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Transitioning from the COVID leasing protections – Sneakerboy reveals some issues

02 September 2020

#Dispute Resolution & Litigation, #COVID-19, #Property & Real Estate

Published by:

Sam Darwish

Transitioning from the COVID leasing protections – Sneakerboy reveals some issues

Sneakerboy (No 1) considered the COVID leasing laws. In its sequel – Sneakerboy (No 2), the NSW Supreme Court gives clues, and points to difficulties, in how leasing life might play out once the leasing protections are rolled back on (maybe) 24 October 2020.

The landscape

Landlords have fast learned that ‘prescribed actions’ including termination cannot be taken against SME tenants for breaches such as arrears or not trading, where these have occurred during the ‘prescribed period’ – 24 April to 24 October 2020. Come 24 October 2020, unless extended – like in Victoria - landlords can again enforce their leases. This includes for arrears and not trading, but only if these breaches occur after 24 October 2020.  Breaches which occurred during the prescribed period remain ring-fenced. Landlords cannot end leases, following the prescribed period, for arrears accrued during the prescribed period.

What next?

But what happens after 24 October 2020 more generally, particularly where leases have not been renegotiated?

And what about incomplete renegotiations, or where renegotiations have not started, or if a tenant wants to renegotiate the renegotiation? Is the landlord required to consider extending concessions beyond 24 October 2020? 

Sneakerboy (No 2) considers these. 

What is involved in a renegotiation?

The court helpfully pointed to the COVID laws contemplating a single renegotiation. There can be a ‘once and for all’ moment. Yet, the laws also permit parties agreeing on having multiple renegotiations, such as reviews every few months to monitor trade etc.  Single renegotiations may give legal certainty, but teeter economically – lawfully terminated leases with empty shops may not be desirable for anyone.

How far into the future should renegotiations extend?

A fair few landlords and tenants have approached renegotiations only for the time up to 24 October 2020. This approach is incomplete. The COVID regulations and Commonwealth’s COVID leasing Code stipulate a renegotiation period for rental concessions where the parties must have regard to the economic impacts of the “COVID-19 pandemic and a subsequent recovery period”. These two concepts are undefined and seemingly open negotiations to time beyond 24 October 2020 – the ‘substantial recovery period’. How long that time period extends is considered below. As for the rationale - if the pandemic ends, a tenant’s trade is unlikely to immediately restore to pre-pandemic levels. Concessions for a recovery period allow tenants time to again establish their economic footing.

As for the “subsequent recovery period”, this involves two concepts: firstly, for a recovery period to begin, the pandemic must have ended. Next, how long should that period be?  In Sneakerboy, the court assumed the pandemic’s end date as 24 October 2020. Really? The NSW Supreme Court is many things, but even it cannot order the pandemic, at risk of contempt, to end. Yet, in the particular context of the Sneakerboy case, the timing was needed (returned to below). The court then regarded 6 months from 24 October 2020 as being a reasonable “subsequent recovery period” – i.e. to 24 April 2021. This timing gives guidance, but is not a precedent - the period is for negotiation between parties.

What happens when the COVID laws are repealed?

Unless extended, the COVID leasing laws are being repealed on 24 October 2020. Yet even this throws up issues: what rights accrue on repeal? What rights are voided?

Firstly, where leases have been renegotiated, these rights should be taken as accrued. Next, landlords cannot terminate or take action for arrears accrued during the prescribed period.

But what if there has been no renegotiation, or renegotiations are not finalised? Can a landlord insist upon payment of full rent accrued during the prescribed period? Can tenants compel landlords to renegotiate lease terms for the prescribed period after 24 October 2020?  The court was non-committal: rights may not be lost but the question stands to be decided. It would seem odd for a landlord to be entitled to full rent if it has not renegotiated – this seems to reward avoiding, amongst other things, the good faith obligations in the COVID laws. Sensibly, the court urged parties to value completing renegotiations before 24 October 2020.      

Can the court offer assistance for failed renegotiations?

Sneakerboy particularly concerned relief against forfeiture and the likely future rent payable which required considering the COVID laws. The court needed a baseline position from a hypothetical renegotiation – which was why determining ‘subsequent recovery period’ became relevant. It helped answer questions like the surplus from a drawn bank guarantee, and the amount of a replacement guarantee. Factually, Sneakerboy is atypical.

The court also explained the COVID laws did not enable courts to vary lease terms where parties were unsatisfied with renegotiations, or felt the other party was not acting properly. “It is for the parties to renegotiate the terms”, and if unsuccessful, then a mediation can occur. However, the court’s power did not extend to rewriting leases after a failed renegotiation.

What to do?

This case shows that the COVID regulations and Code create enforcement issues. Further decisions will be useful and necessary.

Parties should strive for a single renegotiated position, reduced to writing. It may oblige the parties to reassess based on business performance etc, but a finalised renegotiation is beneficial. Clarity over obligations, liabilities and enforcement options may be at a premium after the COVID laws end, which may – or may not be – on 24 October 2020. 

Authors: Bede Haines & Sam Darwish

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Published by:

Sam Darwish

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