Navigating leasing arrangements during the Greater Sydney lockdown

Navigating leasing arrangements during the Greater Sydney lockdown

At the time of writing, the recent outbreak of the delta variant of COVID-19 in New South Wales has been met with the NSW Government enacting the Retail and Other Commercial Leases (COVID-19) Regulation 2021 on 14 July 2021 (dealing with retail shop leases under the Retail Leases Act 1994) and the Amendment of the Conveyancing (General) Regulation 2018 (dealing with commercial leases under the Conveyancing Act 1919) (together, the “Regulation”).

Much like the Retail and Other Commercial Leases (COVID-19) Regulation 2020, (including No 2 and 3) (“Former Regulation”), the Regulation provides certain protections for tenants who are in financial distress because of the pandemic.

The principal function of the Regulation is to limit landlords’ ability to exercise certain rights under retail and certain other commercial leases for a breach of the lease if:

  1. the tenant qualifies for certain grants due to the impact of COVID (an “impacted lessee”); and
  2. the breach is a “prescribed breach” that occurs during the “prescribed period”.

Below, we step through some of the key questions landlords must consider before taking steps to enforce the terms of their leases:

Is my lease captured by the Regulation?

The Regulation applies to retail shop leases and commercial leases entered into before 26 June 2021.

Is my tenant an “impacted lessee”?

A tenant is an impacted lessee if:

it qualifies for one or more of the following grants:

  1. Micro-business COVID-19 Support Grant;
  2. COVID-19 Business Grant; or
  3. Job Saver Grant; and

during the 2020 – 2021 financial year, the turnover of the business conducting by the lessee (or corporate group of which the tenant is a member) is less than $50 million.

It will be incumbent on tenants to produce evidence which demonstrates that they are an “impacted lessee” for the purposes of the Regulation (i.e. that they qualify for one or more of the relevant grants).  Tenants must give this information to landlords either before or as soon as practicable after the prescribed breach occurs and also within a reasonable period of time after it is requested by the landlord.

Is the breach a “prescribed breach”?

Among other things, the Regulation identifies the following as “prescribed breaches” for the purposes of the Regulation:

  1. a failure to pay rent; or
  2. a failure to pay outgoings; or
  3. the business operating under the lease not being open for business during the hours specified in the lease.

Importantly, the Regulation does not preclude landlords from taking prescribed action on grounds which are not related to the economic impacts of the pandemic.

Did the prescribed breach occur during the “prescribed period”?

The prescribed period is 13 July 2021 to 20 August 2021.

The timing of the prescribed breach will be important for landlords to consider. It does appear open to landlords taking prescribed action for prescribed breaches which occurred prior to the prescribed period.

The above criteria has been met, what now?

Initially, landlords cannot take prescribed action

Provided your tenant has successfully demonstrated that it is an impacted lessee, and the prescribed breach occurred during the prescribed period, landlords cannot, among other things:

  1. evict their tenant from the premises;
  2. seek damages;
  3. require the payment of interest on unpaid rent;
  4. recover of a security bond (in whole or in part);
  5. enforce personal guarantees; or
  6. terminate the lease.

Landlords must first attempt to mediate before taking prescribed action 

Before taking prescribed action, landlords must attempt mediation with their tenants and only upon obtaining a certificate from the Registrar certifying that the mediation has failed to resolve the dispute will landlords be able to take prescribed action.

This prerequisite for landlords to first attempt mediation with their tenants prior to taking prescribed action certainly raises questions as to whether this will translate into a substantial increase in mediations and if so, whether those mediations will be able to be held in a timely manner.

What else can be done?

  1. The parties are still free to agree to take action in relation to the lease, including the landlord taking prescribed action or terminate the lease if both the landlord and tenant
  2. As noted above, Landlords may still take prescribed action in relation to grounds not related to the economic impacts of COVID-19.
  3. Landlords are not obliged by the Regulation to renegotiate rents, however it does seem from the manner in which the Regulation is drafted that there is an assumption that parties will endeavour to reach commercial agreements in dealing with prescribed breaches during the prescribed period.

It appears that the Regulation poses more questions than it gives answers.  With the prescribed period running for little over a month and at the time of writing, New South Wales’ daily rates of infection showing no signs of easing, it remains to be seen whether the NSW Government enacts further measures to dictate the manner in which landlords and tenants navigate their leasing arrangements.  With this in mind, landlords should seek advice from our experienced Property team before taking prescribed action for prescribed breaches during the prescribed period. If you would like to get in contact with us directly please call +61 2 9391 3000.

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