Sydneys second lockdown rent relief finally mandated

As Sydney's lockdown extends into its third long month, the NSW Government has taken the much anticipated step of mandating rent relief for small and medium sized commercial and retail tenants. 

With many tenants forced to close their doors, questions have been circulating as to what is the appropriate calculation of rent relief during these difficult times.  At the start of the pandemic in 2020, the National Cabinet released the Mandatory Code of Conduct (Code), guiding parties to negotiate rent relief that is proportionate to a tenant's loss of turnover. However, the NSW legislation that implemented the Code expired earlier this year, leaving uncertainty as to what rent relief should be granted during this second lockdown. 

The NSW Government's release of  the Retail and Other Commercial Leases (COVID-19) Amendment Regulation 2021 (NSW) (the Amended Regulation) now makes it clear that the proportionality principles of the Code should again be implemented. 

Relief is on its way for some landlords, in the form of land tax reductions and a $40 million Hardship Fund to provide grants to small commercial and retail landlords.  It is now for landlords and tenants to re-apply the processes they established in 2020, to renegotiate leases and to support each other to ensure that businesses can survive until lockdowns are lifted. 

What is the Amended Regulation? 

The Amended Regulation came into effect on 13 August 2021 and amends the Retail and Other Commercial Leases (COVID-19) Regulation 2021 (NSW).  It extends the "prescribed period", which began on 13 July 2021, and was to expire on 20 August, to 13 January 2022. No guidance has been provided as to whether the extension to 13 January 2022 is intended to cover the "reasonable subsequent recovery period" referred to in the Code or if this is a separate period.

The Amended Regulation requires landlords to renegotiate rent and other terms of an impacted lease in good faith having regard to the leasing principles of the Code, if requested. The Code also requires landlords to provide rent relief in proportion with their tenant’s decline in turnover. Similar to last year, of the rent relief provided, at least 50% must be in the form of a rent waiver and the balance a rent deferral. Negotiations must commence within 14 days of a request (or another period agreed to by the parties).

Which leases does the Amended Regulation apply?

The Amended Regulation applies to commercial and retail leases to tenants with a turnover in the 2020 -2021 financial year of less than $50 million, and who qualify for one or more of the 2021 COVID-19 Micro-business Grant, 2021 COVID-19 Business Grant or 2021 JobSaver Payment. The $50 million threshold is assessed at a group level, which means that the Amended Regulation will likely not apply to tenants at the big end of town.

What does the Amended Regulation prohibit?

The Amended Regulation prohibits a landlord from taking a prescribed action (such as terminating a lease or calling on security) for certain breaches of the impacted lease that occur during the prescribed period, unless the parties have first attempted to renegotiate rent (if requested by the tenant), the matter has been referred to mediation and the Registrar has certified that the mediation has failed to resolve the dispute. While likely to be challenging for landlords in practice, the parties can agree that prescribed action can be taken without mediation or renegotiation of the rent. 

The Amended Regulation also prohibits a landlord from increasing rent during the prescribed period if the tenant is an "impacted lessee", other than rent determined by reference to turnover. 

What next?

The Amended Regulation provides the much needed guidance as to how landlords and tenants should navigate tenancy issue during the current NSW lockdown. As expected, landlord groups have expressed concerns about the government prescribing processes on what are essentially private contracts. 

Eligible landlords are able to apply for up to 100% land tax relief for the 2021 tax year, if that landlord has reduced rent for an affected tenant by at least the amount being claimed for any period between 1 July and 31 December 2021.  A $40 million Hardship Fund is being established to provide a monthly grant of up to $3,000, but only for small commercial and retail landlords who provide rent waivers of at least the value of the grant and any land tax relief they are eligible for. 

Of course, any such relief could not compensate a landlord for months and months of lost rent.  However the Amended Regulation re-establishes a familiar framework so that landlords and tenants can now move forward to try to ensure they are in the best position possible to bounce back at the end of this torturous lockdown period. 

If you would like to discuss any questions regarding your leases, please do not hesitate to contact us. 

Authors: Vicki Aron, Partner; and Danica Colli, Lawyer.