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Commercial leasing changes

Why is the NSW Government taking action?

On 14 July 2021, the NSW Government enacted the Retail and Other Commercial Leases (COVID-19) Regulation 2021 (the Regulation). Amendments passed on 13 August 2021 provide even greater protections to impacted tenants by reinstating National Cabinet’s Commercial Leasing Code of Conduct.

The Regulation ensures that the economic impact of COVID-19 is shared by property owners and tenants. The protections in the Regulation, combined with the land tax concessions and the Commercial Landlord Hardship Fund, will help limit the long-term economic damage of COVID-19 and maximise the number of businesses that can resume normal operation when public health orders are lifted.

What actions has the government taken on commercial leases?

Under the Regulation, property owners must negotiate rent relief agreements with eligible tenants in financial distress due to the COVID-19 public health orders.

In negotiating these agreements, property owners and tenants must have regard to the leasing principles in the Code of Conduct and the economic impacts of COVID-19.

Under those principles, property owners are required to offer tenants rent relief proportionate to the tenant’s decline in turnover. Waivers should make up at least 50% of any rent relief provided. Rental deferrals make up the balance.

Don't you already have support measures in place for commercial tenants and property owners? What's different with this new measure?

The Regulation implemented on 13 July 2021 introduced mandatory mediation for commercial property owners and eligible tenants. By reinstating the Code of Conduct, these protections have been taken a step further to bring both parties to the table to renegotiate rent relief consistent with the leasing principles.

Many parties to a lease that existed in 2020 will have already been subject to the requirements of the Code of Conduct, which will operate similarly this time around.

Under the changes, property owners of tenants with turnover up to $50 million that are eligible for one of the COVID-19 grants cannot take certain actions against their tenant (for example, evict their tenant) unless they have renegotiated rent and attempted mediation.

What are the legal protections for tenants?

For a 6-month period (13 July 2021 to 13 January 2022) commercial and retail property owners cannot take certain actions against an eligible tenant (for example, evict an eligible tenant) unless they have first renegotiated rent and attempted mediation.

Commercial property owners and eligible tenants must negotiate rent relief agreements by taking into consideration the following principles in National Cabinet's Code of Conduct on commercial tenancies (unless otherwise agreed by both parties):

  1. Landlords must not terminate leases for non-payment of rent.
  2. Tenants must remain committed to the terms of their lease, subject to any amendments negotiated, and material failure to do so will forfeit additional COVID-19 protections provided to tenants.
  3. Landlords must offer tenants proportionate reductions in rent (in the form of deferrals and waivers) of up to 100% of the amount ordinarily payable, in proportion to the decline in the tenant’s trade.
  4. Rent waivers, as opposed to deferrals, must constitute at least 50% of the rent reduction provided by landlords (in negotiating this, regard must be had to the landlord’s financial ability to provide such a waiver).
  5. Any rent deferral must be amortised over the balance of the lease term and for a period no less than 24 months, whichever is greater, unless otherwise agreed by the parties.
  6. Landlords must pass any reduction in statutory charges (for example, land tax, council rates) to the tenant.
  7. Landlords should seek to share any benefit received due to deferral of loan payments by a bank or otherwise with the tenant in a proportionate manner.
  8. Landlords should, where appropriate, seek to waive recovery of any other expense (or outgoing payable) by a tenant under the lease terms during the period the tenant is unable to trade.
  9. Repayment of other (non-rent) expenses should not commence until the earlier of the COVID-19 pandemic ending (as defined by the Australian Government) or the existing lease expiring.
  10. Landlords must not charge fees or interest on rent or fees that are waived or deferred.
  11. Landlords must not draw on a tenant’s security for the non-payment of rent (such as a cash bond, bank guarantee or personal security) unless agreed by the tenant and landlord.
  12. Tenants should be allowed to extend their lease for an equivalent period of any rent waiver/deferral period.
  13. Landlords must freeze rent increases (except for retail leases based on turnover).
  14. Landlords may not apply any prohibition or levy any penalties on tenants that reduce operating hours or cease to trade during the COVID-19 pandemic.

What rent reductions must property owners provide?

Under the Regulation, property owners must renegotiate rent with eligible tenants in good faith having regard to the leasing principles in the Code of Conduct and the economic impact of the COVID-19 pandemic.

Under the leasing principles, property owners are required to reduce rent in proportion to the tenant’s decline in turnover. This means if a tenant has experienced a 40% decline in turnover due to COVID-19, then the property owner must provide a 40% reduction in rent.

As a default position, at least 50% of any rent relief must be in the form of a rent waiver with the remainder a rent deferral. Any deferred rent must be paid back over the balance of the lease term or for a period of no less than 24 months, whichever is greater.

