Tenancies Mandatory Code of Conduct
A recent case decided upon by the NSW Supreme Court has provided clarity on the application of the Mandatory Code of Conduct for retail and commercial tenancies.
The Sneakerboy Case
About the Code
The code (introduced in April and in force until 31 December 2020) intends to appropriately balance the business interests of tenants and landlords while in the midst of the Coronavirus pandemic. Both parties were expected to act in good faith, and be transparent with each other on agreement-critical information, to ensure the successful observance and implementation of the code.
Companies experiencing financial distress that had either retail or commercial lease agreements prior to the code’s 24 April implementation date may apply for reprieve under the code. The code does not cover lease agreements entered into after the above-mentioned date, unless it is a renewal or extension of an existing lease.
The code’s regulations stipulate that it is intended to provide assistance to small and medium-sized enterprises that meet several criteria, which includes:
Business must be in operations since 1 March 2020;
Suffered, or likely to suffer, revenue decline of at least 30%;
Lessee must not be in liquidation or bankruptcy proceedings;
Lessee is not an excluded entity; and
Annual turnover for year 2018/2019 must be less than $50 million.
Landlords or lessors are likewise prohibited from taking legal action against the lessee, in observance of the terms laid out by the code, as well as any good faith negotiations that may have taken place between the two parties. Rather, tenants must be given the opportunity to amortise the deferred rent within 24 months while complying with the negotiated terms of the lease.
The code does not prevent any legal proceedings for grounds that are not related to the economic impacts of the Coronavirus pandemic.
Sneakerboy vs Georges Properties Pty Ltd
One of the businesses that sought financial reprieve using the code was Sneakerboy, a retailer of luxury shoes and sneakers that maintained five retail outlets in three states, as well as an online platform.
In February 2020, Sneakerboy experienced a sharp decline in revenue, due to the Coronavirus pandemic. In March, the company also ceased selling activities across all its retail outlets and shifted to online selling, in response to the government-mandated restrictions on non-essential indoor gatherings. By then, Sneakerboy had already stopped paying rent, and had abandoned the retail spaces they were leasing.
As a result, Georges Properties Pty Ltd, the lessor of the retail spaces that Sneakerboy rented, entered possession of the Sydney CBD premises, citing delayed payments and abandonment. In addition, the lessor called upon the bank guarantee in the amount of $253,668.90, which effectively paid the tenant’s outstanding rent.
Sneakerboy appealed for relief against forfeiture, where they sought to re-enter the premises they leased, and recommence occupation of the space as a tenant. This appeal was granted by the court, since the lessor’s calling upon the bank guarantee constituted payment of all pending rental fees.
Moreover, the code provides companies with a reasonable recovery period before a landlord can raise the rent and recover possession of the leased space. In the case of Sneakerboy, the code provided them until 20 April 30 2021 to come up with a rent repayment scheme that would be amenable to Georges Properties Pty Ltd.
Difficulties in Enforcing the Code
The novelty of the code has led to some difficulties regarding its proper implementation. Some of these include:
a lack of clear communication and collaboration with tenants and lessors;
lessors insisting on new lease agreements as a condition of providing or agreeing to COVID-19 relief; and
tenants using the code, as well as the market uncertainties, to negotiate for lower rental fees.
Given these, the provision of professional financial and legal advice is required to ensure proper and lawful adherence of the law. Please contact us on 3310 8716 or email to discuss your specific business requirements.
