11 Nov 2021

Takeaways from COVID-19 commercial and retail tenancy disputes and decisions

By Danielle Mildren, Julia Liu

The National Code of Conduct adopted by the National Cabinet in response to the COVID-19 pandemic in 2020 provides a set of relief and resolution processes to leasing disputes arising out of COVID-19.

For commercial landlords, there are five key takeaways from the decisions in States and Territories on the application of the National Code of Conduct:

1. The COVID-19 relief legislation for commercial leases provides commercial tenants with a relatively low threshold to demonstrate their eligibility to request rental relief.

2. Commercial tenants are likely to become eligible for rental relief if they:

  • can show evidence that their business experiences an overall reduction of 30% in turnover or revenue;
  • are not voluntarily electing to cease trading; and
  • are relying on more than screenshots of bank accounts and emails to demonstrate the reduction in their business activity (such as BAS statements, profit and loss statements, tax returns or business records).

3. The general position in New South Wales and Victoria is that all tenants in shared premises are eligible for rental relief if one of the tenants meets the requirements.

4. Good faith negotiations are necessary throughout the dispute resolution process for rental relief. Before escalating the dispute to a tribunal, landlords and tenants must:

  • engage in self-arranged negotiation and mediation;
  • make and consider appropriate offers of settlement such as rent waiver and deferral offers; and
  • complete the mediation process and be issued with a certificate of the outcome of the mediation.

5. Once a tenant becomes eligible for rental relief, commercial landlords need to be cautious about exercising the power of forfeiture and rental recovery, including:

  • issuing notice of breach for rental arrears;
  • terminating the lease;
  • calling on a bank guarantee; and
  • compelling the tenant to continue paying full rent until the end of negotiations.

New South Wales

In New South Wales, resolution for disputes arising from impact on commercial and retail tenancy from COVID-19 must follow the Retail and Other Commercial Leases (COVID-19) Regulation 2021 (NSW) (NSW COVID Regulation), which expressly adopts the principles in the National Code of Conduct.

Commercial landlords and tenants in New South Wales can learn the following from decisions under the NSW COVID Regulation:

  • for a single commercial tenant to be an 'impacted lessee' for entitlements under the NSW COVID Regulation:
    • the tenant does not need to prove that the reduction in revenue or turnover of its business is related to COVID-19, so long as the tenant can prove that the reduction is at least 30% (Cong v Ning [2021] NSWCATAP 292);
    • the tenant can receive Jobseeker payments in addition to receiving JobKeeper payments in the same period and remain eligible as an impacted lessee (Cong v Ning [2021] NSWCATAP 292); and
    • it is not necessary that the document constituting a 'commercial lease' to be titled as a 'lease', so long as the effect of the document (such as a deed of assignment of lease) is an agreement relating to the leasing of premises for commercial purposes (NTT Australia Digital Pty Ltd v Cover Genius Services Pty Ltd [2020] NSWSC 1378);
  • where there are multiple tenants in the same premises as joint tenants:
    • it is sufficient that one of the tenants is eligible for JobKeeper payments for all joint tenants to be 'impacted lessees' for entitlements under the NSW COVID Regulation (Cong v Ning [2021] NSWCATAP 292);
  • once a tenant is an "impacted lessee" under the NSW COVID Regulation:
    • the landlord would be prohibited from issuing a notice under section 133E of the Conveyancing Act 1919 (NSW) in relation to the tenant's failure to pay rent and to stop the tenant from exercising the option to renew (Highlands on a Plate Ltd v Roloz Pty Ltd [2021] NSWSC 1072);
    • the landlord needs to provide the tenant with 50% waiver and 50% abatement of rent in compliance with the Code of Conduct (Newlife Centre Pty Ltd v Dymocks Book Arcade Pty Ltd [2021] NSWCATCD 26);
    • the landlord is not entitled to draw on a bank guarantee for the tenant's non-payment of rent and outgoings:
      • after the lease has ended (Tsoukalas v Nguyen (International) Trading Co Pty Ltd [2021] NSWCATCD 30); or
      • if the lease is terminated slightly before the commencement of the NSW COVID Regulation and the termination was related to the impact of COVID19 (Sneakerboy Retail Pty Ltd v Georges Properties Pty Ltd [2020] NSWSC 996);
    • the tenant is not entitled to a reduction in outgoings for the period in which it voluntarily elects to not trade, as opposed to it being unable to trade (Newlife Centre Pty Ltd v Dymocks Book Arcade Pty Ltd [2021] NSWCATCD 26);
  • when the landlord enters into a rent negotiations with the tenant, the requirement of good faith means that:
    • the parties need to first attempt their own renegotiations and undertake mediation before a dispute can be escalated to the appropriate forum for determination (Sneakerboy Retail Pty Ltd v Georges Properties Pty Ltd (No 2) [2020] NSWSC 1141);
    • the landlord cannot require the tenant to continue to pay full rent until the rent negotiation process has been completed (Darzi Group Pty Ltd v Nolde Pty Ltd [2021] NSWSC 774);
    • the landlord cannot request financial statements from the 2018 or earlier financial years for the purposes of assessing the impact of COVID-19 on the tenant's business, as it is too remote from the commencement of the pandemic (Darzi Group Pty Ltd v Nolde Pty Ltd [2021] NSWSC 774);
    • the tenant needs to respond to the landlord's rent waiver and deferral offer and to participate in mediation (Lstar Holdings Pty Ltd v Ta [2021] NSWCATCD 62).