How long do property owners need to provide rent relief?

Parties can negotiate rent relief for whatever period they determine appropriate.

As a starting point, property owners should provide rent relief for as long as the tenant is impacted by restrictions. This could be determined by referring to the period for which the tenant receives the JobSaver or the micro-business grant payments.

The Regulation was amended on 24 September 2021 to clarify that a landlord is not required to provide rent relief for periods in which the tenant is not an impacted lessee. For example, if a tenant has a strong period of trade and does not receive the JobSaver payment for a fortnight, the landlord is entitled to request full rent be paid for that period.

What period should be used to calculate decline in turnover for the purposes of rent reduction?

To determine decline in turnover, parties should use the comparison periods the tenant relied on when applying for the COVID-19 grants as a starting point.

For example, if a tenant is eligible for JobSaver because they experienced a 40% decline in turnover from 12 July to 26 July compared to the corresponding period in 2019, the property owner may agree to provide rent relief of 40%, with at least half being a waiver.

However, parties are also free to determine an alternative comparison period that works for them. If you are unsure what comparison period to use, you may want to get legal advice to determine your best option.

Regardless of the comparison used, tenants should provide evidence of their decline in turnover to their property owner to help them calculate the appropriate rent reduction. Evidence could include a Business Activity Statement (BAS) or an accountant’s letter.

If a tenant’s circumstances change, they can make a subsequent request to negotiate future rent.

Are NSW Government grants considered as part of a tenant’s turnover?

When applying for a COVID-19 grant, businesses will generally not include JobKeeper and JobSaver payments and other NSW Government COVID-19 grants in their calculation of aggregated annual turnover and decline in turnover.

However, for the purposes of calculating the level of rent reduction, JobSaver, micro-business grant and business grant payments should be included as part of a tenant’s turnover. This is because these payments can be used to help pay rent (unlike JobKeeper in 2020 which could only be used to pay employees).

How should deferred rent obligations from last year be treated?

Property owners and eligible tenants should consider how to treat any previously deferred rent as part of the rent relief negotiations. Parties should come to an agreement that works for their individual circumstances.

I am now selling goods from a warehouse and not the shopfront I lease. Should my online sales be considered when calculating my decline in turnover?

Yes, the tenant’s turnover from online sales should be considered when calculating the level of decline in turnover.

When does my landlord need to respond to my request for rent relief?

The Regulation requires a party to a lease that is asked to negotiate to respond within 14 days of receiving the request or another period if agreed to by both parties.

When do these rules apply from? How long will they last and when will they be reviewed?

The prescribed period applies from 13 July 2021 to 13 January 2022. Lessors cannot take prescribed actions against an eligible lessee in this period unless they comply with their obligations to renegotiate rent and mediate

Tenants in financial distress and the property owners should start the process of negotiating rent relief agreements as soon as possible.

Support measures will be reviewed regularly as the COVID-19 pandemic has created a rapidly changing environment, and we must ensure the rules continue to be appropriate.

Can a property owner evict a tenant if they've been in arrears prior to this announcement?

If your tenant can demonstrate that they are in arrears since 13 July 2021 because they are financially distressed due to the COVID-19 public health orders, you must seek to negotiate a rental abatement agreement — consistent with the principles of the Code of Conduct — and engage in mediation.

All other situations will need to be considered based on individual circumstances.

Can I take action for a breach that occurred prior to 13 July?

There is nothing in the Regulation preventing lessors from taking action at any time for breaches that occurred prior to 13 July 2021.

Where can I find the Regulation?

The Regulation has been published on the Legislation NSW website.

Eligibility

Which leaseholders are eligible for the rent relief protections provided in this package?

A commercial or retail tenant will be eligible for the rent relief protections provided in this package if their business has annual turnover of less than $50 million and is eligible for any of the following support:

  • 2021 COVID-19 micro-business grant
  • 2021 COVID-19 business grant or
  • JobSaver payment.

Additionally, businesses that would have been eligible for one of these supports if they had not received the Commonwealth COVID-19 Disaster Payment are also eligible.

Generally, businesses that have experienced a decline in turnover of at least 30% due to the public health orders will be eligible. Not-for-profits must have at least a 15% decline, corresponding with their eligibility under the JobSaver payment.

Charities will also be eligible for the protections in the package, provided they meet the same eligibility criteria.

How will franchises and corporate groups be treated?

The $50 million annual turnover threshold will be applied in respect of franchises at the franchisee level, and in respect of retail corporate groups at the group level (rather than at the individual retail outlet level).

How do I demonstrate to my property owner that I am eligible for the commercial lease protections?

