Last week, the NSW Supreme Court found that luxury footwear retailer, Sneakerboy, will have until 30 April 2021 before its landlord can increase rent or evict it.
What relief do tenants currently have?
Under the National Cabinet Mandatory Code of Conduct: SME Commercial Leasing Principles during COVID-19 (the Code) and Retail and Other Commercial Leases (COVID-19) Regulation 2020 (the COVID-19 Regulation), SMEs receive rental relief through the pandemic period.
The Code was introduced so “landlords will agree to tailored, bespoke and appropriate temporary arrangements for each SME tenant, taking into account their particular circumstances on a case-by-case basis”.
Under leasing principle 3 in the Code, Lessors are required to offer Lessees a proportionate reduction in rent payable in the form of waivers and deferrals. These can be up to 100 per cent of the ordinary rent payable. Under leasing principle 4, rental waivers must not be less than 50 per cent of the total reduction in rent.
This support was made available “during the COVID-19 pandemic period and a subsequent reasonable recovery period”.
When interpreting “reasonable recovery period”, Justice Robb stated that “[t]he period of the reduction is … not tied to the period in which the COVID-19 pandemic affects the tenant’s trade, but must extend to a subsequent reasonable recovery period.”
Justice Robb held that concessions under the COVID-19 Regulation will continue for 6 months after it ends on 24 October 2020. Landlords may therefore be unable to increase rent or evict tenants until March 2021.
What happens if renegotiation is unsuccessful?
If parties are unsuccessful in renegotiating, the Regulation is not clear on the next steps for resolution.
“It is not entirely clear what is to happen if the parties to a lease to which the COVID-19 regime applies do not succeed in renegotiating the lease, or a party refuses to enter into the renegotiation, or does not do so in good faith,” stated Justice Robb.
Nonetheless, neither the court nor the NSW Civil and Administrative Tribunal appear to have power to intervene in renegotiations.
“The Court has no power to decide an appropriate outcome of the renegotiation, before the parties have had the opportunity to conduct the renegotiation themselves.”
“It is at least doubtful that the Tribunal has the necessary powers to resolve a dispute arising out of a failed renegotiation, even though it is possible that the drafters of clause 8 of the COVID-19 Regulation intended that disputes could be resolved in the Tribunal.”
What does this mean for SMEs?
Sneakerboy’s solicitor, Adam Cutri, indicated that despite the Court’s guidance on what constitutes a “subsequent reasonable recovery period”, SMEs should negotiate with landlords as soon as possible.
“Do it quickly. If the mediation and negotiations aren’t concluded prior to the repealing of the Regulations in October, tenants may not be protected.
“The second important learning is that the Court has indicated that the period between when the Code was announced and when the Regulations came into effect, should be included in any negotiated outcome.”