COVID-19 has had a dramatic effect on businesses, particularly in the Retail Industry. In an attempt to mitigate these effects, the NSW government introduced National Cabinet Mandatory Code of Conduct (Code) and the Retail and Other Commercial Leases (COVID-19) Regulation 2020 (Regulation).
A recent decision of the Supreme Court of NSW gives landlords and tenants some guidance on how to apply the Code and the Regulations.
The Code and Regulations require landlords and tenants to negotiate, in good faith, reductions in rent during the pandemic period. Reduced rents negotiated under the Code must continue for a “reasonable recovery period” after the end of the COVID pandemic.
In the case of Sneakerboy Retail Pty Ltd v Georges Properties Pty Ltd, the Court confirmed that a period of “at least six months” was reasonable in the circumstances. Experts consider this will be the appropriate benchmark for most businesses.
However, the Court also commented that courts and tribunals (including the NSW Civil and Administrative Tribunal) may not have power to intervene where the parties fail to reach agreement during negotiations, or where a party refuses to negotiate in good faith (or at all), even though it is possible that the drafters of the Regulation intended that disputes could be resolved in the Tribunal.
Landlords and tenants who cannot reach agreement on reduced rent during COVID should not rely on the Tribunal or courts to decide for them.
The Facts
Sneakerboy Retail Pty Ltd leased a retail store in Sydney and had a history of failing to pay rent on time, even before COVID. When sales dropped dramatically in February and March of 2020, the Lessee failed to pay rent for two months and decided to cease trading temporarily.
In late March 2020, the Landlord terminated the lease and re-took possession of the premises on the assumption that the Sneakerboy had permanently vacated. The Landlord also called on Sneakerboy’s bank guarantee for a sum of $253,668.90.
In July 2020, Sneakerboy sued the Landlord, seeking to regain possession of the premises on the grounds that the Regulations prohibited the Landlord from terminating the lease during the ‘COVID-19 pandemic period’.
The Court found that the Code and the Regulations only applied from 1 April 2020 and did not apply at the time of the termination. However, the Court reinstated the lease under traditional common law principles on the grounds that all outstanding rent had been paid via the bank guarantee and because the lease was terminated on an incorrect assumption that Sneakerboy had permanently abandoned the premises.
The Court further found that Sneakerboy would be entitled to the benefits of the Code and the Regulations from 1 April 2020, including any entitlement to rent reduction negotiated between the parties.
Ultimately, the Landlord was required to pay some of the bank guarantee back to Sneakerboy, and the Lease was reinstated. Sneakerboy was also able to negotiate a significant reduction in rent from 1 April 2020.
The Court also found that the reduced rent negotiated between the parties should continue for a period of at least six months from the end of the COVID pandemic (currently legislated to be 24 October 2020, although this may be extended).
It was not all good news for Sneakerboy, who were ordered to pay the Landlord’s legal costs and provide a full new bank guarantee of $253,668.90, although they have until March 2021 to come up with the money.
If you have any questions in relation to the above leasing information, please call James Blaxland on (02) 6648 7487 who will readily provide advice on your specific circumstances.
This article is intended to be for information and educational purposes only and cannot be relied upon as legal advice. The information may not apply to your circumstances or to your particular situation. If you need specific advice or you have any questions, we welcome you to contact us directly.
