Sneakerboy cases from NSW – the first judgments about the Code

August 31, 2020

Uncategorized

Justice Robb in the NSW Supreme Court has handed down two recent decisions that discuss the effect of the Code and its implementation in NSW.  

The decisions are:

Sneakerboy is a tenant that fell into arrears of rent and its landlord called on its bank guarantee and terminated its lease at the beginning of the COVID-19 pandemic but before the Code was brought into law in NSW.  

After a delay of around four months, the tenant sought relief from forfeiture to revive the lease.  Because the lease was terminated before the Code became law in NSW, termination was not prohibited by the Code.  

A tenant seeking relief from forfeiture is required to cure all relevant breaches and comply with the terms of the lease.  However, the application of the Code to the lease once revived would alter the tenant’s obligations under the lease.  Consequently, to decide whether and how the tenant would comply with the lease, the Court was required to examine the Code and the NSW Regulations giving effect to it in some detail.

I have set out below what I think are the important take-home observations about the Code and the NSW Regulations for Victorian leasing lawyers.  It is important to remember, however, that the decision was in NSW and considered the Code and the NSW Regulations, so the decision is not directly applicable to our legislation.  That being said, the findings discussed below are still, in my view, relevant.

Remedies

One of the issues under the Victorian Regulations is what orders a court or VCAT can make to determine a dispute between a landlord and tenant who cannot agree on the amount of rent relief.  In particular, it is by no means clear that a court or VCAT can substitute its own decision as to the appropriate rent relief that should be agreed between the parties.  

A similar problem was identified by Robb J at paragraphs [79] to [93] of the second decision.  The discussion is summarised in the following paragraphs (emphasis added):

89.       The following may be said. First, it … seems at least to be clear that, if the renegotiation [of the lease terms] required by clause 7 fails, a party has a right to refer the dispute to mediation by the Registrar under the Retail Leases Act, and proceedings cannot be commenced in a court until the Registrar has certified that the mediation has failed, or the court is otherwise satisfied that the mediation it is unlikely to resolve the dispute. It is at least doubtful that the Tribunal has the necessary powers to resolve a dispute arising out of a failed renegotiation, even though it is possible that the drafters of clause 8 of the COVID-19 Regulation intended that disputes could be resolved in the Tribunal.

90.       It is not necessary for the Court to decide now the circumstances in which this or any other Court might have jurisdiction to resolve any dispute arising out of a failed renegotiation under clause 7 of the COVID-19 Regulation. This Court is not given any specific power to do so, and it does not fit comfortably within this Court’s historical jurisdiction that it be required remake contracts on the basis of commercial considerations, although it must be acknowledged that it may do so to some extent under the Contracts Review Act 1980 (NSW). How this problem should be resolved must be left for the future when a case comes before the Court that requires its resolution.

Ultimately, it was not necessary for the Court to decide that issue in either judgment. 

The Victorian Omnibus Regulations suffer from the same problem.  However, the proposed amendments to the Omnibus Act and Regulations to extend the CTRS in Victoria might address this (see https://samhopperbarrister.com/2020/08/20/what-did-we-learn-from-todays-announcements/).

Knowing the remedies that are available is important for two reasons.  First, it is important for the courts or Tribunal to have the power to finally resolve disputes, especially when the issues are complex or one party is being unreasonable.  Secondly, parties need to understand the alternatives to an agreement when considering offers at mediation – ie you need to know your alternatives to a negotiated agreement.

Tenant’s trade

One of the areas of debate in this area is whether reduction in a tenant’s trade is determined on a store-by-store basis or on the basis of the tenant’s overall turnover.  

