Are you better off under new leasing changes?

Are you better off under new leasing changes?

REAL ESTATE FINANCE AND INVESTMENT ALERT

November 2020

New COVID-19 leasing changes – are you better off?

Unresolved questions for property investors and tenants

On 23 October 2020, the NSW Government released the Retail and Other Commercial Leases (COVID-19) Regulation (No. 2) 2020 NSW, (Regulation No.2). This regulation extends (until 31 December 2020) and modifies the previous regulations introduced to implement the Commonwealth Mandatory Leasing Code. Regulation No. 2 became effective from 24 October 2020

The original Regulation (Regulation No.1) expired on 24 October 2020. It raised a number of questions for landlords and tenants (and their financiers). These included:

  • What happens to negotiated arrangements on expiry of Regulation No.1?
  • How can property investors protect their interests where tenants fail to provide information required to determine acceptable rent relief?
  • Can parties seek to negotiate further rent relief or other changes if their circumstances change during the “prescriber period”?
  • What happens if negotiations are not completed by the date of termination of the Regulation?

In this Alert, we consider

  • Has Regulation No.2 dealt with the above questions? and
  • Do the changes improve the position of property investors and their financiers’?

HAS REGULATION NO.2 DEALT WITH THE ABOVE QUESTIONS?

What happens to negotiated arrangements on expiry of Regulation No.1?

There is no clear answer to this.

Due to the change in the JobKeeper program from 28 September 2020, tenants now need to satisfy the eligibility tests contained in Regulation No.2 (which includes the satisfaction of the JobKeeper 1.0 and 2.0 requirements) to continue to be entitled to rent relief.

While tenants who continue to satisfy each of the tests will continue to be entitled to seek rent relief, the drafting is unclear in other circumstances. Will previously agreed rent relief (which extends beyond expiry of Regulation No.1) continue to apply if the both tests are not met? Do the JobKeeper 1.0 tests need to be met if rent relief is only sought for a period commencing on or after 24 October 2020?

How can property investors protect their interests where tenants fail to provide information required to determine acceptable rent relief?

This remains ambiguous.

Regulation No.2 requires both parties to commence their good faith negotiations within 14 days of either party requesting renegotiation of rent or other terms of impacted leases.

Landlords may be able to take “prescribed action” if tenants fail to commence such negotiations or provide evidence to demonstrate that the lessee is an impacted lessee (as defined). Unfortunately, there are no guidelines as to the nature of the evidence to be provided or the timeframes within which it must be provided. This can delay negotiations and adversely affect a landlord’s enforcement rights.

While landlords may have the right to take prescribed action in the above circumstances, Regulation No. 2 still contains a requirement for mediation to be undertaken to resolve a dispute before a landlord can take action for breach by a tenant.

As a result, property investors’ rights remain unclear.

Can parties seek to negotiate further rent relief or other changes if their circumstances change during the prescribed period?

Yes but (unless the parties otherwise agree) the further renegotiation can only relate to rent for a period in respect of which there has been no previous agreement to provide rent relief.

If parties have previously agreed to rent relief for a period, then notwithstanding their changed circumstances, there are no rights or obligations under the Regulation to further negotiate the rent for that period. The parties can, however, agree to do so.

What happens if negotiations are not completed by the date of termination of the Regulation?

Negotiations not completed by 31 December 2020 may be concluded after that date. It is unclear whether the parties would be bound by the requirements of Regulation No.2 in respect of such negotiations, as it will no longer be law at that time.

DO THE CHANGES IMPROVE THE POSITION OF PROPERTY INVESTORS AND THEIR FINANCIERS?

We have previously highlighted the financial and practical consequences of the Mandatory Leasing Code – see our May 2020 Alert.

It appears that Regulation No.2 has not clarified a number of questions raised in relation to Regulation No.1 and has raised some more questions. As a result, the financial and practical issues identified in our May 2020 Alert continue to be relevant.

Parties will continue to require expert advice on these matters.

Please feel free to contact me to have a complimentary 20-minute discussion to see how these matters affect you, including your finance arrangements.

Peter Faludi Consulting

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The comments made in this Alert do not constitute the provision of any legal, tax or accounting advice by Peter Faludi Consulting or any Director or employee thereof and therefore you should not rely on this Alert in making any decisions relating to present or future transactions in which you are involved. We strongly recommend that you seek legal, tax and/or accounting advice (as relevant) in relation to the same.

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