2021 COVID-19 NSW Leasing Regulations & Land Tax Relief

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The NSW Government has passed the Retail and Other Commercial Leases (COVID-19) Regulation 2021 (NSW) (Regulation) commencing 14 July 2021.  The Regulation prohibits landlords from taking prescribed actions against impacted lessees without having first mediated the tenant’s breach.  It does not, however, require landlords to provide rent relief to impacted lessees.  The Government has also announced an “act of grace payment” under section 5.7 of the Government Sector Finance Act 2018 (NSW), entitling landlords to relief from the payment of up to 100% of their 2021 land tax charge, where landlords have given rent waivers to affected tenants.

The Regulation

1.  Format of the Regulation

The Regulation contains two different sets of regulations:

  1. under the Retail Leases Act 1994 (NSW) to govern retail leases (Retail Regulation or RR); and
  2. under the Conveyancing Act 1919 (NSW) to govern commercial, office and industrial leases (Commercial Regulation or CR).

Other than the type of lease, the RR and CR have similar provisions and are in the same format as the regulations that were introduced in 2020 to deal with the financial impact of the COVID-19 pandemic (the Previous Regulations).

The Regulation regulates the actions a landlord may take in respect of tenant breaches that occur between 13 July 2021 and 20 August 2021 (Prescribed Period).  The Regulation remains in force until 13 January 2022 and so landlords must comply with the Regulation until that date (subject to any later legislation, which may well extend the Prescribed Period if lockdowns are extended).

 2. Application of Regulation to tenants and leases

  1. The Regulation applies to a tenant that both:
    1. qualifies for one or more of the following grants:
      1. Micro-business COVID-19 Support Grant;
      2. COVID-19 NSW Business Grant;
      3. Job Saver Grant; and
    2. has a turnover (including that derived from the internet sales of goods or services) in the 2020-2021 financial year of less than $50 million (for franchises and corporate groups, this is assessed in the same way that it was assessed under the Previous Regulations),
      being defined as an “Impacted Lessee”.
      [RR 4 & CR 2]
  2. The Impacted Lessee must provide the landlord with both a statement that the tenant is an Impacted Lessee and evidence that the tenant is an Impacted Lessee. This information must be given before, or as soon as practicable after, the breach occurs and must be given within a reasonable timeframe after the landlord requests it.
    [RR 6(3) and 6(4) & CR 4(3) and 4(4)]
  3. The Regulation does not specify the nature of the evidence that must be provided. A major hurdle under the Previous Regulations has been obtaining information from tenants in order to determine a tenant’s eligibility for relief and the extent of the tenant’s entitlement to relief.
  4. The Regulation applies to Impacted Lessees under a “Commercial Lease”, which is defined as:
    1. for the CR, a commercial lease (meaning all leases other than residential and retail leases) that is governed by the Conveyancing Act 1919 (NSW), which would not include a licence; and
    2. for the RR, a retail lease governed by the Retail Leases Act 1994 (NSW), which expressly does include a licence.
  5. A Commercial Lease does not include the following:
    1. a lease entered into on or after 26 June 2021, unless it is:
      1. a lease entered into by means of an option to extend or renew the lease; or
      2. any other extension or renewal of an existing lease on the same terms as the exiting lease; and
    2. a lease under the Agricultural Tenancies Act 1990.
  6. The Regulation will continue to have effect until it is repealed on 14 January 2022, being 6 months after the date it commences, however it only applies to the exercise or enforcement of rights under an Impacted Lease in relation to a prescribed breach of the lease occurring during the Prescribed Period. The “Prescribed Period” is 13 July 2021 to 20 August 2021.

3. Prohibitions, Restrictions and Mediation

  1. If the tenant is an Impacted Lessee, a landlord cannot, during the Prescribed Period, take a Prescribed Action in respect of a “Prescribed Breach”. A Prescribed Breach is:
    1. failure to pay rent;
    2. failure to pay outgoings; or
    3. failure to open for business during the trading hours specified in the lease.
  2. The term “Prescribed Action” has the same meaning as under the Previous Regulations and includes:
    1. terminating a lease, evicting a tenant, recovering possession of the premises;
    2. charging interest for unpaid rent,
    3. calling on security including bank guarantees, or enforcement of a guarantee;
    4. recovering damages; and
    5. any other remedy available at common law or under the law of the State of NSW.
  3. Mediation – Prescribed Actions in respect of Prescribed Breaches during the Prescribed Period are permitted if the matter has been referred to mediation and the Small Business Commissioner has certified in writing that the mediation has failed to resolve the dispute.
    [RR 6(2) and CR 4(2)]
  4. The required mediation process remains mediation via the Office of the Small Business Commissioner. Once the Small Business Commissioner has issued a certificate that mediation has been unable to resolve the dispute, the landlord is able to exercise its usual rights under the lease, including taking any Prescribed Action.
    [RR 6(2) and CR 4(2)].
  5. If you have a mediation booked to occur and it has not yet occurred, we recommend that you update the points the mediation is to cover to include breaches of the lease on and from 13 July 2021.  This will avoid the need to hold a second mediation relating purely to breaches occurring on and from the beginning of the Prescribed Period (13 July 2021).
  6. Default before prescribed period – Landlords can still take Prescribed Actions (including locking tenants out and drawing down on bank guarantees) for breaches by Impacted Lessees in the period 29 March 2021 to 12 July 2021, if those breaches are unrelated to the economic impacts of the pandemic.
    [RR 7 and CR 5]
  7. If a Landlord does take a Prescribed Action for breaches by the tenant in the period from 29 March 2021 to 12 July 2021, the Landlord must be careful not to refer to post 12 July 2021 breaches in respect of the grounds that support the relevant Prescribed Action.
  8. Landlord action for non-Covid-19 reasons – Nothing in the Regulation prohibits a landlord taking a Prescribed Action (either within or outside the Prescribed Period) on grounds unrelated to the impact of COVID-19. For example: if a tenant has breached the lease for failing to vacate and make good on expiry of the lease.
    [RR 7 and CR 5]
  9. Landlord taking a prescribed action by agreement – The Regulation specifically allows a landlord and an Impacted Lessee to agree to take any action in relation to an Impacted Lease, including allowing the landlord to take a Prescribed Action. For example, allowing the landlord to draw down on a bank guarantee, or the parties agreeing to terminate a commercial lease.
    [RR 6(6) and CR 4(6)]

