The 13 January 2022 amendments extend the rent deferral and waiver period to 13 March 2022.

Why has the NSW Government taken action to ease rent?

On 14 July 2021, the NSW Government introduced the Retail and Other Commercial Leases (COVID-19) Regulation 2021 (the Regulation), and on 13 August of the same year passed an amendment providing greater protection for tenants who entered into leases before 26 June 2021 and were affected by the pandemic.

The latest amendments of 13 January 2022 further extend the rent deferral and waiver period to 13 March 2022.

The Regulation ensures that the economic impact caused by the pandemic is shared between landlords and tenants. The protections in the Regulation, together with land tax concessions and the newly established Commercial Landlord Hardship Fund, will help limit the economic damage caused by the pandemic and maximise the number of businesses able to return to normal operations.

In short, SMEs, as key participants in economic activity, have borne the heaviest economic losses during the pandemic. Given the lower risk-bearing capacity of SMEs, the Australian government takes the view that landlords, as lessors, should share the adverse impact of the pandemic with their SME tenants. This is why the policies on rent waiver and deferral have been introduced.

What specific actions has the government taken regarding commercial leases?

Under the Regulation, landlords must negotiate a rent relief agreement with eligible tenants who are in financial distress due to COVID-19 public health orders. In negotiating these agreements, landlords and tenants must have regard to the leasing principles set out in the Retail and Other Commercial Leases (COVID-19) Regulation 2021 and the economic impact caused by the pandemic.

Under these principles, landlords are required to renegotiate rent in good faith with eligible tenants. In accordance with the leasing principles, landlords must provide rent relief in proportion to the tenant’s decline in turnover. This means that if a tenant’s turnover has fallen by 40% due to COVID-19, the landlord should provide a 40% rent relief. At least 50% of the rent relief must be in the form of a rent waiver, with the remainder able to be provided as a rent deferral. The deferral period is the remainder of the lease term or 24 months, whichever is longer.

What protections apply to tenants during this period?

During this 8-month period (13 July 2021 to 13 March 2022), commercial and retail property landlords are prohibited from taking certain actions against eligible tenants (commercial tenants with turnover below AUD 5 million affected by the pandemic) — such as evicting an eligible tenant — unless the landlord has renegotiated rent with the tenant as required.

In negotiating a rent relief agreement, both parties must have regard to the following principles set out in the Code of Conduct for commercial leasing (unless otherwise agreed by the parties):

(1) Landlords must not terminate the lease for non-payment of rent by the tenant;

(2) Except for terms varied through negotiation, tenants must continue to comply with the other terms of the lease. If the tenant breaches the lease, they will lose the additional protections granted to tenants by the government;

(3) Landlords must provide rent relief to tenants in proportion to the decline in the tenant’s turnover;

(4) 50% of the rent relief amount must be waived (in negotiations, consideration should also be given to whether the landlord’s financial position can bear such relief);

(5) In addition to the waived rent, the remaining relief portion may be deferred. The deferral period is the remainder of the lease term or 24 months, whichever is longer. Of course, the parties may also agree on a different deferral period;

(6) If the landlord obtains statutory fee relief, this relief must be passed on to the tenant (for example, if the landlord obtains land tax or council rate relief);

(7) The landlord should share with the tenant, on a proportionate basis, any benefit obtained from banks or other sources (e.g. where the bank agrees to a loan repayment deferral);

(8) Where appropriate, the landlord should waive outgoings for tenants unable to trade due to the pandemic;

(9) Other non-rent expenses should be collected at the end of the lease or after the government declares the pandemic over (whichever is earlier);

(10) Landlords must not charge interest on waived or deferred rent;

(11) Unless agreed between the tenant and landlord, the landlord must not deduct the tenant’s security deposit for non-payment of rent (the deposit may be in the form of cash security, a bank guarantee, or a personal guarantee);

(12) The landlord must allow the tenant to extend the lease renewal term, with the extension equal to the rent relief period;

(13) The landlord must temporarily freeze rent increases (except for retail leases where rent is based on turnover);

(14) During the pandemic, the landlord must not impose any prohibition or charge any penalty on tenants who reduce their trading hours or cease trading.

Other questions?

When does the landlord need to respond to my rent relief application?

The landlord should respond within 14 days of receiving the rent relief application, or within a period agreed to by both parties.

I lease from a sub-landlord. Do the NSW rules apply to me? Who should I negotiate with?

If you are a sub-tenant and meet the eligibility criteria in the Regulation, you may request your lessor (the sub-landlord, rather than the property owner) to renegotiate the rent.

In summary

The overarching principle of rent relief is that the lessor should share with the eligible lessee the economic losses caused by the pandemic. The amount of relief should match the proportionate loss in the tenant’s trading income. The relief component should combine rent waiver and rent deferral, with the waived portion being no less than 50%. Any economic benefit the landlord’s property receives due to the pandemic — such as tax concessions — must be passed on to the tenant on a proportionate basis. During the pandemic, the landlord may not terminate the contract, evict the tenant, or impose rent increases or other actions adverse to the tenant on the basis of non-payment of rent.

If you operate an SME with annual turnover below AUD 5 million, your business has been affected by the pandemic, and you have entered into a commercial lease with a lessor, then please act promptly to discuss rent relief with your lessor. The current amendments extend the deadline to 13 March 2022. During this period, the lessor is obliged to cooperate with the tenant in rent relief negotiations.

Finally

If you still have questions about the relevant policies, we recommend consulting a professional commercial lawyer, or engaging a professional lawyer to represent you in commercial lease negotiations, to help you through the difficult period of the pandemic.