The NSW position is discussed in detail in paragraphs 112 to 118, and also 119 to 122, of the second decision and is summarised in the following paragraphs (emphasis added):

112.     The issue of whether the phrase “tenant’s trade” in leasing principle 3 refers to the whole of the tenant’s turnover, or only the turnover at the premises the subject of the particular lease, does not in my view always require the same answer. The overarching principles stated in the Code include: “It is intended that landlords will agree tailored, bespoke and appropriate temporary arrangements for each SME tenant, taking into account their particular circumstances on a case-by-case basis”. The overarching principles include that arrangements “will take into account the impact of the COVID-19 pandemic on the tenant with specific regard to its revenue, expenses and profitability”. They also include: “All premises are different, as are their commercial arrangements; it is therefore not possible to form a collective industry position”.

113.     However, in my view it will generally be the case that the phrase “tenant’s trade” in leasing principle 3 will require a consideration of the whole of the particular tenant’s turnover, as well as costs and profit, from all locations at which the tenant conducts retail businesses.

It is important to note from the outset that the Court was considering the meaning of the Code and the NSW Regulations and the Victorian Omnibus Regulations do not expressly adopt the wording of the Code, so may be interpreted differently.  Regulation 10 in the Victorian Regulations contains this statement:

(4)  A landlord’s offer of rent relief under subregulation (3) must be based on all the circumstances of the eligible lease and—

(d)        take into account—

(i)     the reduction in a tenant’s turnover associated with the premises during the relevant period;

I have heard anecdotally that a lot of negotiations have assessed the downturn in tenants’ trade at a store level, so this part of the decision could prove to be significant.  However, given the statement above from the Victorian Regulations, the impact of this statement in Victoria may be limited.

Month-by-month assessment of rent relief

I have also heard anecdotally and observed the practice emerging of rent relief being assessed and re-assessed on a month-by-month or two-monthly basis.  

However, the Court considered and rejected that approach, stating that:

143.     The COVID-19 regime does not contemplate that the rent payable under retail leases will be proportionately reduced on the basis of separate monthly calculations comparing turnover with the equivalent month in the preceding year. It contemplates a single renegotiation for the COVID-19 pandemic period and a subsequent reasonable recovery period. However, the COVID-19 regime does not prevent the parties to a commercial lease from agreeing some other formula, or from initiating more than one renegotiation.

This is consistent with the Victorian Regulations, which require the landlord to make an offer of rent relief that covers the whole of the relevant period (ie the six months from 29 March 2020).

Comparison data

Another issue in determining rent relief is how to work out what trading figures to compare with the pandemic period, as isolating particular months can lead to distorted results.  The Court had this to say on the issue:

122.     The process of renegotiation contemplated by the Code may not be problematic in cases where the turnover of the tenant’s business is regular and consistent, so that a substantial decline in turnover following the onset of the COVID-19 pandemic may reasonably be accepted as being representative of the tenant’s likely turnover for the period of the pandemic and a reasonable recovery period thereafter. The problem may be acute in the case of seasonal businesses, which I expect to be true for most clothing and footwear retailers. The exercise may require a comparison between the turnover for a month or so in 2020 with a longer trading period before the onset of the COVID-19 pandemic. If the seasonality of the business is sufficiently regular, it may be appropriate to compare the turnover for a month or so before the commencement of the renegotiation with the equivalent period in the previous year. These difficulties demonstrate why the solution to the consequences of the COVID-19 pandemic has required good faith commercial negotiations by the parties to the lease.

Concluding remarks

Ultimately, the Court directed the parties in the Sneakerboy cases to negotiate rent relief and any consequential amendments to the lease and granted leave to have the matter relisted if agreement cannot be reached.  For the sake of the parties to the litigation, we can only hope that they reach a suitable compromise. However, if they do not then we will no doubt hear more from the Court about the Code and the NSW Regulations.

Also, the Court’s judgments are long.  If you want to read the decisions but are pressed for time, the second decision is the one to read. 

No doubt others will see different significant issues in the reasons.  If I hear some that I think readers will find interesting I will try to post them as soon as I can.  

About Sam Hopper

Sam is a property and insolvency barrister.

View all posts by Sam Hopper

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