COVID-19 | The Court Speaks: Terminating Leases in the Age of COVID-19

John Nicolas, Partner, together with Rebecca Brown, Senior Associate and Briony Foxe, Associate, at Gadens, share the key takeaways in the recent Sneakerboy Retail Pty Ltd trading as Sneakerboy v Georges Property Pty Ltd [2020] NSWSC 996. They explore the predicament of terminating leases during an ongoing pandemic.

On 31 July 2020, the NSW Supreme Court published a decision in the case of Sneakerboy Retail Pty Ltd trading as Sneakerboy v Georges Properties Pty Ltd [2020] NSWSC 996.

The decision relates to an application by the tenant for relief against forfeiture, following termination of a retail lease on 25 March 2020.

There is nothing novel in the way the decision was made, but does have some interesting commentary on the impact of the COVID-19 pandemic on leasing arrangements, including as a result of the National Mandatory Code of Conduct announced by the National Cabinet (National Code) on 7 April 2020 and the Retail and Other Commercial Leases (COVID-19) Regulation 2020 (NSW) (NSW Regulation) being passed on 24 April 2020.

Background

1. Briefly stated, the facts are as follows:The tenant was continuously late in paying the rent and other charges under the lease, from as early as March 2016.  The tenant has not explained its delinquency at any time.  The landlord had issued several demands, and three formal breach notices in that period, the latest being on 2 October 2019.
2. In March 2020:
   1. the tenant was in arrears, the amount owing being approximately $65,000; and
   2. as the effects of COVID-19 were becoming apparent:
      1. the tenant unilaterally sought to pay the rent for February and March 2020 in specified instalments in March and April 2020 respectively.  The tenant did not make payments as per its own specified instalment program; and
      2. the tenant began to remove stock from the premises.
   3.  The landlord asserted that the removal of stock from the premises constituted an abandonment of the premises, and upon enquiry from the landlord, the tenant advised that they were not vacating the premises but were:
      1. temporarily ceasing trade for the health and safety of its customers and workers in light of the COVID-19 pandemic and then applicable COVID-19 safety requirements; and
      2. taking the opportunity to refresh the technology in the premises whilst trade was reduced and the premises were not open for trade due to COVID-19.
   4.  By notice sent on 25 March 2020, the landlord sought to terminate the lease and re-enter the premises as a result of the tenant’s failure to pay the arrears and the tenant’s abandonment of the premises.
   5. Importantly, the Conveyancing Act 1919 (NSW) does not require the giving of notice prior to termination of a lease where the breach being relied upon is the failure to pay rent.  No issue was therefore made of the fact that the last breach notice was issued close to six months prior to the termination.
   6. The lease was terminated before both the National Code was announced or the NSW Regulation had been passed.
   7. The tenant commenced proceedings on 20 July 2020 seeking relief against forfeiture.

Outcome

Having considered all of the evidence, the Court found that:

1. The tenant’s actions, having regard to all the circumstances and COVID-19 pandemic, did not constitute an abandonment of the premises, and therefore the only ground for termination was the arrears.
2. As the only basis for termination was arrears, and despite the Court being satisfied that the tenant had been delinquent in paying rent and other charges under the lease over a long period, relief should be given per normal principles that relief is usually given if the only ground for termination is arrears.  The Court also:
   1. had regard to the fact that the landlord had the benefit of a big bank guarantee (10 months) and had called on the whole amount despite the arrears and other amounts charged following termination being less – this resulted in a credit of approximately $55,000 being on the tenant’s rental account; and
   2. did not consider it relevant that the tenant took almost four months to commence proceedings seeking relief.
3.  Relief against forfeiture was given on the conditions that the tenant:
   1. provides a new bank guarantee; and
   2. pays the landlord’s costs of the proceedings, on the basis that the landlord had acted reasonably in requiring the tenant to prove its entitlement to the relief.
4.  The Court also made comments about the impact of COVID-19, noting that:
   1. had the landlord sought to terminate the lease in the period between the National Code being announced on 7 April 2020 and the NSW Regulation being passed on 24 April 2020, the landlord may also have fallen foul of good faith requirements;
   2. had the landlord sought to terminate the lease after the NSW Regulation was passed on 24 April 2020, the landlord would have been in breach of the NSW Regulation;
   3. the Court was aware that the granting the relief against forfeiture would likely disadvantage the landlord because the NSW Regulation would have to be applied so as to require the landlord to provide rent relief following reinstatement of the lease from 25 March 2020.  Ultimately, this did not change the Court’s view that relief should be granted; and
   4. the Court would continue to take an interest in the matter to ensure the parties followed the NSW Regulation regulation.

Important Lessons

The important lessons to take away from this case are:

1. Arrears alone may not be sufficient to terminate a lease.
2. Proving a tenant has abandoned the premises is a high bar, and should not be relied upon easily, especially in circumstances where the tenant has provided a logical explanation for not trading from the premises.
3. The impact of COVID-19, and the regard a Court will have to it and to the National Code and any State or Territory regulation, should not be underestimated.

John Nicolas leads Gadens Brisbane’s retail asset team, supported by senior lawyers Rebecca Brown, Senior Associate, and Briony Foxe, Associate.  Focussing on retail asset leasing, management, development and capital transactions, the team work with some of Australia’s largest shopping centre owners, managers and developers (including two of the top five in Australia) on their whole ambit of legal issues.  This includes transactional documents, general advice and disputes for more than 60 centres nationally, and being involved in over $1.8bn of shopping centre developments in the last 5 years.  The team consults on regulatory and industry issues, advising the SCCA on the most recent review of the Retail Shop Leases Act (Qld), and the PCA Qld on the recent Retail Shop Leases and Other Commercial Leases (COVID-19 Emergency Response) Regulation 2020 (Qld) and associated COVID-19 regulatory issues.  John has been a member of the PCA Qld Retail Committee since 2015, and Rebecca and Briony are participants in the 2020 PCA 500 Women in Property program.

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