“Sneakerboy” case  – takeaway points:

1. The COVID-19 regulations may have a retrospective effect to 1 April 2020 in relation to the rent and outgoings for the period from that date even though the COVID-19 regulation came into effect at a later date on 24 April 2020;
2. The rent is not automatically reinstated once the prescribed period is over and the Lessor and Lessee should come to an agreement as to the new rent (including the deferred rent during the prescribed rent to be amortized);
3. If parties cannot reach an agreement via negotiations; they will be subject to mediation/arbitration. The Court indicates that the Court will not have jurisdiction to make orders varying the terms of commercial leases that are subject to the COVID-19 regime.
4. The outgoings must be paid by the lessee at all times with the only exception of the time when the lessee is not able to trade.

In response to the developing Covid-19 crisis, the NSW government was swift to enact the Retail and Other Commercial Leases (COVID-19) Regulations 2020 NSW  in April 2020, which were later updated in July (the Regulations) to give some clarity regarding the dispute resolution process. The main rationale was to protect the interest of struggling tenants during the pandemic while balancing this against the interest of landlords.

The Regulations were always intended to be temporary in nature and will automatically expire on 24 October 2020, unless the NSW government elects to extend them.

The Regulations & case law

Given the urgency of the developing situation, the Supreme Court gave some priority to disputes pertaining to the Regulations, and the first decision Sneakerboy Retail Pty Ltd trading as Sneakerboy v Georges Properties Pty Ltd (No 2) [2020] NSWSC 1141 (‘Sneakerboy’) came on 26 August 2020, inwhich the Court found that the plaintiff, Sneakerboy, was entitled to an order against the defendants, the Lessors, relieving it from forfeiture of a lease of a retail shop in Temperance Lane, Sydney. This case has provided some certainty regarding the application of the Regulations, as discussed further below.

The Regulations are effectively split into 3 main parts:

• Who is eligible for the protection?
• What landlords may and may not do?
• What happens if there is a dispute?

Exploring each of these in light of the Sneakerboy case.

Who is eligible for the protection under the Regulations?

 A lessee is only eligible for protections if it is an ‘impacted lessee’ in that it must be demonstrated:

• The lessee qualifies for the jobkeeper scheme; and
• The lessee had a turnover in the 2019-2020 financial year less than $50 million (noting that the method of calculating turnover may be affected by whether the lessee is a franchise or part of a corporate group).

It should be noted that, while a franchisee’s turnover is generally only calculated by reference to the relevant premises, other lessee who have multiple retail locations must calculate their turnover by reference to all their trading locations.

It should be also noted that there is no strict timeframe for the lessee to provide evidence of its turnover to the lessor (either under the Regulations or as a result of Sneakerboy), rather it was suggested in Sneakerboy that such be provided on a monthly basis, as this usually matches with most business’ trade reporting.

What the landlords may and may not do?

If a lessee is an impacted lessee, then the lessor is restricted from taking a number of actions as a result of a failure to pay rent, outgoings or stay open during set trading hours. The list of restricted actions is quite comprehensive, including the follows:

• Eviction;
• Exercising the right to re-entry;
• Recovery of the premises or land;
• Distraints of goods;
• Forfeiture;
• Damages;
• Requiring a repayment of interest on, fee or charge incurred on the unpaid rent;
• Calling on personal guarantee;
• Re-possession;
• Terminating of the lease;
• Increasing the rent;
• Recovering the fixed amount that represents an amount of land tax or any other statutory charges; and
• Any other remedy.

Importantly, the Supreme Court stressed that the restricted actions cannot be taken by the lessor either during or after the expiry of the Regulation in relation to the lessee’s default occurred while the Regulations were in force. That said, once the Regulations expire, the landlord will automatically resume having all its normal rights and powers under the lease, in relation to breaches occurring after that date.

It is important to note, however, that a lessor may still take action against a tenant for other breaches of a lease, for example a failure to maintain the premises, or a restriction on assigning the lease. As such lessor’s should seek legal advice regarding their lessee’s breaches to confirm what action they may take.

Finally, if requested by an impacted lessee, a lessor must renegotiate the rent payable (or any other term) of a lease in good faith and having regard to the National Code of Conduct. As above, failure to comply with this requirement will mean that the lessor is precluded from taking enforcement action for a failure to pay rent.

It should be noted that negotiations on rent adjustment are not just limited to the impacts of COVID-19 during the period the regulations are in force and can cover periods after the Regulations come to an end (indeed, the National Code of Conduct effectively requires consideration of the impact of the pandemic, regardless of when it ends). As such it is important to seek professional advice as to what your rights and limitations might be in such negotiations.

What if there is a dispute?

The Regulations require that any lease with an Impacted Lessee, will be subject to the dispute resolution requirements of the Retail Leases Act 1994 NSW, regardless of whether the lease is a retail or commercial lease. As such this may entitle parties to the lease rights they might not ordinarily have, including requiring that the dispute be referred to mediation, prior to any court actions.

As such it is vitally important for both lessors and impacted lessees to seek professional legal advice before seeking to enforce their rights, either under an impacted lease, or the Regulations.

What is the system of negotiations (including dispute resolution)?

Any party may initiate the negotiations with respect to rent owed or any other term of lease and, if this occurs, then the parties are to attempt negotiate in good faith. Although it is not specifically addressed, it seems fair to say that the negotiations consist of offers and counter-offers from both parties rather than the lessee simply trying to dictate the rent reduction in the form of the rent waiver or deferral. If the former is the case, it will not likely amount to be negotiations in good faith. Furthermore, it has to be, in fact, negotiations and not just be a simple statement of the fact by the lessee that it is an impacted lessee, otherwise, there is a good chance that the lessee will not be considered to be seeking to negotiate in good faith.

The negotiations stage is the first and compulsory step to be taken to invoke the protection of the  Regulations. If negotiations have not commenced until the expiry date, then the lessee will not be eligible for any protection provided under the Regulations and during the subsequent recovery period even if it becomes affected later down the road.

Once the rent is re-negotiated by the parties, it will not be automatically reinstated on the expiry date of the  Regulations. The parties will still have to make additional effort to attempt negotiations once again to assess the impact of the pandemic and the reasonable recovery period.

The Court points out that it assumes that the re-negotiations and the subsequent recovery period should be initiated and/or attempted by the parties on a one-off basis rather than the rent being proportionally reduced on the basis of separate monthly calculations comparing turnover with the equivalent month of the preceding year. Nevertheless, the parties to a lease might implement any formula by their mutual agreement. In reality, most of the landlords have already chosen the approach contrary to the one encouraged by the Court.

If, sadly, the parties cannot come to an agreement despite negotiations, then they will be left with the following options:

• To attempt mediation and/or arbitration. The easiest and the cost most efficient mediation option is provided and facilitated by the NSW Small Business Commissioner; or
• To lodge an application in the Housing and Property division of the NSW Civil and Administrative Tribunal (NCAT); or
• To potentially contest the case in the Court. Although in Sneakerboy case the Court indicates that the Court will not have jurisdiction to make orders varying the terms of commercial leases that are subject to the COVID-19 regime.

Moving forward

Although the Regulations and the Sneakerboy decision provide helpful guidance for landlords and tenants, a number of practical issues continue to present challenges and raise further questions. Should you require any assistance or advice in relation to the operation of the Regulation and how it might apply to you, the team at Goodwin & Co Lawyers Pty Ltd would be happy to assist.