Sydneys second lockdown new protections for commercial and retail tenants

As Sydney is thrown into a second lockdown, including the closure of most retail premises, uncertainty has been growing between landlords and tenants as to how to manage their leases.  Until last Thursday, the NSW government had been silent on tenancy issues, hoping that the lockdown would be short lived.  However, when it became apparent that closures will be extended, the government introduced new legislation to provide some protection for SME tenants.

As with the previous COVID-19 retail and commercial leases legislation (which expired in March 2021), that protection extends only to SME tenants, leaving landlords and tenants at the big end of town to navigate their own way through tenancy issues during the lockdown. 

New Regulation

On 14 July 2021, the NSW government passed the Retail and Other Commercial Leases (COVID-19) Regulation 2021 (the New Regulation).

The New Regulation restricts landlords of certain retail and commercial leases from terminating or enforcing those leases if the tenant does not pay rent, pay outgoings or trade between 13 July and 20 August 2021.  

Landlords may only terminate or enforce leases after the matter has been referred to mediation and that mediation has been certified as unsuccessful. 

Rent relief not mandated

What the New Regulation does not do is prescribe rent relief during the prescribed period.  This means that it will be for landlords and tenants to negotiate between themselves what rent relief (if any) may be appropriate, without any guidance or even reference to the proportionality principles of the National Cabinet Mandatory Code of Conduct. 

If a tenant stops paying rent, landlords are simply directed to mediation to resolve any dispute.  

There is also no guidance as to how to navigate tenancy issues at the big end of town, leaving those landlords and tenants to continue to consider issues such as whether insurance cover can be claimed upon during state-wide shut downs.

Which leases fall under the New Regulation?

The New Regulation applies to certain commercial and retail leases with an "impacted lessee". 

A lessee is an "impacted lessee" if it qualifies for 1 or more of the following government grants:

• the Micro-business COVID-19 Support Grant; 
• the COVID-19 NSW Business Grant; 
• the Job Saver Grant,

and the lessee has a turnover of less than $50 million in the 2020-2021 financial year.  Importantly, "turnover" includes internet sales of goods and services.

Where a lessee is a corporation that is a member of a group, the $50 million threshold refers to the turnover of the whole group.  On this basis, the New Regulation only applies to SME tenants.  

The New Regulation applies to leases entered into before 26 June 2021 (although this timing requirement does not apply in the case of any renewals of existing leases or option leases).

What does the New Regulation restrict landlords from doing? 

During the "prescribed period" between 13 July 2021 and 20 August 2021, landlords are restricted from taking a "prescribed action" on the grounds of a "prescribed breach" by an impacted lessee, unless the matter has been referred to mediation and the Registrar has certified in writing that the mediation has failed to resolve the dispute.

A "prescribed action" includes:

• evicting a lessee;
• terminating a lease; 
• claiming damages;
• claiming interest on unpaid rent;
• claiming under a guarantee or security bond; or
• seeking any other remedy available to a landlord against a tenant at common law or NSW legislation.

A "prescribed breach" is a failure to pay rent, failure to pay outgoings or a failure to operate the business in the hours specified in the lease. 

The New Regulation does not prevent a landlord from taking action on grounds that are not related to the economic impacts of the COVID-19 pandemic (for example, a landlord may terminate a commercial lease if a lessee fails to vacate premises following the expiry of a fixed term).

What next?

While the prescribed period expires on 20 August 2021, the New Regulation continues until January 2022, leaving the door open for the prescribed period to be extended.

Although we all hoped that lockdowns were things of the past, landlord and tenants should consider including pandemic specific provisions in the new leases, which contemplates the consequences if there are further shut downs or lockdowns. 

If you require any guidance on your tenancy issues, please contact us for assistance. 

Authors: Vicki Aron, Partner (Real Estate, Sydney) and Tracy Carr, Senior Associate (Real Estate, Sydney)