Court weighs in on COVID-19 leasing legislation: Landlords may need to prepare for the long haul

A recent decision of the NSW Supreme Court contains the first glimpse of how the Courts may interpret the wording of the Mandatory Code and its interaction with the State and Territory based legislation. The result (if followed in NSW and other States) may result in the financial and legal impacts of the Mandatory Code being felt, long after the repeal of the legislation in each State and Territory.

The Supreme Court's second decision, Sneakerboy Retail Pty Ltd trading as Sneakerboy v Georges Properties Pty Ltd (No 2) [2020] NSWSC 1141 on 26 August 2020, following an application for relief against forfeiture by the Tenant, raises a number of issues for landlords and tenants in implementing the Mandatory Code and relevant State or Territory based legislation, including:

Are the leasing principles in the Code binding?

Given the wording of section 7(4) of the Retail and Other Commercial Leases (COVID-19) Regulation 2020 ("COVID-19 Regulations") which requires the parties to have regard to the leasing principles set out in the Mandatory Code when renegotiating rent, the Court was able to review and apply the leasing principles set out in the Mandatory Code as if they formed part of the COVID-19 Regulations.

Landlords and tenants outside of NSW should exercise care in applying this decision to their leases and should review the wording of the legislation in their relevant jurisdiction, as the drafting differs vastly between States and Territories. For example, in Queensland, the legislation is drafted so that all the relevant considerations that the Landlord must set out in its offer for rent relief are set out in full in section 15 of the Queensland Regulations and there is no reference to the parties applying the Mandatory Code. Accordingly, some aspects of this decision may not be followed in Queensland (and potentially other jurisdictions).

"Tenant's trade"

When interpreting Leasing Principle 3 of the Mandatory Code, the Court determined that the phrase "tenant's trade" will require consideration of the whole of the particular Tenant's turnover (as well as costs and profits) from all locations in which the Tenant conducts retail businesses and not just the business conducted from the retail premises relevant to the variation.

This decision raises a number of practical considerations including:

• where a Tenant has multiple premises with some performing better than other, a Landlord may be obliged to provide relief on the average of the tenant's trade over all locations. Landlords of higher performing premises may effectively be subsidising reduced trading at other premises;
• the reference to "costs and profits" may allow Landlord's to take into account cost cutting measures, government incentives or concessions offered by other landlords;
• a Landlord can take into account of the increase in internet sales.

Subsequent recovery period

While the restrictions in the COVID-19 Regulations apply to the "prescribed period" only (currently set to end on 24 October 2020 in NSW) and do not refer to any subsequent recovery period, the Mandatory Code (in Leasing Principle 3) provides for a proportionate reduction in rent payable "during the COVID-19 pandemic period and a subsequent reasonable recovery period".

The Court accepted that in this particular case, having regard to the Tenant's business and the market in which it operated, a "subsequent reasonable recovery period" to allow the Tenant's business to recover was 6 months and accordingly the recovery period would end on 30 April 2021. It is worth noting that the 6 month period is not for general application and is specific to this decision and the circumstances of the case. The Court indicated that a "subsequent reasonable recovery period" could be shorter or longer and is to be determined on a case by case basis.

This decision is likely to have an increased impact upon Landlords, if followed both in NSW and other States and Territories, requiring Landlords to offer relief for a period in excess of what is legislated for in the COVID-19 Regulations if they are to comply with the Code (noting that the Mandatory Code is a code of conduct and not necessarily legislation).

Timing of negotiations

The decision highlighted the need for Landlords and Tenants to ensure that rent relief is negotiated and a variation of lease is entered into prior to the repeal of the COVID-19 Regulations (currently set to end on 24 October 2020 in NSW). The Court considered that there is potential that any negotiations not finalised may be affected by the repeal of the COVID-19 Regulation and the repeal of the obligation to negotiate/re-negotiate.

In the absence of changes to the legislation and in the interests of certainty, Landlords and Tenants may be best placed to finalise any outstanding COVID-19 variations of lease before end date in the legislation in each State.

Prescribed actions after the prescribed period ends

The Court confirmed that the Landlord's restrictions on taking "prescribed actions" for breaches committed during the "prescribed period" do not cease at the end of the "prescribed period".

This will mean, for example, that a Landlord could not draw down on a bank guarantee on 1 November 2020 (after the COVID-19 Regulations have ended), for the failure to pay rent and outgoings for July, August and September. The protections of the COVID-19 Regulations will continue to apply, long past the end date of the legislation.

Outgoings

The decision clarified that where the Tenant is open for trade, full outgoings are recoverable in line with Leasing Principle 8 of the Mandatory Code.

Power to order variation of lease

The Court confirmed that in a relief against forfeiture application, it did not have jurisdiction to order the variation of a lease to consider the impacts of the Mandatory Code and the COVID-19 Regulations. It is up to the Landlord and Tenant to negotiate an outcome and in the absence of agreement, refer the dispute to mediation by the Registrar under the Retail Leases Act 1994.

The Court also questioned the drafting of the COVID-19 Regulation and Retail Leases Act 1994, noting that while the Court or Tribunal's powers to vary a lease following failed mediation was not a decision that needed to be made in this instance, there was some doubt as to whether the drafting of the NSW legislation was sufficient to allow a Tribunal or Court to vary a lease to give effect to rent relief in accordance with the COVID-19 Regulation.

This issue still remains unresolved and may be tested in the future (or be subject to legislative clarification).

What's next for COVID-19 laws and your business

This decision represents the Court's interpretation of one State's COVID-19 legislation. It is yet to be seen whether this decision will represent the settled law in NSW or be applicable to other jurisdictions.

To the extent that Landlords and Tenants are yet to resolve negotiations in line with the Mandatory Code and the relevant State or Territory legislation, we suggest the parties prioritise resolution and if necessary, apply for mediation to have any disputes resolved.

Landlords should exercise care and seek advice before taking any "prescribed action" following the end date set out in each State's legislation.

While it's been announced that the regulations will be extended in Victoria (with some amendments), at this stage it is not clear whether the other States and Territories will move to extend the regulations. We are continuing to monitor this situation.

If you need assistance with preparing variations that are consistent with the legislation or require advice in respect of COVID-19 and your leases, our team is ready to assist.