Commercial and retail tenants have enjoyed immunity from eviction and rent arrears recovery at various stages of the COVID-19 pandemic. The new wave of infections and lockdowns make the following Supreme Court decision required reading for landlords and tenants.

The scheme applying in most states has been a requirement for the landlord and tenant to negotiate reasonable rent reductions and deferrals. This post considers some surprising consequences of the regulations imposing such schemes.

It concerns a long-running dispute over the lease of restaurant premises in the picturesque NSW town of Forster, the depth of feeling between the protagonists making the prospect of good faith COVID rent negotiations, a distant prospect.

In October 2014, Omid Darzi moved into beachfront premises on the ground floor of the landlord owned hotel –- in response to the landlord’s advert for the sale or lease of the restaurant – and launched The Sicilian to cater to visitors to the coastal town and hotel guests.

The parties had signed a Heads of Agreement for a 5-year lease with 3 x 5-year options before occupation commenced but Maurice Koorey of landlord Nolde Pty Ltd had his solicitors prepare a lease on substantially different terms.

A compromise was eventually agreed in May 2016 after numerous rounds of correspondence between the opposing law firms.

Then in June – as the landlord’s solicitors suddenly lost their tongue – Darzi had his lawyers to draw up a lease and submit it to Koorey to be executed.

The restaurant flourished but the landlord refused to sign.

Darzi filed proceedings in the NSW Supreme Court in February 2019 seeking a declaration that the parties had entered into a retail lease based on the terms of the June 2016 document his solicitors had drafted.

The case subsequently came before the NSW Court of Appeal in July 2019 who declared that the primary judge had erred and that a valid and binding agreement had been reached in the terms of the May 2016 correspondence.

The appeal judges ordered the landlord to sign the June 2016 document prepared by Darzi’s solicitors and then register the lease before providing a copy to the tenant.

Undeterred – and without having signed – the landlord served a breach notice on the tenant in September 2019 alleging it had failed to pay rent and outgoings and had made unauthorised alterations to the premises.

In the meantime Darzi had given Koorey’s company notice of his exercise of option for a further 5.3 year term expiring in February 2025.

He then filed a further claim to set aside the breach notice and seeking a declaration that the option had been duly exercised together with consequential orders.

Nolde opposed on the grounds that specific performance should not be ordered “when the evidence establishes that the ability of the parties to cooperate has broken down”.

It also cross-claimed for the rent for May and June 2020 Darzi had not paid. Darzi countered he was relieved of the payment obligation while in receipt of JobKeeper until trading conditions improved because the landlord had refused to re-negotiate rent despite its obligation under the COVID Regulation to do so.

The Retail and Other Commercial Leases (COVID-19) Regulation 2020 (NSW) – like its Queensland analogue – has extended immunity to commercial and retail tenants from eviction and rent arrears recovery etc, ie “prescribed action” at various stages of the COVID-19 pandemic.

Both schemes require a landlord and tenant to negotiate in good faith for reasonable rent reductions and deferrals.

In NSW the “prescribed period” in which such immunities apply were extended by two subsequent regulations before it was repealed as of 1 July 2021.

In deciding this case in late June 2021, Justice Stephen Robb observed that the bar against “prescribed action” was nevertheless prolonged after the repeal date by s88(1) in its Retails Leases Act which applies the repealed regulation “to anything occurring in relation to a lease while the lease was an impacted lease”.

His honour confirmed prior rulings that he COVID-19 regime does not empower the Court to decide the appropriate rent to be paid under an impacted lease.

That not being in issue, his Honour concluded that an impacted lessee is not required to pay the full rent until an agreement is reached and that a lessor who doesn’t renegotiate the rent in good faith with an impacted lessee, will be forever barred from taking a “prescribed action” to recover any shortfall in rent from the lessee.

Nolde’s proposition that an “ungenerous, heavy handed or even unconscionable” landlord was entitled to full rent unless and until he relented, could not be “more at odds with the clear intent of the COVID-19 regime,” he ruled. “It would be entirely counter-productive to the good faith obligation”.

Thus Darzi’s non-payment of rent was not capable of being a breach of the lease.

His Honour acknowledged that it was “intolerable” to Koorey that that Darzi was entitled to a further 5-year term but declined to make “detailed findings that might unnecessarily exacerbate the difficulties between the parties”.

He held that while the relationship between the parties had endured “ups and downs” and “squabbles”, none of Darzi’s actions justified Nolde denying a renewal of the lease. He made an order for specific performance also deciding that damages would not be feasibly assessed and thus could not be a sufficient remedy.

The findings are instructive on the course that is likely to be taken in  COVID related arrears disputes in Queensland.

Although the Retail Shop Lease and Other Commercial Leases (COVID-19 Emergency Response) Regulation 2020 (Qld) expired on 30 December 2020, it still has force in relation to “impacted leases” – ie to leases impacted up to that date – until the “legislation expiry day”. That day is defined in the COVID-19 Emergency Response Act 2020 and was extended in April to 30 September 2021.

The relevant periods to which COVID related lease protections apply remains fluid and are likely to change again.  A new Retail and Other Commercial Leases (COVID-19) Regulation has just come into force in NSW for the period 14 July 2021 to 20 August 2021.

Darzi Group Pty Ltd v Nolde Pty Ltd [2021] NSWSC 774, Robb J, 28 June 2021 Read case


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