COVID-19 Commercial Lease Relief | September Update

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Recently the Australian State and Territory Governments have implemented laws to assist in renegotiating the terms of commercial leases where lessees

The decision of Sneakerboy v Georges Properties Pty Ltd (No 2) [2020] NSWSC 1141 (Sneakerboy), in the NSW Supreme Court, provides guidance on applying the Retail and Other Commercial Leases (COVID-19) Regulation 2020 (COVID-19 Leasing Regulation) and the National Cabinet Mandatory Code of Conduct (Code) (together, COVID-19 Leasing Regime).

A tenant – Sneakerboy – was evicted just prior to the new COVID-19 leasing laws came into effect. Sneakerboy wanted its premises back and its lease reinstated, so they applied to the court for relief against forfeiture of the lease.  Normally, this relief is only granted when the tenant cures past breaches – particularly unpaid rent – and shows their wherewithal in sustaining the future tenancy. Why re-establish a lease if further arrears are inevitable?

However, given COVID-19, Sneakerboy sought leniency to fulfill its future obligations. While these laws do not prescribe any fixed rental concessions, tenants can renegotiate leases, which generally includes rental concessions.

The ruling, handed down late August in a dispute between luxury sneaker and streetwear retailer Sneakerboy and its landlord, Georges Properties, will provide smaller retailers with more certainty to trade through the Christmas period.  In Sneakerboy’s case the courts assessed the connections between COVID-19 laws, future obligations and relief against forfeiture. Further, the court indicated it had no power to intervene in negotiations under the regime and that retailers and landlords who failed to reach agreement would have to pursue mediation.

Relief against forfeiture

The case neatly summarises the principles in granting relief, including expectations for tenants to pay outstanding rent and put landlords in the position they would have been if the tenant had not strayed from its obligations.

Relief against forfeiture is discretionary – the court need not grant it. This may be where a tenant seems unable to pay future rent.

Lease reinstatement

The COVID-19 regulations relieve tenants of obligations they may not otherwise fulfil due to COVID-19.

If relief against forfeiture reinstates a lease that was terminated prior to the regulations but becomes subject to the regulations, it would be difficult for a landlord to argue that a tenant cannot perform its future rent obligations due to economic downturn. This is because the regulations directly deal with this to the tenant’s benefit. In theory, a tenant could obtain a 100 per cent rent waiver under the regulations, meaning in most circumstances where the regulations apply, the tenant will in fact be capable of fulfilling these future obligations – because they just don’t really exist. Sneakerboy found relief could be granted irrespective of future trading prospects so long as past breaches were remedied.

Why does this case matter?

Even though the practical result is described above, reaching the outcome had two complexities. Firstly, the court considers entitlement to relief at the termination date, which in this instance was pre the COVID-19 laws. This suggests the regulations are irrelevant, and the judge said so. However, the regulations were relevant to prospects of future compliance because that was the legal environment in which the re-enlivened lease would operate. The parties were to renegotiate the lease’s terms, and it could not be said with any certainty that the tenant would be unable to perform its future obligations.

Secondly, the regulations only apply to leases which were in place when the laws commenced. Normally, if a lease ends and a tenant is let back in by agreement, a new lease begins. If this is after the regulations commenced, the tenants will not receive protection. However, relief against forfeiture re-enlivens the former lease, as opposed to creating a new lease. This means the regulations would apply to the future performance of the lease.

The material and contents provided in this publication are informative in nature only. It is not intended to be advice and you should not act specifically on the basis of this information alone. If expert assistance is required, professional advice should be obtained.

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