Rent Relief for Small & Medium Enterprises in NSW amid COVID-19 Pandemic

On 7 April 2020, Australian states and territories agreed to adopt a National Cabinet Mandatory Code of Conduct—SME Commercial Leasing Principles During COVID-19 (‘Code of Conduct’) to address the pressing need for helping small and medium enterprises (SMEs) through the pandemic where they have difficulties in paying their rent as they face falls in trade, restrictions and even forced shut down of business. The Code of Conduct was formally implemented in New South Wales on 24 April 2020 under the Retail and Other Commercial Leases (COVID-19) Regulation 2020 (NSW) (‘the Regulation’).

The Regulation serves to enforce the principles in the Code of Conduct in the form of law with effect from 24 April 2020 for 6 months. In this article, we will outline the essential provisions in the Regulation.

Which leases are subject to the Regulation

The Regulation applies to commercial leases including those of:

1. retail shops;
2. shops in retail shopping centres; and
3. other land or premises for commercial purposes such as offices, excluding agricultural tenancies.

The applicable lease must be:

1. a leases entered into on or before 24 April 2020; or
2. a leases entered into after 24 April 2020 by option or other means to extend or renew the lease on the same terms as the existing lease entered into on or before 24 April 2020.

Which lessees are eligible

An eligible lessee under the Regulation, termed ‘impacted lessee’, is an SME whose turnover of business in the 2018-2019 financial year was less than $50 million (‘turnover threshold’). The turnover threshold applies to the group turnover if the lessee is a member of a corporate group, but it applies to the lessee’s own turnover if the lessee is a franchisee. Notably, turnover includes that derived from internet sales.

Apart from the turnover threshold, the impacted lessee must also satisfy the fall in turnover test under the government JobKeeper scheme. Normally, the lessee’s turnover (monthly or quarterly) from March 2020 must have fallen by at least 30% compared to the same month or quarter in 2019.

For more information about the JobKeeper scheme, please refer to:

https://www.ato.gov.au/General/JobKeeper-Payment/

Freeze on rent increase

A freeze period is imposed on rent increases. Rent under commercial leases with an impacted lessee except turnover-based rent cannot increase before 24 October 2020. Moreover, the amount by which the rent could have been increased during that period cannot be recovered from the lessee afterwards.

Moratorium on eviction etc

A moratorium is also imposed to protect impacted lessees who have any of the following circumstances (‘Impacting Event’):

1. failure to pay rent;
2. failure to pay outgoings (such as lessee’s contribution to the expenses of the management, operation, maintenance or repair of a retail shop building);
3. failure to operate business under the business hours specified in the lease; or
4. doing or not doing a thing required under a federal or state law in response to the pandemic.

Before 24 October 2020, lessors will be prevented by the Regulations from unilaterally seeking actions against the impacted lessee for an Impacting Event, including (‘Recovery Actions’):

1. termination of the lease;
2. requiring payment of interest on unpaid rent;
3. eviction of the lessee (including re-entry, seeking possession, or distraint of goods); and
4. drawing on the bond of guarantee to recover unpaid rents and damages.

Lessor-Lessee negotiation & mediation process

In order to seek the above actions for the lessee’s payment of rent, the Lessor must first undergo the lessor-lessee negotiation & mediation process below or otherwise agree with the lessee.

The negotiation, which can be request by any party to the lease, must take into account the economic impacts of the pandemic and the principles in the Code of Conduct. Under the essential principles of the Code of Conduct, the lessor is required to:

1. offer the impacted lessee rent relief – the percentage of the rent relieved corresponds to the percentage of the lessee’s drop in turnover during the pandemic period and a subsequent reasonable recovery period afterwards.
2. relief the rent in accordance with the legislation: (a) at least half should be waived; (b) the remainder of the rent must be deferred and amortised over the greater of 24 months or the balance of the lease term;
3. offer the lessee extension of the lease for a period equivalent to the rent waiver or deferral, so that the lessee has more time to trade on existing lease terms for recovery after the pandemic;
4. reduce the lessee’s contribution to tax, statutory charges (e.g. council rates) and insurance payments to the extent that the amounts of these charges payable by the lessor are reduced (for example, see the Land Tax Reduction below).

The lessor must not charge fees, interests or other punitive charges against the lessee regarding the rent relieved.

If the negotiation fails, the lessor needs to submit the matter to the New South Wales Small Business Commissioner for mediation. Only after the failure of the mediation as certified by the  Commissioner in writing can the lessor seek Recovery Actions.

Lessee must adhere to the terms of the lease

It is imperative that the lessee adhere to the terms of lease subject to any variation as a result of the negotiation, because the Regulation does not prevent Recovery Actions for reasons not related to the pandemic such as damage to the premises.

Land Tax Reduction

To stimulate rent relief, a lessor of commercial property in New South Wales may have the land tax payable in the 2020 land tax year (1 January to 31 December 2020) in relation to the leased property reduced by up to 25% if:

1. the property is leased to an impacted lessee; and
2. the landlord reduces the rent of the impacted lessee, the amount of rent reduction will be the amount of land tax reduction.

Please contact our firm for advice specific to your circumstances.

Disclaimer: This publication is general information only and does not purport to provide legal advice. We do not accept responsibility for any losses for reliance upon this publication.