Article by Warwick La Hood and Jane Wolfe
The operation of the National Cabinet Mandatory Code of Conduct (the Code) for New South Wales has been extended to 28 March 2021. However, there has been a tapering of the eligibility criteria.
As a reminder, in April 2020, the Federal Government released the ‘National Cabinet Mandatory Code of Conduct – SME Commercial Leasing Principles During COVID-19’. The purpose of the code was to create a set of good faith leasing principles for commercial tenancies (including retail, office and industrial tenancies) for eligible landlords and eligible tenants to consider whilst negotiating rent relief during the COVID-19 pandemic period.
The Code was adopted by the NSW Government in the Retail and Other Commercial Leases (COVID-19) Regulation 2020 (the Regulation), which applied to all commercial and retail tenants whose businesses had a turnover of less than $50m per year and were eligible for relief under the Federal government’s JobKeeper program. The Regulation had an initial expiry date of 28 October 2020.
Given the ongoing nature of the pandemic, the Regulation was extended to 31 December 2020. On 1 January 2021, the NSW Government enacted the Retail and Other Commercial Leases (COVID-19) Regulation (No 3), extending the operation of the Regulation to 31 March 2021 but tapering the eligibility criteria to apply only to:
- retail tenants/leases;
- with an annual turnover of less than $5 million; and
- who suffered a decline in turnover of 30% or more during the December 2020 quarter (as compared to the December 2019 quarter).
It is important to remember that during the operation of the Regulation, a landlord is restrained from acting on its rights under a lease (for instance, lease termination or seeking to recover unpaid rent), if the those rights arise out of unpaid rent or other breach of a lease during the pandemic period AND the tenant has requested rent-relief under the Regulation and negotiation for such relief are underway. If the parties cannot agree on the extent or application of rent relief, then the tenant remains protected pending formal mediation before the Office of the Small Business Commissioner (OSBC). The role of the OSBC is to assist parties who cannot reach agreement to come to a resolution which is fair to both, subject to the Regulation and the principles of the Code, including the obligation to act in good faith.
We have noticed many differing ways parties have resolved the operation of the lease and the grant of rent relief during the pandemic period. However, common outcomes include:
- Looking at the monthly disruption to turnover for the same period in 2019, averaging it and then granting rent relief for the pandemic period based on the average disruption. Rent relief is then equally apportioned between waiver and deferral.
- A 50/50 outcome whereby 50% rent is paid whilst the balance is waived.
In addition to either of the above outcomes, we have seen variation to leases to achieve agreement including varying end of term obligations to make good and grants of exclusivity to a retail tenant where no exclusivity existed.
What happens when the Regulation Expires?
It remains to be seen whether a tenant will, once the Regulation expires and the Code no longer applies, remain protected in circumstances where a landlord seeks to terminate a lease by relying on unpaid rent or other breach during the pandemic period and did not act in good faith in negotiations during the pandemic. Supreme Court cases suggest that any protection of tenants in these circumstances may depend on further regulation.
Leaving aside the Code and the Regulation, a tenant has existing rights under the Conveyancing Act 1919 (NSW) to seek relief against a landlord’s attempt to terminate a lease in any circumstance. Whether or not this right applies (or the extent to which it applies) in circumstances where a landlord did not act in good faith and no agreement was reached on rent relief under the Regulation is also yet to be determined.
Tenants finding themselves in such circumstances would be well-advised to seek legal advice, including as to whether a landlord acted in good faith and whether a tenant remains protected from attempts by a landlord to terminate a lease relying on a breach during the pandemic period.
Get in touch with our property law team on 1300 565 846 if this article has raised any questions or concerns for your business.