What's next for NSW commercial lease agreements?

Author—Helen Pinder

While many businesses are hoping for a return to retail trading over summer, ‘business as usual’ might still be a long way off. Supply chain issues, ongoing healthcare concerns may still affect cash flow for small businesses. Landlords and tenants may still need to negotiate rents and re‑examine commercial lease agreements. What are the current options for landlords and tenants as regards renegotiating rent conditions?

What protections are in place now for commercial leases?

Landlords and tenants will be familiar with the National Cabinet Mandatory Code of Conduct introduced by the Federal Government in 2020 to provide rental relief and lease protections for tenants impacted by the 2020 lockdown imposed in response to COVID‑19. Under the Code, a regime for negotiating waivers and deferrals of rent was introduced as well as a number of protections for tenants and ‘good faith’ principles that both landlords and tenants were required to observe.

NSW introduced the Retail and Other Commercial Leases (COVID‑19) Regulation in April 2020 (the First Regulation) to give effect to the leasing principles of the Code. Under the First Regulation, a regime was implemented for the negotiation of rent and other lease terms for tenants that were impacted by the 2020 lockdown subject to demonstrating that a tenant was ‘an impacted lessee.’ If a tenant was an impacted lessee, a landlord was prohibited from pursuing action against a tenant for breaches of a lease for a prescribed period, such as exercising a right of re‑entry, terminating a lease, increasing the rent and seeking to enforce any other remedy a landlord might have under a lease.  During the course of 2020, two further regulations were introduced extending the prescribed period and changing the eligibility criteria of an impacted lessee. On 28 March 2021 regulations ceased to operate.

Following the second lockdown imposed as a result of the public health measures in response to the Delta variant of COVID‑19, the Retail and Other Commercial Leases (COVID-19) Regulation 2021 (the 2021 Regulations) was introduced and was in force and applied for the period 13 July 2021 to 13 January 2022. That period has now been extended to 13 March 2022 with the introduction of the new Retail and Other Commercial Leases (COVID19 Regulation 2022 (NSW) (the 2022 Regulations).

The NSW Government has also reinstated the Code of Conduct.

The 2021 Commercial Lease Regulations prevent landlords from evicting eligible tenants for non-payment of rent during the pandemic or for a reasonable recovery period afterwards. They require landlords and eligible tenants to negotiate in good faith and agree to reduce and/or defer rent, where the tenant’s trade has been affected by the economic impacts as a result of the lockdown imposed in response to the COVID-19 pandemic.

Impacted tenants are likely to have made claims already. However, tenants may seek to negotiate or renegotiate rental relief over the next months. This is particularly so as sufficient time will have passed to assess the impact of the lockdown on the tenant’s decline in turnover.

Eligibility

Not all commercial tenants will be eligible for rental reductions under the Code of Conduct or Commercial Lease Regulations. The schemes are designed to assist small-medium enterprises. To be eligible, businesses must come within the turnover cap. Businesses also need to show that they qualify for the relief introduced by the NSW government in response to the Delta variant—such as JobSaver, a COVID-19 business grant or COVID-19 disaster payment.

The 2022 Regulations leaves the criteria for an impacted lessee relatively unchanged except that as from 1 December 2021 a lessee is required to have a turnover of $5 million and to be eligible for the microbusiness grant or JobSaver Payment.

Longer-term implications: recovery periods and deferred rents

Agreements reached between landlords and tenants often provide that deferred rent is to be repaid over a period of months, including after a lease has ended.  This may have an impact on a tenant’s cashflow.

Changing business climate and models

By now, most of us probably expect that business models may have changed significantly, and that ‘business as usual’ might look different in the year ahead. Commercial tenants may no longer require so much office space, or they may need different fit-outs to accommodate social distancing. Retail tenants may have shifted a large part of their business online.

Commercial leases in changing times

Negotiate in good faith

Under the Regulations and the Code, either landlords or tenants may initiate negotiations.

Parties must attempt to negotiate in good faith.

This means parties are expected to act honestly, consult appropriately, and genuinely seek to reach agreement.

Action cannot be commenced in court until the parties have attempted mediation and it has not been successful.

Manage issues as they arise

Current regulations make it clear landlords can still take action if tenants breach lease arrangements. However, they need to act with care and having followed the processes for rent relief and mediation.

 

Any decision that affects your business has legal implications. Contact us today to help secure your business for whatever tomorrow brings.

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