The COVID-19 pandemic has had significant impacts on businesses across Australia, with many needing to look at options such as rent relief to enable them to remain in operation.
On 7 April 2020, the Federal Government released a Mandatory Code of Conduct; the National Cabinet Mandatory Code of Conduct- SME Commercial Leasing Principles during COVJD-19 (Code).
The Code provides a set of good faith leasing principles to apply to commercial tenancies (including retail, office and industrial) between landlords/owners/operators and tenants, where the tenant is eligible for the Commonwealth Government’s JobKeeper program.
The Code aims to balance the interests of landlords and tenants, and each state and territory has been tasked to implement its own legislation to:
- Give effect to the Code, albeit to varying degrees
- Regulate the rights and responsibilities of eligible parties to commercial and retail tenancies that are experiencing financial hardship due to the COVID-19 pandemic
Broadly speaking, these legislative measures include the following leasing principles:
a) Prohibited actions, which state that landlords:
- Must not increase rent or draw on a tenant’s security bond or bank guarantee during the COVID-19 pandemic period (or reasonable subsequent recovery period)
- Must not terminate leases for the non-payment of rent
- Must pass on reductions in land tax and statutory charges
- Must freeze rent increases
b) Tenants must remain committed to the terms of their lease (subject to amendments) and not breach the terms.
c) Landlords must offer tenants reductions in rent/rent relief ( as waivers or deferrals) based on the reduction in the tenant’s trade during the COVID-19 pandemic period and a subsequent recovery period.
d) Payment of rental deferrals by the tenant must be amortised over the balance of the lease term for a period of no less than 24 months.
Where the landlord and tenant cannot reach an agreement, the matter should be referred to the applicable state or territory retail/commercial leasing dispute resolution process for mediation.
Case study: Relief against lease termination during COVID-19
The recent decision of Sneakerboy v Georges Properties Pty Ltd  NSWSC 996 (Sneakerboy), gives some guidance from the NSW Supreme Court on how the courts may determine applications for relief against termination of a retail lease in light of the COVID-19 pandemic.
The court considered an application by the tenant, Sneakerboy, for relief against forfeiture, following a termination of the lease by the landlord on 25 March 2020.
The landlord terminated the lease due to the tenant’s history of late rental payments and abandonment of the property following the onset of the COVID-19 pandemic. The Landlord called on the bank guarantee, which was released to it on 15 June 2020.
The court held that a history of late rental payments did not bar the tenant from relief from forfeiture, there was no abandonment, and granted the tenant relief from forfeiture on the condition that the bank guarantee be fully reinstated.
What is distinctive about this case is the court considered what weight (if any) should be given to the Retail and Other Commercial leases (COVID-19) Regulation 2020 (NSW) (COVID-19 Leasing Regulation) and the Code (together, COVID 19 Leasing Regime) in an application for relief.
The decision to grant relief was justified by the fact that the default in paying rent was attributed to a pandemic for which the tenant had no responsibility. The tenant’s abandonment of the premises by moving stock from the premises to a warehouse in anticipation of greater online orders was seen as a “credible” action.
In this case the court:
- demonstrated a willingness to consider the relevance and early effects of COVID- 19 on tenants, taking into consideration the COVID-19 Leasing Regime;
- assisted the parties in applying a COVID-19 rent relief regime; and
- was reluctant to burden the tenant to immediately replace the bank guarantee even where the landlord had a clear right to replacement. The court held it would be an “unfair imposition’ on the tenant and “inconsistent with the underlying principles of the COVJD-19 regime”.
Accordingly, tenants in comparable circumstances that have defaulted prior to the COVID-19 Leasing Regime may similarly be granted relief. Landlords seeking to terminate leases for breaches prior to the commencement of COVID-19 Leasing Regulation should take caution in light of the Court’s application of the COVID-19 Leasing Regulation in the facts of that case.
Disclaimer: This article is intended to provide general information only, and is not to be regarded as legal advice. Formal legal advice should be sought in relation to particular transactions or circumstances.
At McLachlan Thorpe Partners our dedicated team of property professionals advise on all aspects of property and property transactions including retail, commercial and industrial leasing.
For any advice in relation to property matters, please do not hesitate to contact our office. Further, our dispute resolution team is able to advise on disputes between landlord and tenant, including in relation to the applicable federal and state codes regarding Covid-19.