A CBD retailer has won a court fight to overturn its landlord’s termination of a long-term lease in the early stages of the coronavirus pandemic before the National Code shielding retail and commercial tenants was proclaimed.
Sneakerboy – a player in the luxury sneaker and streetwear market – took an assignment of the remaining 8 years of a lease of premises in York Street, Sydney in March 2015.
It was far from an ideal tenant being “frequently, if not constantly, a month or two behind in its $27.4k/month rent and regularly made promises it did not keep”.
Often warned that non-compliance with the Lease risked termination, it always “eventually” met its rent obligations.
In February 2020, Sneakerboy experienced a sudden decline in revenue due to the rapid decline in foot traffic and business conditions associated with the escalation of the COVID-19 pandemic.
Events moved on very quickly from there. The WHO declared a pandemic on 11 March. On 20 March, the Federal Government placed mandatory restrictions upon “non-essential indoor gatherings” limiting numbers in the store to 10.
On 23 March a representative of landlord – Georges Property Group – was alarmed to witness stock being removed and being told by staff that they were “packing up the shop and sending it to Melbourne”.
In fact – having encountered an 85% drop in trade – the business was shuttering up in preparation for the forthcoming lockdown. It intended to temporarily cease trade from the York Street store and concentrate on its online effort.
On 25 March, the COVID-19 Legislation Amendment (Emergency Measures) Act 2020 (NSW) came into force to amend the Retail Leases Act by preventing lease terminations.
Also that day, the landlord served notice of termination asserting that rent of $65k had been arrears for more than 14 days and on suspicion that the tenant intended to abandon premises.
On the day following, it called on the tenant’s bank CBA, to pay $254k to it being the full amount of the Sneakerboy bank guarantee.
Notwithstanding the amendment to the Retail Leases Act in March, the National Cabinet Mandatory Code of Conduct: SME Commercial Leasing Principles during COVID-19 (the “National Code”) did not come into force until 7 April.
The National Code imposes “a set of good faith leasing principles for application to commercial tenancies” between landlords and eligible tenants ie a participant in the Federal JobKeeper program. (Sneakerboy enrolled in the program on 21 April.)
It mandates that landlords must not terminate leases for non-payment of rent and must offer proportionate rent reductions and deferrals “of up to 100% of the amount ordinarily payable on a case-by-case basis based on the reduction in the tenant’s trade”.
The Code also imposes mandatory mediation; an obligation to renegotiate commercial leases; and bars landlords drawing on a tenant’s security during the period of the pandemic “and/or a reasonable subsequent recovery period”.
The NSW law giving force to the National Code- the “COVID-19 Regulation” – came into operation on 24 April. (The Queensland equivalent, the Retail Shop Leases and Other Commercial Leases COVID-19 Emergency Response Regulation 2020 did not start until 28 May.)
On 20 July Sneakerboy filed proceedings in the NSW Supreme Court seeking relief against the landlord’s forfeiture of its lease.
It conceded that the subsequent establishment of the COVID-19 regime did not of itself afford it a right to relief against forfeiture because its lease had been terminated well before its inception.
“However”, as Justice Stephen Robb observed “if relief is granted so that the Lease is retrospectively continued from 25 March 2020, both the Code and the COVID-19 Regulation will apply”.
In such circumstances His Honour considered it “very probable” that substantial COVID rent waivers and deferrals would be “agreed or imposed by mediation”.
Further, the Lessor would be precluded from taking action against the tenant for the shop’s temporary closure and prohibited from terminating the Lease or calling upon (and presumably even demanding the delivery of) any renewed bank guarantee.
Should then relief against forfeiture be granted?
His Honour decided that by calling on the bank guarantee, the Lessor had already recompensed itself for the consequences of the defaults to date and “still had money in hand”.
Given “it is almost certain” that the remainder of the bank guarantee proceeds will – on application of the COVID-19 regime – stretch much further than would have ordinarily been the case, the lessor will be protected, the court concluded, against further defaults for a considerable time into the future.
On that basis, Justice Robb exercised his discretion to grant the relief so as to reinstate the lease as from the date of its termination.
The two grounds the landlord contended should operate against such outcome – that the tenant intended to abandon the premises because it had signed an agreement for new premises nearby and that the landlord had recruited another tenant to take over the Sneakerboy space – had not been sufficiently made out and were accorded little weight.
Sneakerboy Retail Pty Ltd v Georges Properties Pty Ltd [2020] NSWSC 996 Robb J, 31 July 2020 Read case
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