NATIONAL TENANCY CODE FOR RETAILERS AFFECTED BY COVID-19
Unless a “force majeure” clause exists in, or the doctrine of frustration applies to a lease contract, there are no grounds under retail tenancy laws for a tenancy to end or lessees protected from rent stress due to a viral outbreak. However, Governments have acted at Federal and State levels. Details are being finalised to incorporate the National Cabinet Mandatory Code of Conduct Small and Medium Enterprises COVID-19 Leasing Principles (“the Code”) announced on 7 April 2020 into State law, and there’s financial support for many retailers and some landlords. In broad and general terms, this support is:-
- Retailers must be eligible for JobKeeper support which opens 21 April 2020 (click first white “JobKeeper” button below) and turnover less than $50m to access the protections of the Code (click second white “National Cabinet Mandatory Code of Conduct” button below);
- Parties to a COVID19 affected lease negotiation must act in good faith;
- Lessors are required to reduce lease rental payments in proportion to a reduction in a lessee’s business;
- Lessors cannot unilaterally draw on security such as bonds, bank or personal guarantees or increase rents;
- Waivers (not deferrals) are to be a minimum of half of the reduction in the lessee’s business;
- Deferrals, (suspended payments due later) must be amortised no less than 24 months and a lease extended accordingly (maybe a re-payment plan);
- The Code will be mandated in each State and Territory and also by binding mediation;
- Lessor’s cannot unreasonably ignore lessees requests about lease arrangements and, if refused, might be found acting in bad faith.
INSOLVENT TRADING PROTECTIONS EXTENDED TO 31 DECEMBER 2020
Effective from 25 March 2020, temporary amendments made to the Corporations Act 2001 (see Coronavirus Economic Response Package Omnibus Act 2020 and associated Bills), relieved directors of companies from personal liability for trading whilst insolvent as a first response to the economic upheaval from COVID-19.
Directors’ protections apply if debts are incurred “in the ordinary course of business” (a fairly broad definition) and deemed necessary to facilitate the continuation of businesses in general as a going concern. Australia has quite harsh insolvent trading rules, not readily designed for such COVID-19 uncertainty and where a company is insolvent or close to it, directors’ duty must act in good faith in regard to “their company” which may include duties to their company’s creditors. The temporary shield from insolvent trading provided by the temporary amendments is now extended to 31 December 2020, but will only go so far. This is especially important for SME operators of retail businesses and those higher risk businesses such as travel agents, dry cleaners, foodservice and tourism related.
If your company is being kept afloat by JobKeeper, the rent debt is building up, you cannot keep up agreed rent payments because sales are permanently poor and the break-even point seems impossible, it’s now past time to think about renegotiating your lease or closing down altogether. This is especially important if there are significant impacts of director guarantees given to lessors and other major suppliers. Keep in mind that directors must sign a solvency resolution after their company’s review date. Company directors and officers are obligated to act with due care, with requisite skill, in good faith and for a proper purpose in the best interests of the company as a whole. They are not permitted to act in a misleading or deceptive way, obtain or utilise their directorship to cause detriment to the creditors or obtain a personal advantage.
UPDATE: The Corporations and Bankruptcy Legislation Amendment (Extending Temporary Relief for Financially Distressed Businesses and Individuals) Regulations 2020 has been extended to 31 December 2020 enabling safe harbour, bankruptcy and insolvent trading protections extend to that date. On 24 September 2020, the Federal Treasurer Josh Frydenberg announced the Government will make significant changes to Australian bankruptcy law with US style “Chapter 11” laws to allow business owners with liabilities of less than $1 million to deal with their debts in new ways. Treasury facts and announcement here.
STATES ANNOUNCE EXTENDED TENANT PROTECTIONS
Victoria – On 20 August 2020, Victoria announced extended tenancy protections for SMEs and gives additional powers to VSBC see here. The Victorian Government introduced the COVID-19 Commercial and Residential Tenancies Legislation Amendment (Extension) Bill 2020 now passed both houses. This means the Victorian government has extended tenant protections to 31 December 2020 with a possible further extension to 26 April 2021, if required.
SA – On 7 September 2020, the South Australian Government extended the emergency relief for commercial lessees until 28 March 2021. For details of the media release, click here
ACT – On 28 September 2020, the Australian Capital Territory extended the emergency relief for commercial lessees until 31 January 2021. For detail of the extension, click here.
