On 14 July 2021, the NSW Government passed the Retail and Other Commercial Leases (COVID-19) Regulation 2021 (‘2021 Regulations’) which limited the exercise of certain rights by a lessor under retail and other commercial leases for a breach of the lease if:
- the lessee is a business that qualifies for certain grants made available by the NSW Government to businesses due to the impact of the COVID-19 pandemic; and
- the breach is a prescribed breach that occurs between 13 July 2021 and 20 August 2021 (‘Prescribed Period’).
The 2021 Regulations did not initially provide for rent relief (waiver or deferrals of rent), nor did they prohibit the increasing of rent under a lease as the Regulations made in 2020 did – they only prohibited landlords from taking certain “Prescribed Action” against a tenant between 13 July 2021 and 20 August 2021.
A list of Prescribed Actions is set out below.
On 13 August 2021, in response to a surge in COVID-19 cases, the NSW Government passed the Retail and Other Commercial Leases (COVID-19) Amendment Regulation 2021 (‘2021 Regulations’) which:
- extended the Prescribed Period to 13 January 2022 (so that the Prescribed Period became the 6-month period from 13 July 2021 to 13 January 2022 (‘Extended Prescribed Period’); and
- re-introduced the requirement for landlords and tenants to renegotiate the rent payable under Impacted Leases so as to take into account the impacts of the COVID-19 pandemic and the leasing principles set out in the Code (which Code did not change, but was re-activated).
On 13 January 2022, again in response to a large increase in COVID-19 cases due to the emergence of the Omicron variant, the NSW Government introduced the Retail and Other Commercial Leases (COVID-19) Regulation 2022 (‘2022 Regulations’) which:
- further extended the Extended Prescribed Period to 13 January 2022 (so that the Prescribed Period became the 18-month period from 13 July 2021 to 13 March 2022 (‘Further Extended Prescribed Period’); and
- maintained the requirement for landlords and tenants to renegotiate the rent payable under Impacted Leases so as to take into account the impacts of the COVID-19 pandemic and the leasing principles set out in the Code (again, which Code did not change, but had been reactivated by the 2021 Regulations).
The Code
The Code, which was announced by the Federal Government Cabinet on 4 April 2020, imposed a number of “Leasing Principles” to be followed by landlords. This included a requirement that landlords grant the following relief and protections to tenants whose businesses had been impacted by COVID-19.
Under the Code, landlords were:
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required to offer tenants rent concessions in the form of waivers and deferrals of rent proportionate to the reduction in the tenant's trade (up to 100% of the amount payable under the lease). This reduction is called a tenant’s “Decline in Turnover”. Rent waivers and deferrals are required to include at least:
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a rent waiver equivalent to 50% of a tenant’s Decline in Turnover (that is, the rent is never required to be paid); and
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a rent deferral equivalent to 50% of a tenant’s Decline in Turnover (to be repaid over the balance of the lease term, or 24 months, whichever is greater); but
“should” constitute a greater proportion of waiver where failure to do so would compromise the tenant's ability to fulfil its ongoing obligations under the lease;
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prohibited from taking any Prescribed Action;
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freeze all rent increases (except for retail leases whose rent is based on turnover rent);
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pass onto tenants any entitlements they receive to a reduction in land tax, council rates and other statutory charges; and
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not impose fees, interest or other charges.
To avail themselves of the relief afforded by the Code, tenants are required to provide evidence to their landlord sufficiently demonstrating the extent of its Decline in Turnover, and must remain committed to complying with all other terms of their lease.
Prescribed Actions
The following is a list of the Prescribed Actions by landlords that are prohibited by the Code:
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evicting a tenant;
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exercising a right of re-entry;
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recovering possession of the premises;
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seizing a tenant's goods to recover money owed;
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forfeiting (terminating) the lease;
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seeking damages from the tenant;
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requiring a payment of interest on, or a fee or charge for, unpaid rent;
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recovering the whole or part of a security bond (including calling upon a bank guarantee);
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pursuing the tenant or any other person who has given a personal guarantee under a lease;
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terminating the lease; or
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any other remedy that might have been available to a landlord at common law or under another law of NSW.
The Code, 2020 and 2021 Regulations
Retail and Commercial tenants in NSW are likely familiar with the operation of the provisions Code, the 2020 Regulations and the 2021 Regulations, so this article will not canvass those instruments. Summaries of their operation can be found at:
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What is the Legal Status of Retail and Commercial Leases during COVID-19?
