Mediation before enforcement 4 min read
NSW's new retail and commercial leasing regulations are now in force, requiring landlords to use mediation before taking enforcement action against eligible impacted tenants during the current COVID-19 lockdown.
- Between now and 20 August 2021, retail and commercial landlords must attempt mediation before taking enforcement action against a certain class of impacted tenant.
- To be an impacted tenant, tenants must qualify for at least one of three government grants due to the impact of the pandemic, have had an annual turnover below $50 million in FY 20-21 and provide evidence to their landlord to that effect.
- Until 20 August, landlords should be wary of taking any enforcement action against their tenants, although payment reminders and rent arrears statements are acceptable.
- The regulations apply to both retail and commercial leases, but not to leases entered into on or after 26 June 2021.
Legal, risk and compliance teams, including your organisation's property management agents, need to be put on notice of the new regulations, especially those operatives tasked with lease management and enforcement.
On 13 July 2021, the NSW Government announced an economic support package aimed at helping businesses during the current COVID-19 lockdown. As part of the package, on 14 July 2021 the NSW Government introduced the Retail and Other Commercial Leases (COVID-19) Regulation 2021 (the New Regulation) which effectively provides for a moratorium on enforcement action by landlords in NSW.
The New Regulation limits the exercise of certain rights by landlords under eligible retail and commercial leases where the tenant is a business that qualifies for certain grants due to the impact of the pandemic and the breach is a prescribed breach that occurs between 13 July and 20 August 2021. Before exercising the right, landlords must try to resolve the breach using mediation.
The New Regulation picks up the general themes of the Retail and Other Commercial Leases (COVID-19) Regulation 2020 (No 3) and the National Code of Conduct for Commercial Tenancies (the Code), both of which were introduced last year. While it does not reinstate the terms of the Code, it implements similar limited protections for a class of impacted tenant.
The New Regulation applies to retail leases under the Retail Leases Act 1994 (NSW) and, by operation of an amendment to the Conveyancing (General) Regulation 2018 inserted at Schedule 1 of the New Regulation, it also applies to commercial leases under the Conveyancing Act 1919 (NSW). The same limits on landlords apply in respect of impacted tenants of both retail and commercial leases.
The New Regulation does not apply, however, to leases entered into on or after 26 June 2021 (except for leases entered into by means of an option to extend or renew the lease, or any other extension or renewal of an existing lease on the same terms as the existing lease) or to leases under the Agricultural Tenancies Act 1990 (NSW).
From 13 July 2021, an 'impacted lessee' (impacted tenant) must:
- qualify for one or more of the following grants:
- Micro-business COVID-19 Support Grant;
- COVID-19 NSW Business Grant;
- Job Saver Grant; and
- have had an annual turnover below $50 million in the 20-21 financial year.
The $50 million turnover limit is similar to the turnover test under the Code, which was originally implemented by NSW in its 24 April 2020 Regulation.
Applications for each of the above grants have either just opened or are not yet open. The first opened on Monday, 19 July 2021, with the remainder intended to open in late July 2021. Each of the grants requires that the tenant applicant suffers a reduction in revenue of more than 30%. No further details are provided (eg from what period against which a reduction in turnover is measured).
From 13 July 2021, a landlord must not take 'prescribed action' against an impacted tenant (eg eviction, recovery of a security bond or termination) on the grounds of a 'prescribed breach' (eg failure to pay rent or outgoings or not keeping the business open for the hours specified under a lease) of the impacted lease unless:
- the matter has been referred for mediation under the Retail Leases Act 1994 (NSW), Pt 8 Div 2; and
- the Registrar has certified in writing that the mediation has failed to resolve the dispute.
Impacted tenants must give landlords a statement that they are an impacted tenant, as well as evidence to that effect (however, 'evidence' is not defined in the New Regulation). The statement may be given as soon as practicable after the prescribed breach and must be given within a reasonable time after it is requested by the landlord.
In circumstances where the grants are not currently open for application or only opened recently, we query how the New Regulation is intended to operate in practice for these first few weeks. Ultimately, we expect it will simply stall landlords taking any action against a tenant they consider to be a small- to medium-sized enterprise (SME) until after 20 August 2021.
Landlords can still take prescribed action against tenants on grounds not related to the economic impacts of the COVID-19 pandemic. The New Regulation provides, for example, that landlords may terminate a commercial lease if the tenant has breached the lease by damaging the premises or may take action if a tenant fails to yield up following the expiry of a fixed-term lease.
The New Regulation also does not prevent landlords and impacted tenants agreeing to the parties taking action in relation to the impacted lease, including the landlord taking prescribed action or the parties agreeing to terminate the impacted lease.
Although the New Regulation imposes the commercial tenancy protection period until 20 August 2021, the New Regulation expires six months after commencement. Presumably this relates to continued mediation processes under the New Regulation.
In light of the New Regulation, between now and 20 August 2021, we consider it prudent for landlords in NSW not to:
- issue any formal letters of demand in respect of arrears which threaten the taking of further steps if the arrears are not paid;
- terminate any leases off the back of a failure to pay rent or outgoings or a failure to trade;
- call on any bank guarantees for a failure to pay rent or outgoings; or
- commence legal proceedings for a failure to pay rent or outgoings.
While formal letters of demand should not be issued, we think it is still acceptable for landlords to issue payment reminders or arrears statements to tenants in respect to amounts that have not been paid and ask that those amounts be paid.