To be eligible, tenants must provide their property owner with:

  • tax returns and/or Business Activity Statements (BAS) to demonstrate an annual turnover of less than $50 million in 2020–21
  • evidence they qualify for at least one of the following, or would qualify but for a COVID-19 Disaster Payment made to the lessee by the Commonwealth:
    • 2021 micro-business grant
    • 2021 business grant, or
    • JobSaver payment.

This will typically be a remittance or bank statement showing the tenant has received the relevant grant.

Tenants that have not submitted an application or are waiting to be approved for one of the grants may still be eligible for protections. These tenants must provide evidence they have experienced a decline in turnover of 30% or more due to the public health order over a minimum 2-week period commencing 26 June 2021 compared to:

  • the same period in 2019, or
  • the same period in 2020, or
  • the 2 weeks immediately prior to any restrictions, 12 June to 25 June 2021.

This evidence will generally be a letter from a qualified accountant, registered tax agent or registered BAS agent. Templates for these letters are available on the Service NSW website.

Tenants must also provide property owners with sufficient documentation to demonstrate actual decline in turnover to calculate rent reduction. Property owners should act reasonably and not place onerous requests on tenants for documentation.

I have received the Commonwealth Disaster Payment. Am I eligible for protections?

Businesses and not-for-profits that would qualify for a NSW grant if they did not receive the COVID-19 Disaster Payment are eligible for protections under the Regulation.

I am not eligible for a grant because I opened my business after 1 June 2021. Am I eligible for protections?

Businesses and not-for-profits that opened after 1 June 2021 can only receive a grant, and therefore the commercial lease protections, if their grant application is approved by the hardship review panel.

More information on the hardship review pathway is available on the Service NSW website.

My business did not qualify for the 2021 business grant. Am I eligible for protections?

Businesses and not-for-profits that did not qualify for the 2021 business grant may still be eligible for protections if they qualify for the 2021 micro-business grant or the 2021 JobSaver Payment, which used different comparison periods for the decline in turnover test.

Businesses that would qualify for the business grant, micro-business grant or JobSaver if they did not receive the COVID-19 Disaster Payment are eligible for protections under the Regulation. More information on the eligibility for these programs is available:

Are holdover leases covered?

The Regulation covers holdover leases, but it does not cover new leases entered into after 26 June 2021.

The Regulation does not stop property owners from deciding not to renew the lease of an eligible tenant at the end of the lease period.

If the lease passes the land tax liability through to tenants, how should land tax concessions for landlords be treated when negotiating rent relief?

Commercial property owners that provide rent relief to eligible tenants will be entitled to land tax relief of equivalent value, up to a maximum of 100% of their land tax liability for 2021 on the relevant property. Property owners will receive a waiver on land tax if they are yet to pay, or a rebate of previously paid land tax.

Some leases may stipulate that the tenant is liable to pay land tax, meaning by extension they are entitled to any land tax reduction as a pass-through.

The land tax concession is designed to provide support to landlords that negotiate rent relief and is not intended as an additional support measure for tenants on top of negotiated rent reductions.

In circumstances where land tax is passed on to the tenant, parties may agree to vary the lease in a way that requires the tenant to pay the pre-concession land tax amount, allowing the property owner to benefit from the land tax waiver/discount.

Disputes and mediation

What does it mean to enter 'mediation' for a rental relief agreement?

Commercial property owners and tenants should work together to negotiate a rent relief agreement. Where parties are unable to do this, they must attend mediation through the Small Business Commission.

Interim arrangements for urgent matters involving a threatened or actual eviction can be sought through NSW Civil and Administrative Tribunal or the courts.

The mediator cannot impose any outcome but if a mediation is successful, parties can enter a binding deed.

The Small Business Commission’s mediation service supports parties to resolve disputes in a cost-effective and non-adversarial way.

Do I have to mediate through the NSW Small Business Commission?

Although parties are usually free to mediate in any way they wish, the Regulation specifically requires certification from the NSW Small Business Commission that a mediation has failed prior to taking any action.

Where do I go if my property owner will not agree to provide any rental relief, even after mediation?

Where mediation is unsuccessful, parties can pursue action through the NSW Civil and Administrative Tribunal or the NSW civil courts.

Interim arrangements for urgent matters involving a threatened or actual eviction, can be sought through NSW Civil and Administrative Tribunal or the courts.

You should get legal advice before commencing any action in the Tribunal or the courts.

How will the government support the negotiation of rent relief agreements?

It is in the interest of all commercial property owners and financially distressed tenants to negotiate mutually beneficial rent relief agreements. The NSW Government will support parties to do this by scaling up the Small Business Commission to provide:

  • advice on issues for property owners and tenants to consider when negotiating rent relief agreements
  • additional mediation support to ensure disputes are resolved in a cost-effective and non-adversarial way.

