Court allows Landlord to terminate Commercial Lease for pre-covid19 breaches
A recent Supreme Court decision handed down on 14 October 2020 has provided further insight into how a Court may consider the operation of the Mandatory Code of Conduct for retail and commercial leases.
- If a landlord relies on a breach by a tenant prior to the prescribed period under the Retail and Other Commercial Leases (COVID-19) Regulation 2020 (NSW) (Regulation), the landlord is entitled to terminate the lease and re-enter the premises;
- Tenants cannot rely on the Regulation to seek a Court reinstate a lease where the tenant’s breach occurred prior to the Regulation coming into effect; and
- The Courts have reaffirmed that generally they will not reinstate a Lease where a new tenant has entered into a new lease for those same premises unless the new tenant knew of the old tenant’s claim in relation to the premises.
MIR Holdings Pty Ltd and SKRG Pty Ltd (Tenants), were the Tenants of two retail stores in Marine Square at Wentworth Point, Sydney (Premises).
Marina Square Retail Pty Ltd (Landlord) was the Landlord of the Premises.
The leases of the Premises were for nine (9) and eight (8) years respectively, commencing on 21 November 2018.
The Tenants had not paid their rent and other amounts owing for a period prior to the Regulation coming into effect. The Regulation had come into effect on 24 April 2020.
On 11 September 2020 the Landlord served on each of the Tenants a Notice of breach of Covenant requiring payment for rent and other amounts owing up until 31 March 2020 within 14 days and stated that unless that amount was paid the Landlord would terminate the leases and/or re-enter, occupy and resume possession of the Premises.
The Tenants failed to pay the rent and other payments within the requisite period and on 1 October 2020 the Landlord locked the Tenants out and served on each of the Tenants a Notice of Re-entry and Termination.
The Landlord entered into agreements to lease the Premises to two (2) new tenants (New Tenants), although the commencement date for the new leases was to occur at a later date.
On 2 October 2020, the Tenants commenced proceedings against the Landlord seeking the Court makes orders that enabled the Tenants to return and occupy the Premises that had been re-entered by the Landlord. In addition, the Tenants’ application to the Court sought to provide replacement bank guarantees, pay all outstanding rent and other payments owed under each lease and to pay the Landlord’s costs in connection with the Tenants’ application to the Court.
The Tenants’ also sought to rely on those parts of the Regulation that prevented the Landlord from taking any action against the Tenants for a breach of the leases during the COVID-19 period.
The Court refused to reinstate the leases.
The reason for the Court’s decision was two-fold.
The first basis for the Court’s decision was that the Court could not reinstate the leases because the Landlord had already agreed to lease the Premises to the New Tenants. Whilst the Court had the power to reinstate the leases if the New Tenants knew of the relevant circumstances and had notice of the Tenant’s claim to seek relief, the Court found that there was no evidence that the New Tenants knew of the circumstances of the purported termination of those leases or were aware of the Tenant’s claim to reinstate the leases. Accordingly, the Court held the New Tenants had an unconditional entitlement to occupy the Premises. On this factor along, the Court declined the Tenants’ application to reinstate the leases.
The second basis for the Court’s decision was that the Regulation did not apply to the breaches by the Tenant because the breaches occurred prior to the Regulation coming into effect. The Regulation provides, amongst other things, that during the prescribed period, which is currently 24 April 2020 to 31 December 2020, where a tenant fails to pay rent or otherwise comply with its obligations under a commercial lease during the COVID-19 pandemic and, in particular during the prescribed period, a landlord cannot terminate the lease or re-take possession of the premises. As the Landlord issued the Notices of Breach for rent and other payments owing up until 31 March 2020, the Court found that the Regulation did not apply because ‘up to 31 March 2020’ was prior to the prescribed period.
The Court’s decision provides that if a landlord relies on a breach by a tenant prior to the prescribed period under the Regulation, then the landlord is entitled to terminate the lease and re-enter the premises.
It also confirms the Court’s position that a lease will not be reinstated if the premises has been leased to a new tenant who is unaware of the prior termination or the prior tenant’s claim for relief.
If you wish to know more about your rights as a landlord or tenant contact us today.
We would be happy to assist you with specific and tailored advice on your entitlements and best course of action during these unprecedented and challenging times.
Craig Higginbotham and Harrison Dobb
16 October 2020