Further requirements before taking action against tenants 6 min read
NSW's retail and commercial leasing regulations have been amended, now requiring (in addition to the protections under the original regulations) landlords not to increase rent, and to renegotiate rent and other lease terms, before taking enforcement action against eligible impacted tenants during the extended COVID-19 lockdown.
Key takeaways
- Between now and 13 January 2022, retail and commercial landlords cannot increase rent, and must renegotiate rent and other lease terms, before taking enforcement action against a certain class of impacted tenant.
- The eligibility criteria for impacted tenants remain the same, and the government grant application criteria for tenants have been clarified by reference to certain periods against which a tenant's 30% revenue reduction is measured.
- Until 13 January 2022, landlords should be wary of taking any enforcement action against their tenants, should update their rent concession deeds, should not issue rent increase notices and should respond to tenants' requests to renegotiate within 14 days.
- The regulations apply to both retail and commercial leases, but not, presumably, to leases entered into on or after 26 June 2021 (the regulations do not make it clear).
Who in your organisation needs to know about this?
Legal, risk and compliance teams, including your organisation's property managers, need to be put on notice of the amended regulations, especially those operatives tasked with lease management and compliance.
What's changed?
Extension of prescribed period
Allens published an earlier Insight on NSW's retail and commercial leasing regulations, which require landlords to use mediation before taking enforcement action against eligible impacted tenants during the current COVID-19 lockdown (the Original Regulation).
On Friday, 13 August 2021, the Retail and Other Commercial Leases (COVID-19) Amendment Regulation 2021 (the Amended Regulation) commenced, which covers much of the same ground as the Original Regulation but also includes important amendments that may affect you and your business.
The Amended Regulation extends the period during which retail and commercial tenants are protected until 13 January 2022, and largely reinstates the 24 April 2020 Regulation, which was introduced in NSW to deal with the early impacts of the lockdown at that time.
What remains?
Like the Original Regulation, the Amended Regulation applies to retail leases under the Retail Leases Act 1994 (NSW); and, by operation of an amendment to the Conveyancing (General) Regulation 2018 inserted at Schedule 2 of the Amended Regulation, it also applies to commercial leases under the Conveyancing Act 1919 (NSW). The same limits on landlords apply in respect of impacted tenants of both retail and commercial leases.
We assume that the Amended Regulation does not apply to leases entered into on or after 26 June 2021, when the Greater Sydney (and now the state-wide) lockdown began (except for leases entered into by means of an option to extend or renew the lease, or any other extension or renewal of an existing lease on the same terms as the existing lease); or to leases under the Agricultural Tenancies Act 1990 (NSW). However, the Amended Regulation does not make it clear.
Tenants are also still required to provide evidence that they are, in fact, impacted tenants.
Mediation
The Amended Regulation, like the Original Regulation, requires landlords to engage in mediation before taking any enforcement action against an impacted tenant for certain breaches of the lease. This was not a requirement under the December 2020 Regulations, and, from a practical point of view, it will mean that landlords and tenants will need to agree not to require mediation. Landlords will not be able to simply roll out standard documents they used in 2020, as they risk not obtaining tenants' agreement on this important issue.
This could prove an impediment to landlords, as, in our experience, mediation takes some time to accomplish. We recommend that any rent concession deeds entered into include a provision agreeing that mediation will not be required before enforcement action can be taken.
No rent increases
Importantly, under the Amended Regulation landlords are prohibited from increasing rent (other than rent, or a component of rent, determined by reference to turnover) if a tenant is an impacted tenant.
Impacted tenants: government grant application criteria
The eligibility criteria for impacted tenants have not changed under the Amended Regulation (except for minor changes to the names of the relevant government grants). Impacted tenants are those who are eligible for either:
- the 2021 COVID-19 Micro-business Grant;
- the 2021 COVID-19 Business Grant; or
- the 2021 JobSaver payment
and they must have had an annual turnover below $50 million in the 2020–21 financial year.
Some in the property industry, including the Property Council of Australia, have raised the issue of the threshold being a $50 million turnover, saying it is too high and catches a great number of tenants
Applications for all of the above grants are now open, and close in either September or October this year. We previously noted that the application criteria were not entirely clear. Now, each of the grants requires that the applicant suffers a reduction in revenue of more than 30% over a minimum two-week period within the Greater Sydney lockdown (having begun 26 June, and due to end 28 August 2021) compared with either: the same period in 2019; the same period in 2020; or the two-week period immediately before the lockdown began (12 June to 25 June 2021). However, in light of the recent extension of the Greater Sydney lockdown beyond 28 August 2021, presumably the criterion will be updated to include a new end date.
Obligation to renegotiate
Additionally, under the Amended Regulation parties must renegotiate rent, and other lease terms, if one of the parties requests it, and must do so within 14 days of any request. Renegotiations must be conducted in good faith, and parties must consider the principles set out in the National Code of Conduct for Commercial Tenancies (the Code).
An impacted tenant may make a second or subsequent request only if the request is made during the prescribed period, and does not relate to rent or outgoings for a period for which the rent or outgoings have already been reduced, waived or deferred following a renegotiation, unless the parties otherwise agree. A renegotiation commenced but not concluded before the expiry of the prescribed period may be continued and concluded after the expiry.
No breach of lease
Importantly, an act or omission of an impacted tenant required under a COVID-19-related law is taken not to amount to a breach of the impacted lease to which the tenant is a party, and does not constitute grounds for termination of the impacted lease or the taking of any prescribed action by the landlord against the impacted tenant.
Courts and tribunals must consider the Code
Courts and tribunals must consider the principles set out in the Code when considering whether to make orders or decisions relating to the recovery of possession of premises or land from an impacted tenant, the termination of an impacted lease by a landlord, or the exercise or enforcement of another right of a landlord under an impacted lease.
What should landlords do (or not do) now?
In light of the Amended Regulation, we reiterate the tips in our previous Insight on what we consider prudent landlords should not be doing. In addition, between now and 13 January 2022 we suggest the following for landlords in NSW:
- do not issue any rent increase notices;
- if a tenant requests a renegotiation of rent, commence those negotiations within 14 days or within the period you agree with your tenant; and
- include in any rent concession deeds a provision agreeing that mediation will not be required before enforcement action can be taken.