Has NSW clarified the Mandatory Leasing Code?

Has NSW clarified the Mandatory Leasing Code?

REAL ESTATE INVESTMENT ALERT

Special Edition

April 2020

Has NSW clarified the Mandatory Leasing Code?

As mentioned in our last Alert, on 7 April 2020 the Federal Government released its mandatory code of conduct setting out the “good faith leasing principles” to apply during the COVID-19 period to negotiations between landlords and tenants in respect of leases of commercial property, which includes retail, office and industrial premises (Code).

Based on information from a number of sources, some tenants are not complying with their good faith obligations under the Code, thereby causing significant problems for landlords (including in relation to their financing arrangements).

The Code was to be legislated by each state and territory. Although this has occurred in some jurisdictions, not all have completed this task.

On Friday 24 April 2020, the New South Wales Government released the regulations under which the Code is to apply in NSW. A set of regulations apply to retail premises and a slightly different set of regulations apply to other commercial premises.

In this special edition of our Alert, we highlight some of the more significant matters arising from the NSW Regulations – see Retail and Other Commercial Leases (COVID-19) Regulation 2020 (NSW). In particular, we consider:

  • Duration of the Code arrangements
  • Limits on tenants which can rely on the Code
  • Exclusion of new leases
  • An unintended consequence of the proportionality principle
  • The complexity of rights of enforcement for breaches
  • Uncertainty regarding Lessor actions for non-COVID-19 related reasons
  • The need to include references to the Overarching Principles to protect both parties

If you would like to read more please click HERE or see below.

Duration of the Code arrangements

Unlike the Code itself (which referred to “the COVID-19 pandemic period (or a reasonable subsequent recovery period)”), the period for which the NSW Regulations apply is specified as the 6 months period commencing from 24 April 2020, being the date on which the Regulations commenced.

The Regulations provide that they are automatically repealed at the end of that period. Although this provides some degree of certainty to landlords and tenants as to how long these regulations will apply, there is no express mention as to whether this period can be shortened if we are successful in dealing with COVID-19 and going back to business prior to the expiry of the period.

It is also unclear whether any of the Leasing Principles of the Code which can operate beyond 6 months, such as the repayment period applicable to deferred rent, will continue to apply beyond the date of repeal of the Regulations.

Limits on tenants which can rely on the Code

To be able to rely on the Code, the Code requires tenants to qualify for JobKeeper and have an annual turnover of no more than $50m. The NSW Regulations make it clear that the turnover threshold is to be determined by reference to turnover in the 2018-19 financial year and is to include “turnover derived from internet sales of good and services”.

As a result, if a tenant had a good 2018-19 financial year (by having a turnover, including online sales, of more than $50m), it appears it will not have the benefit of the Code in NSW even if its turnover has dropped below this threshold since 1 July 2019 (assuming it’s financial year ends on 30 June).

We note some landlords have raised concerns as to the use of the turnover threshold without also considering other aspects of a tenant’s finances and ownership structure. No changes have been made to broaden the criteria to be used in assessing the entitlement of tenants to benefit from the Code.

Exclusion of new leases

The Regulations (and therefore the Code in NSW) do not extend to any commercial leases entered into after 24 April 2020.

To the extent a landlord has any vacant premises and can find new tenants, this should provide the landlord with assurance that the Code will not impact it its rights should there be any issues with such tenants.

Unintended consequence of proportionality principle

Where a tenant is obliged to contribute a fixed amount towards land tax, any other statutory charge or insurance premiums payable by the landlord, and the landlord obtains a reduction of such tax, charge or premium,  the Regulations provide the tenants is to be exempted from its obligation to pay its contribution “to the extent of the reduction”.

It is not clear whether the term “extent of the reduction” is a reference to the proportion of the previous amount payable by the landlord as is represented by the reduction or a reference to the dollar amount of the reduction. It would not be equitable if it related to the dollar amount as this could result in each tenant, which is obliged to pay a fixed contribution amount, receiving an exemption for the full amount of their contribution, even though the reduction received by the landlord was less than 100% of the original tax, charge or premium.

This needs to be clarified by the Government.

