Negotiating a commercial lease during COVID-19
For many business owners, the COVID-19 pandemic has significantly impacted their ability to meet their obligations under a commercial lease. This has a flow-on effect to landlords who may also be struggling financially during this period, creating tension and leading to rental disputes.
This brief discusses current legislative responses to the impact of COVID-19 and what it means for small to medium sized enterprises (SMEs) and their landlords.
Retail and Other Commercial Leases (COVID-19) Regulation 2020
In response to the pandemic, the NSW Government enacted the Retail and Other Commercial Leases (COVID-19) Regulation 2020 (Regulation), which commenced on 24 April 2020 and gives effect to the National Cabinet Mandatory Code of Conduct – SME Commercial Leasing Principles During COVID-19.
Who does the Regulation apply to?
The Regulation applies to business involved, for example, in the manufacture, sale or supply of goods and/or services, and who are classified as an “impacted lessee” – that is, a tenant who:
is subject to a commercial lease;
qualifies for the JobKeeper scheme under the Commonwealth Coronavirus Economic Response Package (Payments and Benefits) Rules 2020; and
had a turnover of less than $50 million in the 2018-2019 financial year.
Are there any kind of commercial leases that the Regulation does not apply to?
The Regulation does not apply to leases which were entered into after 24 April 2020, unless they were was entered into pursuant to an option to extend or renew.
It also does not apply to leases made under the Agricultural Tenancies Act 1990.
What does the Regulation do?
The purpose of the Regulation is to regulate the rights of landlords and tenants in relation to the enforcement of certain commercial leases during the pandemic period.
For example, under the Regulation:
A landlord is prohibited from taking action against an impacted lessee on the grounds of a breach of the commercial lease, such as:
a) A failure to pay rent;
b) A failure to pay outgoings; or
c) Not being open for business during the hours specified in the lease.
Where the tenant is an impacted lessee, the rent payable under the lease must not be increased during the prescribed period (i.e. until 24 October 2020, 6 months after the commencement date).
A landlord is prohibited from taking action against an impacted lessee after the prescribed period on the basis of a failure to pay rent during that period.
If there is a provision under the lease that would require an impacted lessee to pay a fixed amount for land tax or other statutory charges or insurance that may be payable by the landlord, and that amount is reduced, the impacted lessee is exempted from the operation of the provision to the extent of the reduction.
How do I renegotiate the rent?
Where the tenant is an impacted lessee, any of the parties to the lease can request that rent be renegotiated.
If a party receives a request to renegotiate the rent, they must do so in good faith and having regard to the Leasing Principals set out in the National Cabinet Mandatory Code of Conduct. For example:
The lease cannot be terminated due to non-payment of rent during the COVID-19 pandemic period.
Landlords must offer tenants proportionate reductions in rent in the form of waivers and deferrals of up to 100 percent of the amount of rent ordinarily payable, based on the reduction of the tenant’s trade during the pandemic period and a subsequent reasonable recovery period.
Rental waivers must constitute no less than 50 percent of the total reduction in rent. A greater reduction should be given where, without it, the tenant would be incapable of fulfilling their other obligations under the lease. However, regard must be hard to the landlord’s own financial ability to provide such waivers.
If rent is deferred rather than waived, payment by the tenant must be spread out over the balance of the lease term and for a period of no less than 24 months (whichever is greater), unless the parties agree otherwise.
The landlord should seek to share with the tenant (in a proportionate manner) any benefit the landlord receives due to deferral of loan payments that may be provided by a financial institution as part of the Australian Bankers Association’s response to the pandemic.
Landlords should seek to waive the recovery of other expenses or outgoings that are payable by the lessee during the period in which the lessee is unable to trade. However, the landlord has the right to reduce services as required in such circumstances.
What if the parties cannot reach an agreement?
If the parties to a commercial lease enter into negotiations and cannot come to an agreement, the dispute will be referred to the Registrar of Retail Tenancy Disputes for mediation.
The dispute cannot be the subject of proceedings before any Court unless the Registrar has certified in writing that mediation has failed to resolve it.
What if I entered into a commercial lease after the commencement of the Regulation?
While the Regulation does not apply to commercial leases entered into after 24 April 2020, parties are still free to negotiate the terms of their lease.
However, where the tenant is an SME, is suffering financial stress or hardship as a result of the pandemic and is eligible for the JobKeeper programme, the Leasing Principals will apply even if the lease was entered into after the commencement date of the Regulation.
If you feel that your ability to meet your obligations under a commercial lease have been impacted by the pandemic and you are unsure of what rights or remedies you may have, contact our office and one of our staff members will be able to assist you.
P (02) 6772 4899