Temporary COVID-19 protections for NSW commercial and retail lessees extended

NSW has renewed and extended the Retail and Other Commercial Leases (COVID-19) Regulation 2021, so landlords and tenants alike must ensure they understand its impacts on their arrangements and future negotiations.

The Retail and Other Commercial Leases (COVID-19) Regulation 2022 applies to both commercial and retail leases entered into prior to 26 June 2021. The 2022 Regulations do not apply to new leases entered into after that date, except for renewals of existing leases pursuant to a contractual option or an extension on the same terms. It will also cover agricultural leases entered into under the Agricultural Tenancies Act 1990 (NSW).

Here are the latest details lessors and lessees need to know when negotiating under the 2022 Regulation.

Prescribed period

The 2022 Regulation extends the expiry date of the prescribed period by an additional 2 months to 13 March 2022. The "prescribed period" now comprises the period between 13 July 2021 and 13 March 2022.

The Regulation applies to commercial and retail lessees who satisfy the "impacted lessee" criteria at any point during the prescribed period.

Impacted lessee must provide evidence

A lessee must provide both a statement to the effect and evidence which shows it is an "impacted lessee" to be eligible for relief.

An impacted lessee is a lessee who qualifies for:

• either the:
  • 2021 COVID-19 Micro-business Grant;
  • 2021 COVID-19 Business Grant; or
  • 2021 JobSaver Payment; and
• has a turnover of less than $50 million in the 2020/21 financial year.

In addition, an impacted lessee must provide evidence that its turnover for the 2020/21 financial year was less than $50 million.

When assessing the amount of turnover or the 2020-2021 financial year, the Regulation makes the following differentiations:

• if the lessee is a franchisee, only the turnover of the business conducted at the premises is relevant;
• if the lessee is a corporation that is a member of the group of related body corporates (as defined in the Corporations Act 2001), the turnover of the whole group of companies is relevant;
• in any other case, the turnover of the business conducted by the lessee is relevant; and
• turnover of a business includes income derived from internet sales of goods and services.

Any previous rent relief arrangements are not automatically extended, unless the parties agree an extension. Any new request for rent relief must cover a different time period than any previous rent relief.

Rent relief

The 2022 Regulation extends the rental relief principles set out in the National Cabinet Mandatory Code of Conduct - SME Commercial Leasing Principles During COVID-19. An impacted lessee may request the other party to renegotiate the rent payable under the impacted lease in accordance with the Code. The parties must commence renegotiations of the rent on a good faith basis in accordance with the Code within 14 days of the request being made. The rental relief must be proportionate to the impacted lessees decline in turnover, with at least 50% of the relief being in the form of a waiver, and the balance of the relief to be a deferral in the payment of rent.

Lessees are further protected as the parties cannot seek to delay negotiations and any unconcluded negotiations at the end of the prescribed period may still continue until resolved.

The 2022 Regulation has introduced new conditions for the parties to comply with when re-negotiating the rent, including:

• moneys received from either the 2021 COVID-19 Micro-business Grant, 2021 COVID-19 Business Grant or the 2021 JobSaver Payment to be treated as part of the impacted lessee's turnover;
• the lessor is not required to reduce rent for periods when the lessee did not qualify as an "impacted lessee"; and
• any negotiated rent reduction is not to apply during periods when the lessee does not qualify as a "impacted lessee".

Lessors and lessees should note that for the purposes of determining if a lessee is eligible for a rent reduction after 30 November 2021, the "impacted lessee" criteria significantly change so that an impacted lessee must show:

• it would have qualified for the COVID-19 Micro-business Grant or the 2021 Jobsaver Payment; and
• it had a turnover of less than $5 million in the 2020-2021 financial year.

No increases in rent

The 2022 Regulation prohibits a lessor from increasing the rent payable under an impacted lease during the prescribed period.

The 2022 Regulation does not apply to turnover rent which will still be payable (if applicable).

Mediation before lessor can take a prescribed action

During the prescribed period, a lessor cannot take any prescribed action, which includes evicting a lessee from the premises, terminating a lease or exercising a right of re-entry to the premises, unless the lessor has:

• attempted to mediate the dispute with the Small Business Commissioner, who has certified in writing that the mediation conducted by the Small Business Commissioner has failed to resolve the dispute; and
• engaged in a renegotiation of a rent, if required.

A lessor may take a prescribed action for a breach unrelated to the economic impacts of the COVID-19 pandemic, for example failure to maintain premises in accordance with the lease.

Courts and tribunals must consider the Code:

The 2022 Regulation requires courts and tribunals to consider the leasing principles set out in the Code when making any decisions or orders relating to:

• the recovery of possession of premises or land from an impacted lessee;
• the termination of an impacted lease by a lessor; or
• the exercise or enforcement of another right of a lessor under an impacted lease.

The 2022 Regulation, however, does not give express powers for courts and tribunals to enforce renegotiated rents.

Impact of the 2022 Regulation on lessors

Retail and commercial lessors, who provided rental relief under the 2020 and 2021 equivalent regulations, may once again be required to grant further rental relief to impacted lessees.

Lessors and lessees should again prepare themselves to enter into good faith discussions in respect to the decrease in revenue suffered by lessees when determining an appropriate amount of relief. The parties should also consider repayment terms and whether lease term extensions are appropriate in the circumstances.

Parties should formally document any renegotiated terms providing rental assistance or concessions.