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Terminating and avoiding termination of commercial leases during Covid-19

by | Aug 12, 2020

12 August 2020

Roelof Stols, Consultant

In NSW, in response to the issue of the National Cabinet’s principles and mandatory leasing code of conduct to govern the intervention to aid commercial tenancies in financial distress due to the economic impacts of Covid-19, the State Government introduced the Retail and Other Commercial Leases (Covid-19) Regulation 2020 for purposes of the Retail Leases Act 1994 and Amendment of Conveyancing (General) Regulation 2018 with addition of Schedule 5 Commercial leases — Covid-19 pandemic special provisions. These Regulations do apply to new commercial leases entered into after 24 April 2020 or any lease under the Agricultural Tenancies Act 1990 (NSW).

Clause 6 (1) of the Regulation relating to Retail Leases and Clause 4 (1) of the Regulation regarding Commercial leases mirror the prohibition and restriction of prescribed actions, that may not be taken by a Lessor against a impacted lessee, whilst these Regulations are in effect. At this stage, these Regulations will be operational for six months, thus until 24 October 2020. As such, lessees that are considered impacted lessees (lessees that qualify for the jobkeeper scheme and have a turnover of less than $50 million, as further qualified in the Regulations), may not be subjected to prescribed action (eviction from the leased premises, exercising of a right of re-entry, recovery of the premises, distraint of goods, forfeiture, damages payment of interest, recovery of the whole or part of a security bond, obligations under a guarantee, possession, termination or any other remedy available under common law or under a law of the State of NSW)for failure to pay rent, failure to pay outgoings or the business operating under the lease not being open for business during the hours specified in the lease. Note that prescribed actions do not include actions taken by a lessor on grounds not related to the impacts Covid-19. It is difficult to envisage though, that it will be easy to convince a Court or Tribunal that, non-payment of rent and or outgoings and the failure to operate a business, is not because of Covid-19.

It also seems, that the provisions of the Regulation, where it relates to disputes, apply to all commercial leases regardless if the lessee meets the qualifications to be classed as an impacted lessee. In clause 6 of Schedule 5 Commercial leases, the Regulations require a lessor not to seek to recover possession of premises or land under the commercial lease, terminate the commercial lease, or exercise or enforce any other right of the lessor under the lease, unless and until the Small Business Commissioner has certified in writing that mediation offered and conducted by the Commissioner has failed to resolve the dispute, and given reasons for the failure.

 The NSW Supreme Court gave some interesting commentary on leasing arrangements during the impact of Covid-19 in its recent decision in Sneakerboy Retail Pty Ltd trading as Sneakerboy – v – Georges Properties Pty Ltd [2020] NSWSC 996. This decision relates to an application for relief against forfeiture following termination of a retail lease prior to the publication of the National mandatory Code of Conduct on 7 April 2020 and the passing of the Regulations in NSW referred to above on 24 April 2020. In brief the lease was terminated on 25 March 2020 whilst the lessee was in arrears with rental just as the impacts of Covid-19 became apparent. The lessee failed to adhere to make rental instalments in terms of a payment plan it specified and started removing stock from the leased premises. The lessor asserted that the lessee abandoned the leased premises under the circumstances notwithstanding that the lessee advised that they temporarily ceased trade for Covid-19, health safety requirements, and to refresh the technology in the premises. In the notice to terminate the lessor re-entry to the leased premises. The Court found that the lessee’s actions did not constitute an abandonment, which only left arrear rental and the history of delinquent rental payments, as grounds for termination. Notwithstanding a delay of nearly four months in commencing proceedings, the Court, despite rental arrears and the history of being an infrequent paye,r granted relief against forfeiture on provision of providing a new bank guarantee and payment of the lessor’s costs in the proceedings.

The Court commented about the impact of Covid-19, and noted that:

a)            If the lessor terminated the lease after the National Code was promulgated and prior to NSW Regulations being passed, the lessor may not have passed the good faith requirements;

b)            If the lessor terminated the lease after 24 April 2020, the lessor would have been in breach  of the Regulations mentioned above;

It should be noted that arrears alone may not be sufficient to terminate a lease and a Court or Tribunal is not easily going to accept that a lessee abandoned leased premises, where  the lessee ceased trading from the premises during Covid-19.

Please contact Edge Legal Group if you require any further details about your rights as lessor or lessee during Covid-19

PLEASE NOTE THAT THIS COMMENTARY DOES NOT CONSTITUTE LEGAL ADVICE NOR SHOULD IT BE RELIED UPON AS LEGAL ADVICE. Seek legal or other advice before acting on the content of the above.

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