Commencement and Overview
The Retail and other Commercial Lease (COVID-19) Regulation 2021 commenced on 14 July 2021.
The new regulation has the effect of limiting certain enforcement rights by a lessor under a retail or commercial lease if the lessee qualifies for certain grants due to the impact of COVID-19 and a breach occurs during the prescribed period.
Before exercising certain rights, the lessor must attempt mediation to resolve the breach.
What leases are covered by the regulation?
The regulation applies to retail and commercial leases entered into before 26 June 2021, unless the new lease is an extension or renewal granted under an option to extend or renew, or other extension or renewal on the same terms as the existing lease.
The regulation does not apply to agricultural leases.
Which lessees are protected under the regulation?
The regulation applies to an ‘impacted lessee’ if:
- the lessee qualifies for 1 or more of the following grants:
- Micro-business COVID-19 Support Grant;
- COVID-19 NSW Business Grant; and
- Job Saver Grant.
A common criteria amongst all 3 grants is that the lessee must establish a minimum decline in revenue by 30% or more with respect to a comparison period specified in each grant.
For example the COVID-19 NSW Business Grant requires a minimum decline in turnover of 30% or more due to the Public Health Orders over a minimum 2 week period between 26 June 2021 to 17 July 2021 when compared to the same period in 2019.
Other specific eligibility criteria applies to each grant.
The COVID-19 NSW Business Grant is now open for applications online through the Service NSW website. For more information on the full eligibility criteria for this grant please visit https://www.service.nsw.gov.au/transaction/2021-covid-19-business-grant.
The Job Saver Grant and Micro-business COVID-19 Support Grant are expected to be available in late July. Lessees can register with Service NSW to receive notifications and further information on these grants by visiting https://www.service.nsw.gov.au/campaign/covid-19-help-businesses/grants-loans-and-financial-assistance#covid-19-business-grant.
- the lessee has a turnover of less than $50 million in the 20/21 financial year.
As with the earlier COVID-19 regulations: a franchisee’s turnover is the turnover conducted at the premises and for corporate groups it is the turnover of the group. Turnover includes any turnover derived from online sales.
What information does the lessee have to give the lessor?
An impacted lessee must give the lessor a statement and evidence that it is an impacted lessee.
Evidence is likely to be in the form of the Business Activity Statements or Tax Returns for the 2020/21 financial year to establish the under $50 million turnover criteria and other evidence that confirms the lessee is receiving or qualifies for one or more of the grants.
An impacted lessee can provide this information before a prescribed breach occurs or as soon as practicable after. A lessee must provide this information within a reasonable time following a request by the lessor.
What Breaches and Prescribed Period Does the Regulation Cover?
The regulation applies to the following prescribed breaches by an impacted lessee occurring during prescribed period 13 July 2021 to 20 August 2021:
- a failure to pay rent or outgoings; or
- not opening for trade.
Also, any act or omission by impacted lessee that is required to comply with any law in response to COVID-19 will not be taken to breach the lease or constitute grounds for termination or taking prescribed action against the impacted lessee.
What action is prohibited against an impacted lessee?
The regulation prevents a lessor taking prescribed action against an impacted lessee unless the matter is referred to the Small Business Commissioner for mediation and a failed mediation certificate is obtained.
Prescribed action includes terminating a lease, eviction, recovering the premises, charging interest, calling on security (security deposits, bank guarantees or personal guarantees) and other enforcement action and remedies.
How is this Regulation different to the earlier COVID-19 Retail and Commercial Leasing Regulations?
The new regulation does NOT impose any obligation on the parties to renegotiate rent or apply rent waivers or deferrals under the National Code.
The regulation merely restricts the ability of a lessor to take prescribed action against impacted lessee until it has attempted mediation.
It can take approximately 5 weeks for the Small Business Commission to allocate a mediation date following an application.
It appears the regulation aims to temporarily delay enforcement action against an impacted lessee in order to give the parties time to access the recently announced government grants and facilitate negotiations regarding cash flow arrangements during the Greater Sydney lockdown.
It is anticipated that during the mediation process lessors may be asked to consider payment plan options with respect to amounts owing during the prescribed period. Lessors may also be asked to consider offering rent waivers by utilising the recently announced 2021 land tax relief measure.
However negotiations of this nature are not prescribed in the regulation.
What action is still permitted by a Lessor under the regulation?
- Nothing prevents the parties from reaching an agreement regarding action that can be taken.
- Rent reviews and rent increases continue to apply during the prescribed period.
- Nothing prevents a lessor taking prescribed action on grounds unrelated to the economic impacts of COVID-19.
- Nothing prevents a lessor taking prescribed action with respect to a breach occurring before or after the prescribed period (subject to compliance with the earlier COVID-19 regulations).
New 2021 Lessor Land Tax Reduction Incentive Overview
- The NSW government has offered an incentive to lessors who offer rent waivers to eligible impacted lessees between the rent period 1 July 2021 to 31 December 2021.
- A lessor can apply for a reduction in land tax for an equivalent amount of the rent waiver up to 100% of the land tax charged for the premises for 2021. Where the land tax assessment covers more than one premises, the land tax reduction will be apportioned.
- The incentive does not apply to payment plans or rent deferrals that are repayable by the lessee.
- Lessors who charge a gross rental may benefit from this incentive by offering impacted lessees rent waivers equivalent to their land tax reduction.
- However it is currently unclear how the land tax reduction will apply where a lease provides for a net rental plus outgoings. In these circumstances the lessee could benefit twice from a rent waiver at the expense of the lessor:
- firstly from receiving the rent waiver; and
- secondly from receiving a further reduction to outgoings due to the reduction to land tax, following an outgoings reconciliation.
For further information on this land tax relief measure please see the link to the Review NSW website https://www.revenue.nsw.gov.au/news-media-releases/covid-19-tax-relief-measures/2021-land-tax-covid-19-relief-guidelines-jul-dec.
This article was written by Maged Jebeile, Special Counsel and reviewed by Gary Newton, Partner.