WA – On 10 September 2020, the West Australian Government extended the emergency relief for commercial lessees until 28 March 2021. For details of the media release click here.
QUEENSLAND – On 16 September 2020, the Queensland Government extended the emergency relief for commercial lessees until 31 December 2020. For details of the media release click here.
NSW– The regulation Retail and other Commercial Lease (COVID-19) Regulation 2020 has now been extended to 31 December 2020. See media release here. The enabling Regulation is the Retail and Other Commercial Leases (COVID-19) Regulation (No 2) 2020 which commences 24 October 2020.
JOBKEEPER EXTENDED AND MODIFIED
On 21 July 2020, the Federal Government announced an extension to the JobKeeper programme to 28 March 2021. Depending on each business, this extension may or may not extend tenancy protections afforded by the Code and State and Territory legislation. The States and Territories will need to provide further information. Seek advice, especially if you have made, are about to, or will make agreements that will affect your legal rights under a lease. Download the fact sheet for the JobKeeper programme here.
PANDEMIC PERIOD EXTENDED TO 17 DECEMBER 2021
The Australian Government’s human biosecurity emergency period as defined by the Biosecurity Act 2015 (Cth) has been extended to 17 December 2020. This date is important for those parties negotiating rent deferral repayment timelines under point 9 of the Code whereas, “No repayment should commence until the earlier of the COVID-19 pandemic ending or the existing lease expiring and taking into account a reasonable recovery period.” The ‘reasonable recovery period’ has been is expressed by the NSW Supreme Court as “…no less than six months…and it does not seem to be a long time for…trade to recover after the COVID-19 pandemic period.”
COURT INTERPRETATION NEWS
LESSOR FAILS TO EVICT SYDNEY RETAILER IMPACTED BY COVID-19.
The first of what is likely to be a flurry of retail leasing cases relating to the pandemic was handed down by the NSW Supreme Court on 31 July 2020, in Sneakerboy Retail Pty Ltd trading as Sneakerboy v Georges Properties Pty Ltd  NSWSC 996.
In essence, the lessee ‘Sneakerboy’, a Sydney CBD retailer experienced a sudden decline in sales from February 2020. On 11 March 2020, when WHO declared the COVID-19 outbreak a pandemic, the lessee was behind in its rent.
On 25 March 2020, the day the NSW Government amended the Retail Leases Act 1994 to prevent recovery, possession of premises, termination of leases and other rights such as rent collection, the lessor terminated Sneakerboy’s lease and re-entered the premises.
On 26 March 2020, the lessor requested a drawdown of the bank guarantee of $253,669,90, more than $55,754.95 than would have been payable up to 21 July 2020, when the injunction summons was first filed in the Court registry. On 24 April 2020, NSW gave its own legal effect to the National Cabinet Mandatory Code of conduct with the Retail and Other Commercial Lease (COVID-19) Regulation 2020. The Court took into account the effect of the pandemic, the applicability of the National Cabinet Mandatory Code of Conduct and that the COVID-19 regulation gives effect to the Code retrospectively from 25 March 2020.
The Court found that the lessor must reinstate the lease and that the decision to terminate the lease for rent default was, to some degree caused by the initial consequences of the COVID-19 pandemic for which Sneakerboy was not responsible. Importantly, the Court said at , about the Code, as “…the product of a national agreement to deal with a once-in-a-century public health crises…”, at  it said, “…The consequences of the COVID-19 pandemic for the viable economic future of all retail enterprises are completely unknown and at  said “Incidentally, given the parlous circumstances experienced by retail businesses during the term of the COVID-19 pandemic, I would not find Sneakerboy’s delay in making the application for relief against forfeiture to be a valid ground for denying that relief…”
And at , the Court said, “One feature of concern that arises out of the exceptional circumstances in which this application for relief against forfeiture has been made is that the immediate effect of the reinstatement of the Lease will be to subject the parties to the COVID-19 regime. Ordinarily, it is clear enough that the effect of relief against forfeiture will be to oblige the tenant to observe the terms of the lease and to pay rent as required by the lease. In the present case, the Court expects that the implementation of the COVID-19 regime will affect the amount and the timing of payment of rent under the Lease. That regime likely will have other effects. The Court cannot quantify or predict those effects, or estimate when the effects will be crystallised by application of the processes required by the COVID-19 regime. There will be considerable scope for further disputation and possible disadvantage caused to one party or both as a result of the course that each takes in implementing the COVID-19 regime.”
