Legal20/08/2020 12:00:00 AM

COVID-19 commercial leasing decision

In the decision of Sneakerboy Retail Pty Ltd v Georges Properties Pty Ltd [2020] NSWSC 996, the lessors were the owners of a commercial property in York Street, Sydney. By an assignment of lease in March 2015, Sneakerboy Retail Pty Ltd became the lessee of the premises. The lessee operated a retail business from the premises, selling luxury sneakers and streetwear.

Pursuant to the terms of the assignment, the lessee provided the lessors with a bank guarantee in an amount equivalent to 10 months’ rent. The terms of the assignment also provided that the lessee had to reinstate the bank guarantee if the lessors called upon it.

The lessee was constantly behind in the payment of rent, usually by a month or two. Regularly, it made promises that it did not keep, asked the lessors for brief indulgences and was frequently warned that the lease would be terminated if it did not comply with the rental provisions in the lease.

In February 2020, the lessee experienced a sudden decline in revenue, which appeared to be due to the emergence of the COVID-19 pandemic.

On 12 March 2020, the lessee advised the lessors that it would be paying the outstanding rent for February and March in instalments. However, the lessee failed to pay those instalments. Then, on 23 March 2020, the lessee temporarily ceased trading from the premises.

On 25 March 2020, the lessors terminated the lease and re-entered the premises. The next day, the lessors demanded payment of the amount covered by the bank guarantee.

On 7 April 2020, the National Cabinet adopted the National Cabinet Mandatory Code of Conduct: SME Commercial Leasing Principles during COVID-19 (the Code). Then, the Retail and Other Commercial Leases (COVID-19) Regulation 2020 (NSW) (the Regulation) was made, with effect from 24 April 2020. The combined effect of the Code and the Regulation for eligible lessees in New South Wales impacted by the pandemic was that, among other things, they would be entitled to waivers and deferrals of rent and would be protected from “prescribed action” taken by lessors. “[P]rescribed action” included the termination of a lease and calling upon a bank guarantee.

On 15 June 2020, the lessors received the full amount of the bank guarantee from the relevant bank.

The lessee applied to the Supreme Court of New South Wales for relief against forfeiture of the lease.

Decision

Robb J granted the lessee relief against forfeiture, subject to the condition that the lessee reinstate the bank guarantee.

The lessee’s application ticked all the applicable boxes. Most importantly, the lessors had received full payment for the outstanding rent under the bank guarantee and, in fact, had an additional two months’ rent in hand. Indeed, they probably had more than two months’ rent in hand if, as anticipated, the rent would be substantially reduced under the COVID-19 legislation.

The court did say that if the lessors had been able to show that they had another lessee for the premises that was likely to be “commercially preferable” to the lessee, then that would have been a relevant consideration. The court may have been inclined to let the termination stand instead of undoing the termination (by granting relief against forfeiture) and burdening the lessors with a “delinquent” lessee paying a substantially reduced rent, with no right in the lessors to take any “prescribed action” in relation to future breaches. However, the lessors were unable to lead firm evidence of any such prospect.