The 2019 novel coronavirus disease (COVID-19) pandemic has greatly affected Australia’s leasing market. This has prompted state and territory governments to introduce temporary legislation for commercial and retail tenancies in financial distress (collectively, emergency leasing legislation). These measures especially target small to medium sized enterprises without deep pockets.
While emergency leasing legislation has largely paused the economic fallout for tenants, the true test arises when these measures, having already been extended, expire at some point between 1 December 2020 and 28 March 2021. As further extensions seem unlikely, landlords need to prepare for what might happen when these legislative measures end.
Step 1: Finalise incomplete renegotiations and land title registrations
State and territory governments started introducing emergency leasing legislation from April 2020. Beginning in September 2020, the protections were extended subject to new qualifications based on the changing Jobkeeper payment thresholds, which subsequently opened a new round of lease negotiations for landlords with their tenants.
Some landlords have struggled to promptly agree on rent and other renegotiations with their tenants. This may be problematic particularly as the emergency leasing legislation in many jurisdictions prohibit the landlord from taking action for a tenant’s failure to pay rent or trade from the premises during the prescribed period unless they have first negotiated with their tenant in good faith.
In Sneakerboy Retail Pty Ltd v Georges Properties Pty Ltd (No 2)  NSWSC 1141, the New South Wales (NSW) Supreme Court highlighted that:
- Parties may face uncertainties surrounding their obligation to renegotiate their leasing arrangements if these are not finalised before the legislation’s prescribed period ends in NSW (initially on 23 October 2020, but extended to 31 December 2020). Subsequent legislative changes in NSW now provide for the parties to finalise renegotiations after the relevant regulation has been repealed.
- The court and the NSW Civil and Administrative Tribunal may not be empowered to intervene in failed renegotiations between parties to the lease.
Consequently, landlords should promptly meet with their tenants to finalise incomplete lease renegotiations before the applicable emergency leasing legislation expires. Parties should ideally renegotiate their lease “once and for all” for COVID-19 impacts. However, most emergency leasing legislation leaves it open for parties to commit to additional renegotiations (for example, a programme of quarterly reviews to track the tenant’s turnover recovery). Landlords also need to review the savings provisions in the relevant emergency leasing legislation to determine if negotiations can be concluded after the legislation expires.
Importantly, the parties’ agreement should be appropriately documented. Depending on the specific arrangements, this may entail a simple side letter or side deed (for example, to document a limited rental waiver) or a formal variation of lease (for example, to document a rent deferral arrangement that binds successors in title to the lease). Instruments to be registered at the land registry (such as variations of lease) should be promptly finalised and lodged for registration.
Step 2: Confirm when and how your tenant should repay deferred rent
Rent deferrals are a key support measure for tenants under the emergency leasing legislation in most jurisdictions. If a landlord defers their tenant’s rent payments:
- The tenant’s repayment obligation generally does not start until the prescribed period ends under the emergency leasing legislation (for example, in Queensland and Victoria).
- The rent should be amortised and progressively repaid by the tenant over a reasonable recovery period after the prescribed period ends. Specifically, under the legislation in jurisdictions like NSW, Queensland and Victoria, the minimum repayment period is 24 months, and the lease term can be extended to facilitate this.
- The tenant does not incur any interest, fees or charges on deferred rent.
Given the various parameters around rent deferrals, prudent landlords should give their tenants a rent payment schedule which identifies the amounts comprising deferred rent and ordinary rent under the lease payable during the repayment period. The rent payment schedule can be annexed to the side letter or side deed documenting the parties’ arrangements. For a registrable variation of lease, the parties can keep the repayment arrangements confidential by also separately entering into a side letter to acknowledge the tenant’s agreement to repay deferred rent as per the annexed rent payment schedule.
The unfortunate reality is that some tenants will be unable to meet their rent repayments after the prescribed period ends. If this occurs:
- Unless prohibited by the emergency leasing legislation, the landlord may potentially draw on its bank guarantee or security deposit, or have recourse to any tenant guarantor, for the tenant’s failure to repay the deferred rent. This depends on the scope of the tenant’s obligations as secured by the relevant security. The landlord should ensure that the tenant has confirmed in writing that its security also secures the tenant’s obligations to repay the deferred rent.
- The landlord may consider issuing a notice of default and exercising its rights under the lease for the tenant’s default, including forfeiture and re-entry. Before doing so, the landlord should weigh up the outcome of evicting a defaulting tenant with the possibility that the premises may remain vacant for some time.
Step 3: Check your PPSR registration hygiene
Personal Property Securities Register (PPSR) registration hygiene is important for landlords as part of good estate management and particularly in a corporate tenant insolvency scenario. Generally, a landlord under a PPS lease has a Personal Property Security Act (PPSA) security interest where:
- The landlord holds a sizeable cash security deposit.