What’s the upshot? The lesson is that lessors and lessees should act reasonably towards each other and within the spirit and intent of the Regulations to get SME’s through the recovery period and to the other side of the pandemic. The NSW Supreme Court will likely construe the Regulations and Code in a broad and beneficial way given the extraordinary circumstances retailers find themselves in.
NSW COURT INTERPRETS REGULATION BROADLY AND BENEFICIALLY – BUT SIDESTEPS RE-WRITING COVID-19 INFECTED LEASE TERMS
In a further decision in Sneakerboy (No2) NSWSC 1141 on 26 August 2020, the Supreme Court of NSW set out some basic principles relating to the Retail and other Commercial Leases (COVID-19) Regulation which enables the Code into law. Perhaps the most important observation is that lessors can no longer erroneously argue that rent abatements and deferrals under the Regulation and Code apply from 24 April 2020 and not 1 April 2020 or earlier, and secondly, the recovery period may end on 31 March 2021 and not the 24 October 2020 as some lessors have erroneously been clinging onto. The case leaves open a few idiosyncrasies as to jurisdiction and it is expected that more issues will arise in coming months. A paper discussing the issues arising is available to clients by emailing a request: email@example.com.
NSW COURT FINDS A DEED OF ASSIGNMENT FALLS UNDER THE COVID-19 REGULATIONS, DAMAGES ARE AN ADEQUATE REMEDY RATHER THAN SPECIFIC PERFORMANCE AND ORDERS MEDIATION
On 9 October 2020, Justice Ward in NTT Australia Digital Pty Ltd v Cover Genius Services Pty Ltd  NSWSC 1378 dealt with warring parties over a lease subject to a Deed of Assignment and which part of the lease term covered the COVID-19 pandemic.
The Court indicated the Deed of Assignment is relevantly a “commercial lease” for the purposes of the Retail and Other Commercial Leases (COVID-19) Regulation, but the defendant had failed to adduce sufficient evidence to prove that it was an “impacted lessee”. The Court held than rather ordering specific performance, damages would be an adequate remedy. It held the defendant was not entitled to raise the operation of the Regulation as it had failed properly to plead the defence. Nevertheless, the Court of its own motion ordered that, in any event, the defendant had notified the lessor that it seeks rent relief and the Court ordered they must attend a court-annexed mediation. A copy of the summary is here.
COURT PERMITS BACKDATED BREACH OF LEASE NOTICE
On 14 October 2020, Justice Stevenson of the NSW Supreme Court handed down a decision in MIR Holding Pty. Limited and Anor v Marina Square Retail Pty. Limited  NSWSC 1418. The matter involved retail tenants operating restaurants seeking relief from forfeiture for failure to pay rent. The application was refused. The circumstances were that on 11 September 2020, the lessor served notices under s129 of the Conveyancing Act 1919 (NSW) for failure to pay rent. That rent was for amounts to 31 March 2020. In other words, a back dated notice. The notices were served subsequent to the commencement of the Retail and Other Commercial Leases (COVID-19) Regulation 2020.
On 1 October 2020, the lessor served a notice to terminate the retail leases arising from those s129 notices and on 2 October 2020 interlocutory relief was refused. The matter came back before the Court on 13 October 2020. Whilst the Court found the lessees were “impacted lessees”, it found that the s129 notice was valid as it did not fall under the Regulation. There seemed to be a paucity of evidence as to the details of the financial circumstances the lessee found themselves in as a result of COVID-19, but in any event, the lessors had in the meantime leased the premises to third parties. The Court found it should not disturb the now new lessee’s occupation and grant relief from forfeiture to what were ostensibly the previous sitting tenants.
With all due respect to the parties and the Court, in accordance with s78 of the Retail Leases Act “Interpretation based on industry practise”, where literally many thousands of lessor and lessees find themselves in unprecedented circumstances and sitting down and working it out lease by lease, it’s difficult to understand the Court’s reasoning is sound and simply didn’t order a mediation like it has in Sneakerboy and NTT Australia Digital Pty Ltd above, either through the statutory scheme or on its own motion.