Complexity of rights of enforcement for breaches

It appears that unlike the Code, which only allowed a landlord to take action against a tenant during the COVID-19 period for “material failure to abide by substantive terms of their lease” other than payment of rent, the Regulations allow action to be taken by the landlord (as allowed by the lease) in the case of any breach during the COVID-10 period other than:

  • failure to pay rent
  • failure to pay outgoings, and
  • the tenant’s business not being opened for business during the hours specified in the lease,

which occurs during the 6 months period of the Regulations.

In addition, no action can be taken if the breach of the lease is due to an act or omission required under a law of the Commonwealth or the State.

If a breach of a lease (including failure to pay rent or outgoings) occurred prior to 24 April 2020, the Regulations do not appear to prevent enforcement by the landlord.

To the extent a tenant fails to pay rent during the 6 months period of the Regulations, the parties must negotiate in good faith to agree the new rent payable, having regard to the Leasing Principles in the Code.

Commercial premises other than retail

Despite the above rights given to the landlord, in the case of commercial leases (other than retail leases), a landlord cannot:

  • seek to recover possession of premises or land
  • terminate the lease, or
  • exercise or enforce any other right under the lease

without first seeking mediation by the Small Business Commissioner. This seems to apply irrespective of the timing or nature of the breach on which the landlord wishes to rely (although see below under the heading Lessor actions for non-COVID-19 related reasons.

It is only if the Commissioner certifies that the dispute has not been resolved that the landlord may take court action to exercise any of the above rights.

When considering its decision, a court is required to have regard to the Leasing Principles in the Code.

It is not clear why the above procedure applies to actions by landlords in respect of breaches other than:

  • failure to pay rent
  • failure to pay outgoings, and
  • the tenant’s business not being opened for business during the hours specified in the lease,

which occur during the 6 months period of the Regulations.

This needs to be clarified by the Government so that both tenants and landlords clearly understand the procedures applicable to breaches under their leases.

Retail premises

In relation to retail leases, the existing dispute resolution procedures contained in Part 8 of the Retail Leases Act 1974 (NSW) will apply, as modified by the Regulations. Those provisions are different to those mentioned above.

Uncertainty regarding Lessor actions for non-COVID-19 related reasons

To the extent that a landlord wishes to take action under a commercial lease “on grounds non-related to the economic impacts of the CONVID-19 pandemic nothing in the Regulations will prevent the landlord from doing so.

The meaning of this exception is unclear. How is a landlord to determine whether a breach was “not related to the economic impacts of the COVID-19 pandemic”?

If a breach occurred prior to the onset of COVID-19, the exception should logically apply but the meaning of this exception should be clarified.

Need to include references to Overarching Principles to protect both parties

A number of provisions in the Regulations refer to the Leasing Principles set out in the Code.

The Leasing Principles are largely for the benefit of tenants and do not take account of the interests of the landlord. The provisions of the Code which have regard to the interests of both parties are contained in the Overarching Principles of the Code.

Landlords are concerned that the Code is very one sided and that tenants are not complying with the Overarching Principles when dealing with their landlord in the course of rent reduction negotiations. For example, requests by landlords for financial information to demonstrate the impact of COVID-19 on turnover and eligibility for JobKeeper (both of which are reasonable requests) are being ignored. Tenants are refusing to respond to suggested rent reduction proposals from landlords and have merely stopped paying rent. This is in breach of the Overarching Principles yet there does not seem to be any regulatory consequence to either a tenant or landlord arising from a breach of the Overarching Principles.

It is disappointing that the Regulations do not refer to both the Leasing Principles and the Overarching Principles. As it is clear that the Code and related State and Territory regulations are intended to lead to “mutually satisfactory outcomes”, the Regulations should also refer to the Overarching Principles. Failure to comply with such principles should, at least, be taken into account in any mediation, tribunal or court proceeding.

We understand further clarifications are being sought from the NSW Government in relation to a number of matters.

We trust you enjoyed this Alert.

Please feel free to contact us about any of the above matters.

Please also contact us if you would like to discuss our fixed fee loan document health check which will assist you in understanding your financier’s rights under current loan arrangements in the current challenging climate and help you in determining the strategy to adopt in your discussions with your financier.

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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