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Retail and Commercial Leases During COVID-19: A History and 2021 Update
The 2021 Regulations
As set out in the second article above, the 2021 Regulations made by the NSW Government on 14 July 2021 were stated to operate from 13 July 2021 to 20 August 2021 (‘Prescribed Period’) to both retail and commercial lease tenants:
- that are party to leases commenced before 26 June 2021, or were entered into on or after 26 June 2021 pursuant to an option under a lease entered into before 26 June 2021;
- that have annual turnover during the 2020-21 financial year, was less than $50 million (including internet sales);
- that qualify for one or more of:
- the 2021 COVID-19 Micro-Business Grant;
- the 2021 COVID-19 Business Grant; or
- the Job Saver Payment.
Tenants whose leases satisfy the above criteria were considered to be “Impacted Lessees”. Tenants who did not satisfy the above criteria were not considered Impacted Lessees and were not entitled to any relief or protections under the 2021 Regulations.
Unlike the 2020 Regulations, the 2021 Regulations did not import the provisions of the Code, which is why no rent relief was available to tenants under the 2021 Regulations as initially introduced. The 2021 Regulations did still prohibit the taking of a Prescribed Action by a landlord in the event of breach of lease for non-payment of rent (but not for failure to trade from premises if required by the lease).
Amended 2021 Regulations
The Amended 2021 Regulations extended the operation of the 2021 Regulations by reinstating the requirement for landlords and tenants to renegotiate rent and terms of leases to Impacted Lessees in accordance with the leasing principles set out in the Code for the Extended Prescribed Period.
This resulted in Impacted Lessees again becoming entitled to relief under the Code from 13 July 2021 to 13 January 2022, and being protected from sanction for failing to pay rent or outgoings, or trade from the premises, as required by a lease during that period.
As was the case for the 2020 Regulations:
- nothing in the 2021 Regulations prohibited landlords from taking a Prescribed Action on grounds not related to the economic impacts of COVID-19; and
- a landlord under a retail or commercial lease could still take a Prescribed Action if the matter has been referred for mediation under Part 8, Division 2 of the Retail Leases Act 1994 (NSW) and the Registrar of Retail Tenancy Disputes has certified in writing that the mediation has failed to resolve the dispute.
Whilst the Registrar of Retail Tenancy Disputes is part of the Office of the NSW Small Business Commissioner, mediations concerning COVID-19 relief legislation are usually referred to mediators from the NSW Civil and Administrative Tribunal.
To qualify for rent relief under the Amended Regulations, tenants had to make a request for relief to their landlord during the Extended Prescribed Period (i.e. relief could not be requested retrospectively).
2022 Regulations
The 2022 Regulations are an extension of the Amended 2021 Regulations, so provided a commercial or retail tenant satisfies the criteria necessary to qualify as an Impacted Lessee under the 2021 Regulations, the same provisions continue to apply to that commercial and retail tenant until 31 March 2022. This includes protections from eviction by reason of failure to trade from premises, or breach of lease by reason of non-payment of rent or other monies payable under a lease due to the impacts of COVID-19.
Demonstrating a Decline in Turnover
Under both the 2022 Regulations and the Amended 2021 Regulations, it remains necessary for Impacted Lessees to demonstrate (by providing evidence to landlords) that they have suffered a Decline in Turnover of 30% or more.
The commonly accepted method for demonstrating an Impacted Lessee’s decline in turnover has been for a tenant to provide its Business Activity Statements (‘BAS’) for a relevant period in 2019 (pre-COVID) and compare the turnover for the period in that BAS to turnover disclosed in a 2021 or 2022 BAS for the same period for which rent concessions are sought. When the turnover in the competing BAS are compared across similar periods, the difference (or decline) can then be expressed as a percentage.
The percentage decline can then be applied to the rent payable under the lease for that particular period in 2021 or 2022 (depending on the period for which relief is sought), and the landlord would then grant a waiver of at least 50% of the result, with the balance deferred over at least 24 months as required by the Code (even if the lease expired or is due to expire before 31 March 2022 when the 2022 Regulations come to an end).
It might also be advisable for tenants in particular (but to a lesser extent, landlords) to negotiate rent concessions in stages until the true effect of the pandemic in 2022 becomes apparent. This is because, as for the period during which the 2020 Regulations and the 2021 Regulations applied, once rent and/or the terms of a lease are negotiated under for a particular period, the rent and terms cannot be re-negotiated for that period.
So if concessions are negotiated too early, or for comparison periods which are too short, those agreed concessions may not be truly reflective of an Impacted Lessee’s actual decline in turnover.
It is important, however, for tenants to request rent concessions under the 2022 Regulations during the Further Extended Prescribed Period as a request cannot be made after the expiry of that period and it cannot presently be known whether the prescribed period will be further extended after 31 March 2022.
If you have any questions relating to the information in this article, or you would like to speak with a member of Holman Webb's Property Team in relation to a matter of your own, please don't hesitate to get in touch today.