Firstly, cl7 of the Regulation requires parties to renegotiate rent and other terms of commercial leases before ‘prescribed action’ after 24 April 2020, including seeking to recover possession and terminate leases without mediation under s6. Following on, cl7 says: –
“(4) The parties are to renegotiate the rent payable under, and other terms of, the impacted lease having regard to—
(a) the economic impacts of the COVID-19 pandemic, and
(b) the leasing principles set out in the National Code of Conduct.”
The National Code of Conduct clearly recognises that “Leases may already be arrears” and these “…factors should be considered in formulating any temporary arrangement in line with this Code.” This is so, even if the default was “persistent and significant”.
At , the Court said inter alia, no evidence existed the new, replacement lessees were aware of the plaintiff’s claims, but didn’t go further to explore the positive obligation of the lessor to disclose any current legal proceedings and lawful occupation to the new replacement lessees in accordance with s27 of the lessor’s disclosure statements under the Retail Leases Act
At , there’s a suggestion the lessor might be in the firing line for a claim for damages. Being retail leases, s62B Retail Leases Act and its smorgasbord of considerations may well be used to tease out and explain the lessor’s actions in circumstances which may amount to a damages claim of some form of predatory behaviour with a willingness to take an risk of a claim of unconscionable conduct when a retail tenant, most notably in the severely hit food and beverage industry is fatally vulnerable due to the impact of COVID-19.
Only time will tell if this case goes anywhere on principle.
THE STATES DEAL WITH COVID-19 AFFECTED LEASES WITHIN THEIR OWN PUBLIC HEALTH AND DISPUTE RESOLUTION AND LEGAL FRAMEWORK – NOT ALL LEGISLATION FOLLOWS THE CODE EXACTLY, CHECK YOUR LOCAL LAWS
COMMENCING LEASE NEGOTIATIONS?
LESSEES BEWARE – CONDUCT OF SOME LESSOR’S
Non compliance with spirit, intent and action – (1) Some landlords and agents are not complying with the spirit and intent of the Code (click here). Some tenants are asked to sign one-way confidentiality agreements as a pre-condition to start lease negotiations. These landlords demand documents such as years of BAS, JobKeeper applications, personal and business tax records, all bank statements, profit & loss, balance sheets, assets and liabilities of directors and cash on hand and superannuation details. Some landlords request details of all Government assistance given to the lessee. Nothing in the Code requires disclosure of the kind, breadth and scope of the request these landlords make. Supplying details like this is akin to giving your landlord you PIN number to your bank account. To be clear, if you do not provide turnover information to a landlord (under the terms of your lease), yet you confirm applying for JobKeeper, it is enough to commence negotiations under the Code. It is not a requirement to provide anything more than evidence of a sales decline. If a landlord wants to verify sales, it can usually do so under the terms of the lease and pay for an audit. We can provide a free template letter to assist you with these types of landlords.
Using on-line forms to gather private information – (2) Some landlords and agents are asking tenants complete on line “surveys” and then load up highly confidential information. Nothing in the Code requires disclosures of the kind, breadth and scope of the request these landlords make and these surveys are designed to mislead you into providing information which can, and will be used against you. We can provide a free template letter to assist you with these types of landlords.
“My way or the highway” offers – (3) Some landlords and agents are offering “take it or leave it” deals. They present documents pretending to help with rent, but demand more than existing rights and use side agreements such as fit-out deeds to claw back rent. Some also demand total releases from all claims, past and future, even whilst the recovery period is uncertain. Lessees who don’t understand their legal rights should not sign these documents but obtain proper advice.
Demanding non COVID-19 affected shops subside rent for COVID-19 affected shops – (4). A profitable shop, business or unaffected shop is not required to prop up a closed or loss maker shop due to COVID-19. Some landlords are demanding to see all the results of the profit centres of multiple locations so they can demand rent at a COVID-19 affected shop.
