How should COVID-19 rent relief be calculated? Some NSW guidance

Sneakerboy Retail Pty Ltd trading as Sneakerboy v Georges Properties Pty Ltd (No 2) [2020] NSWSC 1141 (26 August 2020) (Sneakerboy No 2) is a NSW Supreme Court decision handed down in late August which provides some guidance to parties in assessing COVID-19 rent relief in NSW. 

It is the second of two cases related to the reinstatement of a lease that had been forfeited for pre-COVID-19 breaches.  The usual requirements regarding relief against forfeiture applied, but as a bank guarantee needed to be reinstated, the Court decided it was appropriate and necessary to take into account the impacts of COVID-19 in determining the extent and timing of the reinstatement of the bank guarantee.

Preliminary comments

The NSW Supreme Court made it clear that it, and NCAT, are not granted powers under the current NSW legislation to impose an order for renegotiated terms of a lease. This has been a fundamental gap in the legislation across the jurisdictions, given the consequences of failure of parties to reach agreement on renegotiated terms have not been spelt out. Changes to enabling Victorian legislation have been passed which would facilitate such powers to be granted to VCAT and potentially also to Small Business Commissioner mediators.  Members should be conscious that announcements in Victoria regarding extensions and alterations to the regulations are pending (and may even be made today (27 September 2020)).

The Court carried out a notional assessment of what it expected the parties might have agreed in renegotiating rent under the NSW COVID-19 rent relief regime. However, this was solely for the purpose of determining what bank guarantee should be provided by Sneakerboy as part of arrangements to reinstate the forfeited lease. In doing so, the Court effectively took into account the relevant principles under the Mandatory Code of Conduct re Commercial Leases, as relevant landlords and tenants are required to do by the NSW legislation.

How did the Court calculate the notional rent relief?

The Court decided that, under the NSW legislation, it was appropriate to examine the impacts of COVID-19 upon the turnover of the tenant’s business as a whole, in determining the extent of rent relief. This may contrasted to the Victorian COVID-19 legislation where such a question is only a threshold issue to eligibility for relief and the focus is upon the individual lease circumstances (which might include the turnover of the tenant’s business as a whole). Further, despite acknowledging the potential validity of the landlord’s submission that the resources of other entities in the Sneakerboy group (and Sneakerboys’ shareholders) may be relevant in assessing Sneakerboy’s financial capabilities, the Court declined to take those resources into account for the purposes of its calculations.

An assessment of the impact of turnover over a series of months was made, with the Court cautioning that a snapshot of turnover impacts of a shorter period may not give an accurate assessment of impacts. In conducting this exercise although Robb J considered that it was permissible and appropriate for parties to agree some formula for determining rent relief on an ongoing basis over the pandemic period where turnover (and impacts) fluctuated due to conditions, he declined to do so in his own calculations in the circumstances. 

The Court also indicated that, based on the current legislation, a failure to reach a binding agreement in relation to rent renegotiations before the repeal of the NSW legislation (on 24 October 2020) could compromise the parties’ (primarily a tenant’s) position.  We anticipate that transitional or amended legislation will be needed to rectify this potential consequence.

The Court also made it clear that “permitted” lease breaches that occurred during the pandemic period could not be relied upon following the repeal of the legislation to terminate a lease.  That is, the moratorium in respect of breaches during the pandemic period is permanent.

Importantly, Robb J accepted a submission that the “reasonable recovery period” referred in the Mandatory Code of Conduct would be a period of 6 months.

Qualifications

The NSW legislation is somewhat different to Victoria’s and that of other states. These differences and the extent of the legislation means it is not possible to make unqualified statements about how this case with affect rent relief discussions in the various jurisdictions. (An examination of the various jurisdictional differences is beyond the scope of this article.)

Further, the unique circumstances of this case means that, while it provides some guidance, the reasoning of the NSW Court cannot be directly applied to other matters. 

Finally, the fluid nature of governmental responses to the COVID-19 pandemic mean that the position outlined above may change.