commercial property

Relief for commercial tenants – a practical review of the 2021 COVID-19 Regulation

Published: 19 July 2021

Written by: Duane Keighran

Overview  

The Retail and Other Commercial Leases (COVID-19) Regulation 2021 (NSW) (the Regulation) came into effect on 14 July 2021, and will remain in force until 13 January 2022 (covering a period of 6 months).  

The Regulation: 

  • is made pursuant to the Retail Leases Act 1994 and the Conveyancing Act 1919;
  • applies to retail shop leases, and commercial (non-retail) leases; and 
  • provides a new Schedule 5 in the Amendment of Conveyancing (General) Regulation 2018 to deal with commercial (non-retail) leases.

The Regulation excludes leases: 

  • under the Agricultural Tenancies Act 1990;  
  • entered into after 26 June 2021 (except a lease that is entered into by means of an option, or any extension or renewal on the same terms as an existing lease). 

The Regulation has been enacted to provide relief to impacted retail and commercial tenants who may be affected financially by the current lockdown across areas in New South Wales.  The Regulation repeats a number of concepts that are familiar, which were first set out in the previous regulations enacted in 2020 (the 2020 Regulations). 

What type of tenants will the Regulation apply to? 

As with the 2020 Regulations, a tenant has to first prove that it is qualifies for protection, being a tenant which: 

  • qualifies for at least one or more of the Micro-Business COVID-19 Support Grant, the COVD-19 NSW Business Grant, or Job Saver Grant; and 
  • has a total turnover in the 2020/21 financial year of less than $50 million (which will include the tenant’s group of companies, if the tenant is a corporation), 

which is defined in the Regulation as an Impacted Lessee

An Impacted Lessee must provide evidence to its landlord that it is an Impacted Lessee if it seeks to rely on the relief under the Regulation. There is also a requirement for an Impacted Lessee to provide such information to their landlord within a reasonable time of a landlord’s request for such information.  

What relief is granted? 

Subject to the tenant providing evidence that it is an Impacted Lessee, a landlord must not take any ‘prescribed action’ against the Impacted Lessee for a ‘prescribed breach’ unless the matter has first been referred to the Small Business Commissioner for mediation, and the Small Business Commissioner has first certified that the mediation has not resolved the dispute.  On receipt of that certification, a landlord is then able to take any action it would have otherwise been permitted to take under the lease. 

What is a ‘prescribed breach’ and a ‘prescribed action’? 

Consistent with the 2020 Regulations, a prescribed breach relates to a failure to pay rent, outgoings, or a failure to open the tenant’s business during the hours required under the lease.   

A prescribed action which is not permitted refers to actions that lead to termination of a lease, eviction of a tenant, calling on security or a guarantee under the lease or charging interest on rent, or the landlord recovering any other damages. 

Applying the concepts of a ‘prescribed breach’ and a ‘prescribed action’ together, a landlord is not permitted to take a ‘prescribed action’ for a ‘prescribed breach’ under a captured lease while the Regulation is in effect, except where: 

  • mediation has not resolved the dispute (as certified by the Small Business Commissioner); or 
  • the parties to the lease have agreed otherwise. 

How are breaches which have occurred prior to commencement of the Regulation treated? 

A landlord is not precluded from taking action against a tenant for any breach that occurred prior to the Regulation commencing.  For example, if a tenant has a history of unpaid rent for the period prior to 14 July 2021, a landlord may still validly terminate that lease. A landlord is also not precluded from taking action for breaches that are not COVID-19 related (for example, if the tenant is subletting/licensing without consent).

What rental reductions or waivers apply? 

Unlike the 2020 Regulations, a landlord is not required to provide any rental waiver, reductions or deferrals for its tenants.  One of the market criticisms from the 2020 Regulations was that landlords were seen to be required to carry the burden of the COVID-19 economic pandemic, without regard to their own economic situation.  

This time around, the New South Wales Government (through the Office of State Revenue) has provided a carrot for landlords by way of providing a reduction in land tax to the value of any rental reduction provided.  This applies to commercial, retail and residential landlords. 

The Office of State Revenue states: 

A landowner providing a reduction in rent to a tenant between 1 July 2021 and 31 December 2021 can receive a reduction in land tax payable for the relevant parcel of land. The land tax reduction will be the lesser of: 

  • the amount of rent reduction provided to an eligible tenant for any period between 1 July 2021 and 31 December 2021, or 
  • 100 per cent of the land tax attributable to the parcel of land leased to that tenant. 

The reduction in a landlord’s land tax liability will not apply if a landlord requires repayment of rent at a later date.  As applications are not open to landlords at the time of writing, landlords will likely wait for more clarity around this scheme before offering rental reductions to their tenants.  As any rental reduction is not compulsory, this will mean tenants are required to pay full rent to the extent a landlord decides not to offer any reduction.  

What are the likely outcomes from the implementation of the Regulation?  

Tenants who can prove they are Impacted Lessees will not have their leases terminated or security called unless the path of mediation has first been exhausted.  Given the potential backlog of disputes if a large volume of applications are made to the Small Business Commissioner, this could mean that resolution of disputes could take some time.  However, as there is no mandated rental relief, landlords may choose to elect if they apply for land tax relief, and to then subsequently pass on rental relief to tenants. 

 From our experience with the 2020 Regulations, reputable landlords have attempted to resolve most issues with their tenants commercially, as all parties seek to work together to ensure that tenants and landlords remain solvent and are able to trade once the COVID-19 pandemic is over, which is a sensible outcome for all.  We expect the same commercial negotiations to occur across the market this time around.  

Premium Legal + Advisory services delivered through a commercial lense

Keighran Legal + Advisory provides commercially pragmatic legal solutions to the hotel, real estate and construction industries across Australia.  We are also wholeheartedly committed to contributing to the communities in which we work and live.

Proactive engagement

Our experience enables us to think ahead of the curve and proactively manage client outcomes

Commercially focused

Commercially focused, pragmatic and cost-effective service delivered in a collaborative manner

Industry Recognition

Our lawyers have been recognised by independent publications such as Who's Who Legal, Best Lawyers, Legal500 and Chambers Global

Full service

We provide a full life-cycle service, including deal structuring, transaction execution and dispute advisory services

Indigenous Outcomes

As a Supply Nation registered business that is 100% Indigenous owned and managed, we focus on amplifying Indigenous talent

International Reach

Our lawyers have international experience and can assist in the execution and management of transactions in foreign markets

Embracing a beating heart, Connection to Community

Sydney legal firm specialising in legal advice in real estate and construction