Ignoring the Code dovetails into unfair (Cth) and unconscionable conduct provisions (State) – (5) Laws prevent lessors engaging in conduct that is, in all the circumstances, unconscionable or unfair. Lessees pressured into one-sided deals can claim money from lessors acting unfairly or contrary to the Code. For example, in NSW, 62B Retail Leases Act 1994, a Tribunal can compensate lessees in various ways:-
- having regard to the relative strengths of the bargaining positions of the parties;
- if the lessee was required to comply with conditions not reasonably necessary to protect the legitimate interests of the lessor;
- any undue influence or pressure was exerted or any unfair tactics used;
- lessor’s consistent conduct in similar transactions;
- if the lessee acted believing the lessor would comply with the Code;
- if the lessor failed to disclose conduct affecting the interests of the lessee;
- extent to which the lessor was willing to negotiate the terms and conditions (critical for the COVID-19 and recovery period);
- if the lessor acted in good faith.
Landlords claiming equipment and stock – (6). Some landlords are claiming equipment and stock in a lessee’s shop. Attempting to seize stock (known as distraint of goods) belonging to retailers (or their creditors) is illegal and also contrary to the Code. Similarly, landlords cannot seize or control equipment in the premises unilaterally. Title to the equipment may belong to a third party and cannot utilised by the landlord to give away for use by another, incoming tenant.
Landlords double dipping – (7). Landlords who benefit, but fail to disclose tax concessions, rebates or concessions from State governments or banks and not pass on the savings can be liable for misleading and deceptive conduct. For example, in NSW, S62D Retail Leases Act 1994 prevents misleading and deceptive conduct.
Landlords falsely claiming essential service status – (8). Some landlords are claiming their centre is an essential service and therefore tenants are liable for full rent as they chose to close, irrespective of footfall. This claim conveniently ignores the obvious restrictions on public movement, mass gatherings, restrictive use of premises and so forth under the State based public health Acts and local regulations.
Landlords threatening no future lease renewals or sale of the business – (9). Some landlords have been threatening (usually verbally) that if the lessee tries to obtain a rent reduction under the Code, does not borrow the money to cover the rent or go to mediation, the landlord will not renew the lease or permit the business to be sold in the future.
WA’s Small Business Commissioner, David Eaton recently called on small business tenants and landlords to work together…“Tenants may have also heard about the land tax assistance program. Landlords can apply for this, if they have given tenants the equivalent of a three months waiver on their rent. The decision as to whether to apply is for the landlord to make. This application process will include landlords asking tenants for evidence of a decline in their turnover. While this is a reasonable request, it is not reasonable to ask for [tenant’s] financial statements…”
GETTING READY FOR RECOVERY
Think about the future – If you are trying to negotiate a new rent arrangement or in dispute, it’s critical the final agreement to vary the lease is documented. There are significant risks if lease variations are not documented properly. Relying on oral agreements, a few email or simple letters to cover the deal seem easy enough and save you time and money, but may not capture the complete agreement clearly and with sufficient detail to avoid a dispute later.
Documents that record the deal – A lease is a formal legal document for land which may require variation by way of a deed or be registered to be legally binding. The extent and magnitude of the rent, outgoings and licence variation (say, if some of the rent is deferred) must be carefully worded and refer to the lease. It is not certain an email or letter will be sufficient, or one day you may need a Tribunal or Court to provide a declaration if things go wrong. You want to avoid that!
Avoiding future problems now – Variations not prepared correctly may allow a party to avoid their obligations or may not be bind the parties if the premises is sold or repossessed by the bank. Omissions may mean the variation agreement might not bind all parties, or may just operate for the current lessee and not apply to a future any buyer of the business. The rent variation might be conditional upon customer numbers, sales turnover and government re-opening guidelines so on and should clearly worded. Extending a term of a lease which is registered will need a variation for registration on title or maybe a consent from a bank or other lender. Major lease variations may even amount to a surrender at law and it may be better to think about a whole new lease. There’s a lot to consider.
Bottom line. A properly considered lease variation document will protect the interests of both parties and hopefully avoid a dispute further down the road to recovery.
INSOLVENCY UPDATE ON COVID-19 AFFECTED LEASES
On 28 April 2020, Justice Markovic of the Federal Court of Australia expressed the Court’s views on the Code, retail rents and COVID-19 in Strawbridge (Administrator), in the matter of CBCH Group Pty Limited (Administrators Appointed) (No3)  FCA 555.
