The NSW Supreme Court has been the first Supreme Court in Australia to consider the implication of the National Cabinet Mandatory Code of Conduct: SME Commercial Leasing Principles during COVID-19 (Code) and the Retail and Other Commercial Leases (COVID-19) Regulation 2020 (NSW) (NSW Regulations).[1]
The case considered luxury footwear retailer Sneakerboy (Tenant) seeking relief against forfeiture to re-instate the lease with Georges Properties Pty Ltd (Landlord). Once the Lease was revived, the Code and NSW Regulations would apply and the protections within would come into effect.
The Court considered the effect of certain aspects of the Code and NSW Regulations. Whilst this is the first determination of a Supreme Court in Australia, the Court’s decision will be persuasive in other States and Territories. We have previously provided some commentary in relation to the COVID-19 Omnibus (Emergency Measures)(Commercial Leases and Licences) Regulations 2020 (Vic)(Victorian Regulations).
Court’s ability to determine rent relief
The Court considered the process for determining rent relief if the parties are unable to reach commercial agreement. If the parties cannot reach agreement at mediation, the dispute cannot be heard in any court or tribunal until the Registrar certifies in writing that the mediation is unlikely to resolve the dispute.
The Court found that it does not have power to determine the rent relief and that the NSW Regulations do not provide the Small Business Commissioner with a formula or mechanism to resolve a dispute between the parties that cannot be agreed at mediation.
We note that the Victorian Regulations are drafted similarly to those in New South Wales and will likely suffer the same fate. Preliminary legislation for Victoria has been released that indicates that extension of Victorian Regulations will also give the Victorian Small Business Commission greater powers to make an order for rent relief if a landlord refuses to respond to requests for rent relief. Victorians are continuing to wait for the revised Victorian Regulations to be released.
Tenant’s Trade
The Court considered whether the reduction in the Tenant’s trade was determined on a premises-specific basis or collectively – on the basis of the Tenant’s turnover for its business.
In considering the Code, the Court found that the Tenant’s turnover of its business (collectively) should be considered. The NSW Regulations also specifically considered that turnover means a tenant’s business turnover which includes any turnover derived from internet sales. In instances where a tenant has more profitable stores (or online presence), the NSW Regulations allows for the tenant’s turnover to be considered holistically, so that all landlords are on a level playing field when it comes to the reduction in the tenant’s turnover.
This contrasts the Victorian Regulations where a landlord’s offer to rent relief must take into account the reduction in a tenant’s turnover associated with the premises during the relevant period. This may lead to tenants with a thriving online presence being able to rely on unprofitable turnover figures for a particular premises to obtain rent relief. This may also unintentionally allow for certain landlords of tenant companies with multiple stores to be disadvantaged over others that have been able to remain open or open more easily in light of the Victorian Government’s restrictions.
Determination of rent relief during the COVID-19 period
The Court considered whether rent relief should be determined monthly or completely over the COVID-19 period. The Court found that the legislative framework contemplated one single negotiation however also took the view that parties can reach their own agreement for their own circumstances.
The Code allows for tenants to receive rent relief for the pandemic period and a reasonable subsequent recovery period. In this instance, the Tenant sought six months as a reasonable recovery period. Justice Robb took the view that this is unlikely a sufficient period for the Tenant to recover from the pandemic period.[2]
The Victorian Regulations do not include relief for a reasonable subsequent recovery period and to date has only provided rent relief for six months. Victorian landlords and tenants are awaiting the enactment of the substantive legislation extending the Victorian Regulations until April 2021 which may be considered as a reasonable recovery period (so long as the State continues to work towards re-opening businesses).
Determining the Tenant’s reduction in turnover
The Court considered that certain businesses are seasonal and therefore the sharpest decline in the early months may not be indicative of the pandemic period. If the seasonality of the business is regular, parties should compare the turnover to the equivalent in the previous year.
This goes to the heart of the main principle that each party should act reasonably, cooperatively and in good faith to reach an outcome that is as fair as possible (noting that both parties are ultimately adversely affected by the COVID-19 pandemic).
Bank Guarantee
In order to recover the rent arrears, the Landlord drew on the bank guarantee held under the Lease. The Bank released the whole of the guaranteed amount to the Landlord which left the Landlord holding surplus funds (that exceeded the amount of the pre-COVID arrears). The Court agreed that any monies applied to charges during the pandemic period are quarantined and the protections under the Code and NSW Regulations precludes a landlord from drawing on funds that relate to unpaid rent during the pandemic period.
The Court also indicated that it would be unfair and inconsistent with the principles of the COVID-19 legislation for the Tenant to replace the bank guarantee promptly during the pandemic period.
As the Victorian Regulations are set to be extended, it will certainly be interesting to see how the interests of landlords and tenants are balanced.
What do you need to know?
The Sneakerboy case provided some insight into the Court’s application of the NSW legislation.
Tenants can apply to the court for relief against forfeiture of the lease if the tenant pays the arrears (or if they are recovered from a security deposit or bank guarantee). If accepted by the Court, the tenant can then seek to apply the relevant COVID-19 legislation.
Parties are still trying to interpret the legislation as best they can and the Courts will provide direction as cases proceed to Court.
Parties that are still trying to reach agreement for rent relief should seek legal advice to assist them with their negotiations with their landlord or tenant.
We will be providing further updates once the substantive extension and changes to the Victorian Regulations are passed.
[1] Sneakerboy Retail Pty Ltd trading as Sneakerboy v Georges Properties Pty Ltd [2020] NSWSC 996; Sneakerboy Retail Pty Ltd trading as Sneakerboy v Georges Properties Pty Ltd (No 2) [2020] NSWSC 1141.
[2] Sneakerboy Retail Pty Ltd trading as Sneakerboy v Georges Properties Pty Ltd (No 2) [2020] NSWSC 1141 [148]