What are the penalties for a property owner who breaks any of these new rules? For example, how will you enforce the rent freeze increase rule?

If commercial property owners breach their obligations under the new Regulation, the tenant must seek mediation in the first instance through the NSW Small Business Commission.

Where the property owner and tenant are unable to reach an agreement through this process, the parties will be able to pursue action through the civil courts. In the case of a retail lease dispute, the matter may proceed through NSW Civil and Administration Tribunal.

Who do tenants complain to if they're threatened with eviction or not provided rent relief?

In the first instance, the tenant should contact Service NSW where staff will provide guidance on the appropriate next step.

The Small Business Commission’s mediation service can support tenants and property owners to resolve disputes in a cost-effective and non-adversarial way.

If mediation is not successful, parties may take their claim to the civil courts. Retail lease disputes can be heard in NSW Civil and Administration Tribunal.

Property-owner specific

Isn’t this policy unfair on property owners?

The Regulation promotes collaboration and negotiation between property owners and tenants to ensure business continuity and a return to normal trading after public health orders are lifted.

We understand the package could place additional pressure on property owners, however, we are trying to share the load more evenly during these challenging times. We encourage businesses with loans to contact their banks for additional relief arrangements.

What support is available to property owners?

Commercial property owners that provide rent relief to eligible tenants will be entitled to land tax relief of equivalent value, up to a maximum of 100% of their land tax liability for 2021 on the relevant property. Property owners will receive a waiver on land tax if they are yet to pay, or a rebate of previously paid land tax.

Property owners that receive this tax concession will also be able to defer their remaining land tax payments for 3 months.

The Commercial Landlord Hardship Fund provides additional support to smaller property owners whose main source of income is impacted because they have provided rent relief to their tenant.

The fund provides grants of up to $3,000 per month per property to eligible small landlords who have experienced financial hardship due to providing rent waivers to their tenants under the Retail and Other Commercial Leases (COVID-19) Regulation 2021.

How do I know if my tenant continues to be an impacted lessee?

Amendments to the Regulation on 24 September 2021 clarify that a landlord can ask their tenant for evidence that they continue to be an impacted lessee. The request for evidence must be reasonable and cannot be made more than once every 2 weeks. A landlord may, for example, ask their tenant to provide evidence every fortnight that they continue to qualify for a NSW Government grant.

How does the hardship fund for commercial property owners work?

The Commercial Landlord Hardship Fund provides support to smaller landlords whose main source of income is impacted because of providing rent relief to tenants.

Grants of up to $3,000 per month per property are available to eligible small commercial or retail landlords who have experienced financial hardship due to providing rent waivers to their tenants under the Retail and Other Commercial Leases (COVID-19) Regulation 2021.

For eligibility criteria and to apply, see Apply for a commercial landlord hardship grant.

2021 Retail and commercial leases support – case studies

Example one: Impacted lessee requests negotiation

Hannah owns and operates a café in the Sydney CBD that has been impacted by the COVID-19 public health orders, resulting in a decline in turnover of 90%. The business is receiving the 2021 JobSaver payment.

Hannah has been unable to pay her usual $3,000 per week in rent and has instead been paying a reduced amount of $250 per week for the past 4 weeks. She is in breach of her lease and requests a rent renegotiation with her landlord. At the time of requesting a negotiation, Hannah also proves that she is an impacted lessee by demonstrating that she is eligible for JobSaver and has an annual turnover of less than $50 million.

They agree to rent relief of 90% per week until 13 January 2022, with 50% waived and 50% deferred. The agreement is backdated to 13 July 2021 and takes into consideration the reduced rent Hannah was paying before she requested the negotiation.

Hannah’s landlord is eligible to receive land tax relief of equivalent value to the rent waiver, equal to up to 100% of their 2021 land tax bill.

Example two: Landlord requests an impacted lessee to negotiate

A small business leases some office space in Parramatta. As a result of the lockdown, they’ve had a 35% decline in turnover and have applied for, and received, the 2021 COVID-19 business grant.

They have also missed 2 payments of rent and their lessor is threatening to draw on their security bond. The business is eligible for protections under the Regulation having received the 2021 COVID-19 business grant. The lessor is prohibited from drawing on the bond unless they first attempt mediation.

Instead of drawing on the bond, the lessor decides to offer the tenants a rent reduction as their business is impacted. The lessor can then claim a land tax concession of an equivalent value to the rent relief provided, up to 100% of their total land tax payable on the premises in the 2021 land tax year.