In the context of an appointed administrator, this case gives valuable insights into how retail landlords and the Courts are responding the COVID-19 pandemic: At  of the Orders, the administrators are not “…personally liable for any liability for property leased, used or occupied, nor for the rent or other amounts payable pursuant to any of the leases…” At  the administrators are “…justified in causing the companies in the Colette Group not to meet their obligations to pay rent pursuant to any of the Leases which have accrued up until 5.00 pm on 6 May 2020”
At [8 -10] of the Reasons, the Court noted that COVID-19 Restrictions “…make it extremely difficult for the Administrators to operate the 93 retail stores which were the subject of the Leases as at 15 April 2020. By way of example Mr Marsden referred to the announcement made by the Prime Minister of Australia, the Honourable Scott Morrison MP, on 29 March 2020 in the following terms:
National Cabinet’s strong guidance to all Australians is to stay home unless for:
- shopping for what you need – food and necessary supplies;
- medical or health care needs, including compassionate requirements;
- exercise in compliance with the public gathering requirements;
- work and study if you can’t work or learn remotely.
On 10 July 2020, in TM Lewin Australia Pty. Limited (Administrators Appointed)  FCA 992, Davies J referred to the above case and noted the “…restrictions put in place by the Australian Government….resulted in a significant decline in the Company’s retail and wholesale sales”. The administrators offered at , 3 scenarios for the 5 shops; trade to sell out stock, trade to asses chances of a sale as a going concern, or wind up the Company. The lessors did not oppose the request to not pay rent (probably because they have bank guarantees of $831,000) but with rent accruing at $215,000 per month, an extension of rent abatement was required and granted.
So….is your retail business affected by the Coronavirus pandemic? Have your sales virtually vanished? Unable to make rent payments in accordance with your lease terms? We are a qualified entity under the Legal Profession Uniform Law (NSW) specialising in retail leases and disputes.
On 29 March 2020, the Prime Minister Scott Morrison said,
“Commercial tenants, landlords and financial institutions are encouraged to sit down together to find a way through to ensure that businesses can survive and be there on the other side.
This could include tenants and landlords being encouraged to come to agreement ‘on rent relief or temporary amendments to the lease’, reduction or waiver of rental payments, and giving tenants an ability to terminate leases on the grounds of financial distress”
Now the Code has force of law, lessees and lessors should act to assist each other. Both have certain rights and obligations under their lease. Each retailer is affected differently, whether it’s a chain of shops or a single independent. The bottom line is landlords, tenants and banks should try to negotiate a commercial outcome, even if the retailer cannot qualify for the JobKeeper programme. Need help?
Running out of cash? Banks are supporting the Coronavirus Small and Medium Enterprises (SME) Guarantee Scheme with up to $40 billion of lending to SMEs (including sole traders and not-for-profits). Click third white “Coronavirus Small and Medium Enterprises (SME) Guarantee Scheme” button below.
Need help? Use the free guides below (green buttons) or request an expert consult by calling, or sending a message via the form below. We conduct video conferencing, expert rent negotiations, mediations and turnaround advice to help you get through.
Some lessees have received breach of lease, termination notices and have been threatened with lock out. These lessees need urgent interlocutory orders from a Tribunal or Court to preserve their business. Contact us directly if this applies to you.
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Successful retailers know location & lease go hand-in-hand. Even without a pandemic, retail is fiercely competitive and requires broad ranging skills, experience and enormous effort, 7 days a week, highly seasonal and consumers are fickle and demanding – but the COVID-19 virus leasing decisions can make or break the business!
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Australian Retail Lease Management Pty. Limited is a qualified entity pursuant to the Legal Profession Uniform Law (NSW) specialising in retail and retail lease disputes. With over 33 years of retail and retail property, location and leasing experience, we have the resources and practical solutions to help your shops succeed in today’s competitive and ever-changing marketplace. High street, showrooming, pop up shops or shopping centres, we’ll help you get to “yes” so you’re in control. If occupancy costs are crippling your business, we have turnaround strategies to reduce costs, boost sales and protect your leases.
Our personalised approach, be it for individual shopkeepers, senior management or Board directors goes beyond property to ensure rightsizing and better portfolio management, so getting the retail right reduces your risk and helps to lock in profits for future growth.