.
How should agreements be documented?
Where the parties are able to come to an agreement about the impacts of COVID-19 and rent, it is important that they fully document the changes that have been agreed and the circumstances surrounding and impacting this. This is because while things may be agreed very quickly now, it is possible that disputes will arise further down the track as landlords question the rent reductions agreed to.
Is there anything else to take into account?
It is clear that the Regulations have been drafted quickly with the aim of providing guidance and certainty to tenants and landlords as soon as possible. As a result of this, they are not as clear as would be optimal and quite a lot of ambiguity does exit.
Because of this, it is likely that these Regulations will see further changes and refinements as the NSW parliament sits again in the next few weeks. For this reason, all tenants and landlords to commercial leases should keep themselves up to date on the ongoing news.
The latest changes to the law in NSW reflects the reality that both landlords and tenants will be better off if they are able to work together during the pandemic to come to a mutually agreeable solution. It is important that both tenants and landlords understand the commercial reality of the current situation. By negotiating in good faith, along with taking full advantage of the various stimulus packages, commercial tenants will be able to give themselves the best chance to wait out the crisis, and landlords will ensure that they have someone paying them rent on an ongoing basis over the period. We encourage anyone who needs to negotiate as part of these regulations to get in touch with our experienced property law team today.
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