- The landlord has provided, and retains ownership of, fitout and other goods (excluding fixtures) at the premises.
Landlords that fail to register their PPSA security interests within the PPSA’s prescribed time frames are exposed in these ways:
- In a priority contest, a perfected security interest trumps an unperfected one. For example, a tenant’s mortgagee with a perfected all-assets security interest has priority and may claim a cash security deposit over the landlord.
- The landlord (as secured party) may be unable to enforce its rights under the unperfected security interest against an insolvent tenant (as grantor).
- A person might buy or lease the collateral free from any unperfected security interest.
Before the emergency leasing legislation ends, landlords should audit their lease arrangements to confirm that security interests under their leases are perfected by registration on the PPSR. This is particularly important for leases with tenants in financial distress, as insolvency risk remains high. If the landlord has not registered its security interest on the PPSR, these options may apply:
- For leases with an unexpired PPSR registration window, the landlord should promptly register and perfect its security interest to preserve its priority over the collateral against later competing interests.
- If the PPSR registration window has expired, the landlord may be able to:
a) apply to court for an order for a later time to register the security interest, particularly if its failure to register was accidental or inadvertent; or
b) register the security interest late on the PPSR, but risk the security interest “vesting” in the tenant if it goes into liquidation or administration within six months of the registration date.
Step 4: Know your rights and options if your tenant becomes insolvent
The COVID-19 pandemic has highlighted the issue of corporate tenant insolvencies, particularly as emergency leasing legislation ends on or around 31 December 2020. The federal government’s temporary safe harbour relief from insolvent trading liability similarly expires on 31 December 2020. If a tenant becomes insolvent, landlords should know their rights and options to recover their debts.
A tenant’s insolvency usually triggers an event of default under a commercial lease. However, the landlord’s right to terminate a lease entered into after 1 July 2018 under an ipso facto clause is stayed in certain situations, such as an external administrator being appointed to the tenant. As a tenant’s insolvency often coincides with rent defaults, landlords generally rely on this as an alternative ground for termination, but its right to terminate the lease on this basis is also suspended during the prescribed period under emergency leasing legislation.
While these interwoven restrictions on landlord termination rights apply, landlords can:
- Issue a notice to the tenant to reserve the landlord’s rights under the lease for other defaults (such as non-payment of rent), where these rights are not being currently pursued.
2. Engage with the tenant’s receiver, administrator or liquidator, to explore options such as whether:
- the tenant can continue its business and meet its lease obligations; or
- the lease will be assigned (for example, if a receiver intends to sell the business as a going concern).
3. Attend creditor meetings to understand if and how the tenant will continue in business.
In a tenant insolvency scenario, landlords also tend to take comfort in holding security such as a bank guarantee, cash security deposit (protected by a registered PPSA security interest) or a tenant guarantee). However, landlords should exercise caution before enforcing their rights under the security. Importantly, the landlord must have a valid right to draw on or otherwise enforce its rights under the security. Also, as mentioned earlier, the landlord’s rights to enforce the security for the tenants’ non-payment of rent or other payments may be suspended during the prescribed period under the emergency leasing legislation.
Subject to the type of external administration affecting the tenant, other landlord issues may include:
- Who is liable for rent and other lease payments before and after the external administrator is appointed.
- When the landlord can commence proceedings to recover past and future rent.
These matters often require careful analysis of the commercial circumstances against the relevant statutory frameworks, and it is generally prudent for landlords to seek specialist legal advice.
If you liked this, try reading: A Lawyer’s Guide to the NSW Evictions Moratorium
Do what you can now and hope for the best
In the COVID-19 pandemic landscape, landlords need tenants, and vice versa. The ideal scenario when emergency leasing legislation ends is that landlords and tenants will manage to continue with the remainder of their leases. While landlords can take some best practice measures to prepare for the end of emergency leasing legislation, ultimately, whether a lease continues depends on many factors outside the parties’ control. While the economic outlook is tentatively optimistic, only time will tell, and the longer-term impacts will range between industries.
Further reading on Practical Law
Eligible Practical Law subscribers looking to dive further into this topic can refer to the following resources:
- CaseTracker, COVID-19: Commercial and retail tenancy disputes and decisions: Sneakerboy Retail Pty Ltd v Georges Properties Pty Ltd (No 2)
- Standard document, Deed of variation of lease
- Practice note, Termination and forfeiture of leases
- Practice note, PPSA: Landlords and property leases
- Quick guide for landlords: external administration of a corporate tenant
- Practice note, Ipso facto clauses: enforcing termination and other contractual rights against a company in external administration
- Checklist, COVID-19: Commercial tenancies in financial distress: key Australian legislation, legislative instruments and policies
- Practice note, Guide to commercial lease negotiations in response to COVID-19: Documenting alternative lease arrangements
- Toolkit, Practical Law Australia’s guide to COVID-19 resources
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