Can distressed retailers get rent relief for longer?

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The NSW Supreme Court applies the COVID-19 Leasing Regime to offer rent relief until 2021

Retailers, and administrators helping distressed retail businesses, will welcome the recent decision of the NSW Supreme Court to offer further rent relief under the COVID-19 Leasing Regime.

The recent decision of Sneakerboy v Georges Properties Pty Ltd (No 2) [2020] NSWSC 1141 (Sneakerboy) demonstrates the court’s willingness to provide businesses with time to get back on their feet by extending rent relief under the ‘reasonable recovery period’ in the COVID-19 Leasing Regime.

It is also of note that the court in this case applied the COVID-19 Leasing Regime retrospectively. The decision effectively extends the application of the Regime both forwards and backwards, and materially reduces the ability of landlords to evict non-paying tenants.

Background

Sneakerboy is a retailer selling upmarket sneakers and streetwear. They operate out of five premises in three states as well as selling online. The company experienced a sudden decline in revenue in February 2020, which it attributed to the COVID-19 pandemic. They ceased paying rent.

On 25 March 2020, the landlord (Georges Properties) terminated the lease and re-entered the property. At this stage, while the COVID-19 pandemic had entered the national consciousness, no formal legislation had been put in place to deal with the economic fallout.

Some four months later, in July 2020, Sneakerboy applied to the court for relief against the forfeiture of the lease. By this time, the National Mandatory Code of Conduct announced by the National Cabinet (Code), which was passed on 7 April 2020, and the Retail and Other Commercial Leases (COVID-19) Regulation 2020 (NSW) (Leasing Regulation) (together, the COVID-19 Leasing Regime), which was passed on 24 April 2020, were both in effect.

The rent relief was granted. The parties were asked to negotiate and agree on further orders in the light of the Leasing Regulation. They were unable to do so, and Sneakerboy applied to the court for guidance.

The court found that:

  • the ‘COVID-19 pandemic period’ in the Code applied retrospectively to 1 April 2020;
  • in negotiating rent relief based on a reduction in tenant’s trade, the entirety of the business must be taken into account; and
  • retail tenants should be allowed a reasonable recovery period, in this case six months but longer where necessary, before the rent is increased or eviction commenced.

To what period does the COVID-19 Leasing Regime apply?

The Code states its overarching purpose to be ‘to impose a set of good faith leasing principles for application to commercial tenancies (including retail, office and industrial) between owners/operators/other landlords and tenants, where the tenant is an eligible business for the purpose of the Commonwealth Government’s JobKeeper programme.

In the light of this purpose, the court defined the ‘COVID-19 pandemic period’ as applying to the ‘period during which the JobKeeper program is operational’. The JobKeeper program commenced on 1 April 2020. Accordingly, the court held that the COVID-19 Leasing Regime had retrospective effect to 1 April in relation to rent and outgoings.

Barring any further extensions of the COVID-19 Leasing Regime, the current date of repeal is 24 October 2020. Tenants must negotiate any rent relief before (or on) that date in order to take advantage of the ‘reasonable recovery period’ in the Leasing Regime. If negotiations are not concluded until after that date, the Regime (unless extended) does not apply.

It is worth noting that this is a NSW decision. In Victoria, where a second extended lockdown has been imposed, rental relief legislation for retail and commercial tenants was recently extended. If a similar lockdown occurs in NSW, it would appear likely that an extension will be put in place there as well.

What is a ‘reasonable recovery period’?

The COVID-19 Leasing Regime holds that landlords must allow the tenant a ‘subsequent reasonable recovery period’ to allow them to get back on their feet.

In Sneakerboy, the tenant argued that a reasonable recovery period would be six months after the expiry  of the COVID-19 Leasing Regime. The court agreed, giving Sneakerboy until at least 30 April 2021 before the landlord could raise the rent or pursue eviction proceedings.

However, the six-month period should not be read as a maximum. In his decision, Robb J commented that ‘[six months] does not seem to be a long time for Sneakerboy’s trade to recover after the COVID-19 pandemic period’.

That is, the courts may be open to substantially longer periods of recovery. Landlords may face a situation where they cannot take action against underpaying or non-paying tenants for at least the next year and quite possibly beyond.

How is tenant’s trade calculated in negotiating rent relief?

In calculating rental arrears, the parties had reference to the reduction in ‘tenant’s trade’. Leasing principle 3 in the Code requires landlords to offer tenants a reduction in rent that is proportionate to their reduction in trade.

The first question in Sneakerboy was whether ‘tenant’s trade’ meant the trade from the premises that formed the subject of the lease, or the entirety of their business.

Sneakerboy claimed the former. They submitted that they had not been able to trade from the landlord’s premises at all, and that therefore the owed rent should be nil.

They further argued that if it was the entirety of their turnover, the payable rent should be $22,19.18 on the basis that their turnover had reduced by between 95% and 73% in the three months under consideration.

The landlord argued that ‘tenant’s trade’ should be considered as the whole of the tenant’s turnover, including costs and profits.

The court held that if a tenant’s sales are down, but government subsidies (for example JobKeeper payments) mean that their costs are also down, both things should be part of the calculation.

It also includes profits that are not generated at the retail premises in question: for example, if the tenant has managed to increase their online sales to balance out a reduction in retail footfall, the landlord is entitled to take this into account.

To compare turnover, the court considered that businesses with regular trade should compare the month’s revenue with the equivalent month in the previous year. For businesses with seasonal trade, a longer period may be more appropriate. There is flexibility on this point, which is yet to be tested under the COVID-19 Leasing Regime.

How might the judgment affect you as a renter?

As long as you have negotiated an agreement for rent relief prior to the repeal date of 24 October 2020, you should be able to rely on it enduring for a ‘reasonable recovery period’. In Sneakerboy, the period was six months because that is what the tenant asked for. The court’s decision indicated that this was not an unusually long time, which suggests that they may be open to longer periods in some circumstances.

You should get advice as to whether you have experienced a significant enough reduction in trade to be able to negotiate a rent reduction. The Sneakerboy decision takes a cautious approach to tenant’s trade, taking into account all subsidies and cost reductions as well as all revenue streams.

How might the judgment affect you as a landlord?

Landlords should be cautious when trying to terminate a lease, even when the breach occurred prior to the commencement of the COVID-19 Leasing Regime. Sneakerboy indicates that the courts are heavily inclined to give weight to the impact of COVID-19 in any lease dispute. If you are a landlord with a tenant who is not paying rent, seek timely legal advice on what you can and cannot do during the prescribed period.

For more information about how this decision applies to your circumstance, contact us (insolvency law and commercial litigation specialists) to find out how we can help you negotiate rent relief for your distressed retail business.

Further information

For more information about rent relief, dealing with landlords or tenants or insolvency, please contact:
Trevor Withane: trevor.withane@blackwattlelegal.com.au, tel +61 (0)418 717 001

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