21 August 2020

NSW Court considers COVID-19 impact on lease termination

This article was written by Carl Black, Kaday Conteh and Mitchell Blott.

The NSW Supreme Court has recently cast light on the approach to a tenant’s application for relief against a forfeiture against the background of the COVID-19 pandemic.

In Sneakerboy Retail Pty Ltd trading as Sneakerboy v Georges Properties Pty Ltd [2020] NSWSC 996, the Court considered an application by a tenant for relief against forfeiture, following termination of the lease on 25 March 2020. The landlord’s decision to terminate was based on the tenant’s history of late rental payments and an alleged abandonment of the premises following the onset of COVID-19. The Court held that a history of late rental payments did not of itself bar the tenant from relief from forfeiture, there was no abandonment and granted the tenant relief from forfeiture.  

At first glance, the decision may not seem of note. After all, the decision of the Court aligns with a long line of legal authorities that establish that courts will (and should) generally grant relief where a lease is terminated for non-payment of rent, unless there are exceptional circumstances.

What is distinctive about this case is the Court’s approach to the consequences of the COVID-19 pandemic. The landlord’s termination notice related to breaches that occurred before the release of the National Cabinet Mandatory Code of Conduct (National Code) on 7 April 2020 and before NSW adopted the National Code principles via the Retail and Other Commercial Leases (COVID-19 Regulation) 2020 (NSW Code) on 24 April 2020. The Court considered what weight (if any) should be given to COIVD-19 commercial tenancies legislation in an application for relief.

Because this case related to pre-COVID legislation breaches, this decision is particularly relevant for landlords who initiated (or were contemplating) enforcement action before the COVID-19 commercial tenancies’ laws were enacted.

The commentary in this case is also likely to influence the approach in other Australian jurisdictions going forward.

Key considerations for Landlords

Notable take-aways are:

Early effects of COVID-19 will be relevant

The decision to grant relief was justified by the fact that the default in paying rent was ostensibly caused by a pandemic that the tenant was not responsible for (no matter the tenant’s poor record of failing to pay the rent on time). In particular, the Court took into account the initial consequences of the COVID-19 pandemic on the tenant’s actions.

In Sneakerboy, the tenant had experienced a sudden decline in revenue in February 2020, which it attributed to supply chain issues caused by the pandemic. In March 2020, the tenant began moving stock from the premises to a warehouse in anticipation of there being a greater demand for online orders and restrictions on the number of persons that could lawfully be on the premises. The tenant’s actions prompted the landlord to serve a termination notice on the grounds of non-payment and abandonment of premises.

The Court, with the benefit of hindsight, decided this was a “credible” action for the tenant to take at the time and therefore the tenant’s action did not amount to an abandonment of the premises or an intention to repudiate the lease.

Tenants who can similarly set out a constructive narrative to explain defaults that pre-date the COVID-19 commercial tenancies legislation may similarly be given the benefit of the doubt.

COVID-19 rent relief regime no reason to deny relief

The requirements of the National Code and the NSW Code did not prevent the Court from granting relief to the tenant and reinstating the lease, even though the application of those laws to the lease (as reinstated) would be disadvantageous to the landlord. The Court acknowledged that if the 25 March 2020 termination of the lease was invalid, the landlord would be obliged to give the tenant substantial rent relief under the new laws .The existence of the National Code and NSW Code was to treated as a neutral factor - the usual principles of forfeiture should apply, irrespective of the potential disadvantage the effect of those laws would have.

This is likely to mean that landlords may not easily be able to oppose a claim for relief from forfeiture on the grounds that the retrospective application of the National Code and related State laws would prejudice their position.

Rent relief quantum may be considered as part of proceedings

The decision also shows a willingness of the Court to assist the parties in applying the COVID-19 rent relief regime.

In Sneakerboy, once the Court had decided to grant relief, it had the effect of reinstating the lease as at 25 March 2020 which the Court acknowledged meant the lease became subject to the rent relief regime. Rather than leaving the matter there, and even though it was not called upon to supervise this aspect, the Court felt it was proper to assist the parties in implementing the COVID-19 rent relief regime and required the parties to make submissions as to the amount of rent relief that should be granted to the tenant.  

There are advantages to both landlords and tenants in this approach and it is possible that courts, in similar circumstances, will not narrow themselves to deciding the issues in dispute. Instead, courts may constructively seek to resolve the quantum of rent relief as part of concluding proceedings.

Replacement of Bank guarantee

Landlords should also note the approach taken to the tenant’s obligation to replace its bank guarantee if the landlord drew down on those funds following a breach.

The landlord in Sneakerboy had already called upon the bank guarantee, which it was rightly entitled to do under the lease, even though the termination of the lease itself was not effective. Although the Court decided that the tenant should replace the bank guarantee as a condition of the lease being reinstated, the Court also held that it would be an “unfair imposition” on the tenant and “inconsistent with the underlying principles of the COVID-19 regime” to require the tenant to replace it immediately and reserved judgment as to an appropriate time to order a replacement.

It remains to be seen how this aspect was determined but it does show a reluctance to burden the tenants, even where the landlord had a clear right to a replacement.

This is the first of what will be many COVID-related decisions in the months to come.

For more information on how these issues may impact you, please contact Carl Black.

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