Land Tax Relief

1. Nature of the relief

  1. Land tax relief measures are available to commercial and residential landowners:
    1. in respect of their 2021 land tax;
    2. where a landowner provides a reduction in rent between 1 July 2021 and 31 December 2021 to an eligible tenant under a retail, commercial, office, industrial or residential lease.
      The relief reduces a landowner’s land tax payable for 2021 by up to 100%, for a taxable parcel of land, where rent relief has been given to an eligible tenant who occupies that land.
  2. The land tax relief measures are dealt with separately from the Regulation discussed above. The Revenue NSW guidelines in respect of the land tax relief can be found here.
  3. The new Regulation does not require a Landlord to provide relief, however the land tax relief measures would allow a landlord to choose to provide relief (or to manage a tenant’s inability to pay rent during the Prescribed Period) to the extent the landlord was able to obtain the benefit of the land tax relief measures.

2. Requirements for relief

  1. A landowner will be eligible for relief where all of the following circumstances are satisfied:
    1. The parcel of land is leased to:
      1. a commercial tenant, who has an annual turnover of up to $50 million and is eligible for the Micro-business COVID-19 Support Grant, the 2021 COVID-19 NSW Business Grant and/or the JobSaver scheme; or
      2. a residential tenant.
    2. The tenant is in “financial distress” as a result of COVID-19. A tenant is considered to be in “financial distress” where:
      1. for commercial/retail tenants, there is a reduction in turnover compared to a previous comparable period of 30% or more; and
      2. for residential tenants, there is a reduction in household income of 25% or more.
        The landowner is responsible for verifying that the tenant is in financial distress. It is prudent for a landowner to obtain the relevant information before providing relief and to retain the information, in case the landowner is required to provide that evidence to Revenue NSW at a later date.
    3. The landowner reduces the rent of the affected tenant for a period between 1 July 2021 and 31 December 2021, during which the tenant is in financial distress.
    4. For 2021, there must be land tax attributable to the parcel of land leased to that tenant.
    5. The landowner must not require the rent relief to be paid back at a later date. If a reduction in or waiver of rent is provided but is required to be paid back at a later date, this is considered to be a deferral of rent and will not be considered as a reduction of rent for the purposes of 2021 land tax relief.
  2. Critically, the land tax relief does not require the relief to the tenant to be in the same proportion as the drop in turnover. This means that it is open to the landlord to agree to give relief in excess of a tenant’s percentage fall in turnover for each month from 1 July to 31 December 2021 in which a tenant’s turnover has fallen by more than 30%.

3. How the 2021 land tax relief is calculated

  1. The land tax reduction will be the lesser of:
    1. the amount of rent reduction provided to an eligible tenant for any period between 1 July 2021 and 31 December 2021; and
    2. 100% of the land tax attributable to the parcel of land leased to that tenant.
  2. We have asked the PCA to confirm with Revenue NSW whether Revenue NSW’s previous position in respect of multi-tenanted buildings where only some tenants are eligible for rent relief remains the same in respect of this tranche of relief eg that the land tax for the entire land containing the building may be used, and not just the relevant tenant’s proportion of the land tax.
  3. Land tax attributable to a parcel of land is calculated as the taxable value of the parcel of land divided by the aggregate taxable value of all parcels of land, multiplied by the landowner’s 2021 land tax liability.
  4. If a landowner has not completed payment of its land tax for 2021, the relief granted will be used to offset the balance of land tax that remains payable. If the land tax for 2021 has been paid in full, the reduction will be refunded to the landowner.
  5. It is essential that landlords make any relief provided conditional upon having the appropriate and necessary information such as BAS Statements, which shows the reduction in turnover. This is because, unlike the previous requirements, there is a specific requirement that the landlord be satisfied that the tenant has had a reduction in turnover of 30% (or 25% for residential) against that in a previous comparable period. However it is not clear which previous comparable period is to be used, and we have asked the PCA for clarification point his point, given that it is critical to the landlords’ entitlement to relief.  It is likely the comparison year will be 2019, where appropriate to the circumstances.
  6. The relief being provided to landlord is under section 5.7 of the Government Sector Finance Act 2018, which is an act of grace payment. This is in the same way in which previous land tax relief was granted. Accordingly, as the payment is not a refund of land tax, but an act of grace payment, the payment does not need to be handed to the tenant or be used to reduce the outgoings.

Next steps

Although the Regulation is in place, landlords may like to wait for clarification on the land tax relief measures before negotiating rent relief arrangements.  In the event of any potential for a dispute, it is advisable that the landlord apply for mediation as soon as possible to allow flexibility in exercising rights under the lease if the dispute remains unresolved.

The Regulation does not provide protection to a tenant that is not an Impacted Lessee, therefore parties should comply with their respective obligations under such leases, subject to any other agreement reached between the parties.

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