COVID-19: Managing Leases 3 – the Regulations

The National Code of Conduct for Commercial leases is now in force in NSW.

After the National Cabinet introduced the Mandatory Code of Conduct for commercial leases, States and Territories have been preparing their own legislation to give effect to the code. Several states and territories have passed what’s called enabling legislation – laws that allow a minister to make regulations on certain topics – but haven’t actually made any regulations. on 24 April NSW became the first state to give legal force to the Code the Retail and Other Commercial Leases (COVID-19) Regulations 2020 (NSW) (the Regulation) commenced .

When and where do the Regulations apply?

The Regulations apply to a lessee who qualifies for the Jobkeeper scheme and has a 2018-2019 financial year turnover of less than $50 million (including turnover from internet sales). The Regulations will operate for 6 months – until 24 October 2020, unless extended by NSW Parliament. Let’s hope it won’t be necessary.

The Regulations don’t apply to a lease that is entered after 24 April 2020. Although, it will capture leases entered due to an exercise of option or renewal of an existing lease after this date.

Where the Regulations apply to a lessee, they are called an “impacted lessee“. The Regulations operate to limit the landlord’s ability to enforce lease terms against an impacted lessee in a number of ways. They also impose an obligation to negotiate. These limits and obligations are set out below.

Prescribed action

Landlords can’t take ‘prescribed action’ where, during the 6 month regulation period, an impacted lessee:

  • fails to pay rent or outgoings, or
  • doesn’t open the business as required by the lease,

‘Prescribed action’ is widely defined and includes:

  • Terminating the lease;
  • Evicting the lessee or taking possession of the premises;
  • Claiming damages or penalty interest against the lessee;
  • Recovering from the lessee’s security deposit or bond;
  • Any other remedy available to the landlord.

Prohibition on rent increases

The landlord can’t increase the rent during the 6 month period

Landlords must pass on relief

Where a lessee is required to pay land tax, charges, rates or insurance and the landlord receives a reduction in these costs, the reduction must be passed on to the lessee.

Obligation to Renegotiate

The new Regulation essentially provides that a landlord can’t take any action against an impacted lessee, for a breach of the lease during the 6 month regulation period, unless the landlord has attempted to renegotiate the lease.

It also provides that if a party requests a renegotiation of the rent or other terms, the other party must renegotiate, and do so in good faith.

The Regulations provide that in renegotiating, the parties must have regard to:

  • the economic impacts of COVID-19.
  • the principles outlined in the Code

The Regulations explicitly refer (in an unenforceable note) to the principle that requires landlords to offer rent reductions, in the form of waivers or deferrals of rent, proportionate to the lessee’s reductions in turnover.  The reduced portion must be proportionate to the reduction in turnover, where at least 50% is waived and the balance repaid over at least 24 months.

Dispute Resolution

The Regulation requires landlords and lessees to resolve their disputes in accordance with the Retail Leases Act 1994 (NSW). First by attempting mediation with the Office of the NSW Small Business Commissioner then applying to the NSW Civil and Administrative Tribunal or the Court for an order.

The Regulations provide that Courts and Tribunals must have regard to the principles in the Code when considering making an order against a lessee. It’s unclear just how influential the Code will be if and when Courts and Tribunals are asked to look at these cases.

Uncertainty about interpretation

There remains uncertainty about how the Regulation will be interpreted and applied by Courts and Tribunals. On one hand, it says that a landlord can’t take prescribed action against an impacted lessee for failing to pay required rent during the 6 month regulation period. On the other, it suggests that if a landlord engages in good faith renegotiation having regard to the Code, they can take action against an impacted lessee that fails to pay rent during the 6 month regulation period. It’s also unclear how Courts and Tribunals will interpret the obligation to “have regard to” the leasing principles in the Code.

Landlords and lessees can seek to mitigate this uncertainty by negotiating in good faith, having regard to the leasing principles in the Code and record their agreement as a formal variation to the lease or an enforceable deed. This way, they can create their own certainty about the future as between themselves. We strongly recommend seeking legal advice before lease mediation and before agreeing to a lease variation or deed.

Note for landlords – You should renegotiate rent in good faith for the 6 month Regulation period. If you don’t, you might lose your opportunity to take action against the lessee for unilaterally reducing rent.

Note for lessees – You should request a renegotiation of the rent. If you don’t, you might lose some protection you otherwise have.

Final Comment

The Regulation reflects what was intended when the National Cabinet came up with the Code: landlords have to negotiate with impacted lessees to reduce the rent. However, the huge range of different circumstances faced by landlords on one hand and lessees on the other, make it very difficult to make sensible and balanced law to enforce that intention.

The Regulations still leave it very much in the hands of individual landlords and lessees to renegotiate arrangements that take into consideration their unique circumstances. Where an agreed position can’t be reached, both sides are going to go into the future with some significant uncertainty.

For further advice about your specific circumstances – get in touch with us here.

See our round up of other COVID-19 related issues here.