Victoria

In Victoria, the COVID-19 Omnibus (Emergency Measures) (Commercial Leases and Licences) Regulations 2020 (Vic) (Victorian COVID Regulation) operates to regulate the dispute resolution processes for Victorian commercial landlords and tenants impacted by COVID-19. Commercial landlords and tenants in Victoria can learn the following from decisions under the Victorian COVID Regulation:

  • for a tenant to appropriately request rent relief under the Victorian COVID Regulation:
    • a series of emails and attachments in relation to request for rent relief are to be read together as one request for COVID relief by a tenant (Solitaire Mode Pty Ltd v Diakonidis [2021] VCAT 918; Tzilantonis v S&C Thomas Holdings Pty Ltd [2021] VCAT 486);
    • the tenant should provide information such as BAS statements, profit and loss statements, tax returns and business records to evidence a decline in turnover or revenue, rather than relying on a bank income statement (Solitaire Mode Pty Ltd v Diakonidis [2021] VCAT 918);
    • the tenant should provide evidence in relation to all revenue associated with the premises when calculating its decline in turnover, including business income and supplementary or passive income such as rent from subleases (Zeini v Inner Metropolis Holdings Pty Ltd [2021] VCAT 243);
    • the tenant should provide evidence that it is eligible for JobKeeper payments, and for a tenant that is a company, the tenant must show proof that it has at least one employee to meet this requirement (PS Market Pty Ltd v Brijcam Nominees Pty Ltd (Building and Property) [2020] VCAT 1468);
    • the tenant rather than a third party must directly make the request for rent relief. For a tenant who is a company, that means the company director should directly make the request (B&D Gippsland Investments v Lay [2021] VCC 993);
    • the parties need to first participate in their own negotiations and small business commission process to reach a settlement agreement before applying to resolve the disputes at the tribunal level (R&D Health Clubs Pty Ltd v Ling Wang Pty Ltd [2021] VCAT 349);
  • where there are multiple co-tenants in the same premises:
    • it is sufficient that one of the tenants meets the eligibility requirements under the Victorian COVID Regulation for all tenants on the premises to be entitled for relief (Zeini v Inner Metropolis Holdings Pty Ltd [2021] VCAT 243.

Queensland

In Queensland, the Retail Shop Leases and Other Commercial Leases (COVID 19 Emergency Response) Regulation 2020 (Qld) regulates the process for dispute resolution arising out of impact on commercial leases due to COVID-19 (Queensland COVID Regulation). Commercial landlords and tenants in Queensland can learn the following from decision under the Queensland COVID Regulation:

  • the parties need to first participate in their own negotiations and small business commission process to reach a settlement agreement before applying to resolve the disputes at the tribunal level to meet the jurisdictional requirement to escalate the dispute resolution to the tribunal level (Maxwell & Perandis Pty Ltd v Aztech Australia Pty Ltd).

Western Australia

In Western Australia, the Commercial Tenancies (COVID-19 Response) Regulations 2020 (WA) (WA COVID Regulation) provides the dispute resolution process and related protection for commercial landlords and tenants impacted by COVID-19. Commercial landlords and tenants in WA can learn the following from decisions under the WA COVID Regulation:

  • for a tenant to appropriately request rent relief under the WA COVID Regulation:
    • the tenant must be an "eligible tenant" in the emergency period and must have applied for relief before the end of the emergency period, though the application date for the relief can be extended beyond the end of the emergency period (Millennium Sports Pty Ltd v Vinciullo Holdings Pty Ltd [2021] WASAT 109);
    • the extent of the financial information required to prove eligibility for rent relief varies on a case-by-case basis, but screenshots and emails generally do not suffice as adequate and accurate information for a valid rent relief request (Ioppolo Nominees Pty Ltd and Major [2021] WASAT 88; Van der Feltz and Rispoli [2021] WASAT 84).

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Disclaimer

Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.