Retail tenants and relief against forfeiture during COVID-19

Retail tenants and relief against forfeiture during COVID-19

If a tenant breaches a lease for non-payment of rent, there is a fundamental breach which gives a landlord the right to terminate the lease and take possession of the premises. However, a tenant has the right to apply to the court for an order restraining the landlord from doing so, otherwise known as relief against forfeiture. In the early stages of the COVID-19 pandemic, courts had yet to redefine the criteria used to award a tenant protection from the re-entry by their landlord.

The High Court has previously applied a flexible approach to the instances where relief against forfeiture has been granted. However, how such principles that grant relief against forfeiture operate alongside constantly changing COVID-19 rules and regulations has been unclear. Would the courts extend the tenant’s rights and apply the right to relief more liberally?

Sneakerboy Retail Pty Ltd v Georges Properties Pty Ltd [2020] NSWSC 996, decided by Justice Robb on 31 July 2020, goes someway to providing a list of considerations that clarify this issue in the current global health crisis.

Background

On 23 March 2020, sneaker and streetwear retailer Sneakerboy Retail Pty Ltd (Sneakerboy) ceased trading and began packing up their York Street store’s merchandise, facing substantial business losses due to the COVID-19 pandemic and a failed repayment scheme for $65,643 in unpaid rent.

With a three-year history of payment delinquency, and a right to re-entry under their lease agreement, Sneakerboy’s landlord Georges Properties Pty Ltd (Georges) saw this as a forfeiture, re-entering Sneakerboy’s York Street store on 25 March and barring all entrants – including the retailer’s owners and employees.

After a failed request for rent relief and subsequent payment of a $253,668 bank guarantee to Georges failed to earn them re-entry in May, Sneakerboy filed an interlocutory injunction in July in order to be granted entry into the premises, to trade in it, and pay rent.

The Court’s findings

In finding a general test for rent relief during COVID-19, Justice Robb generated three main principles:

  • The establishment of any COVID-19 rules after this act do not give a tenant a right to relief against forfeiture that they did not have on the date such forfeiture occurred.
  • When a lease is terminated for non-payment of rent, courts will generally grant relief (albeit with subjective conditions for repayment of unpaid rent over time and principles of equity and fairness apply).
  • If a bank guarantee has been paid to effectively repay any unpaid rent, an order giving relief against forfeiture must include an order reinstating or replacing a bank guarantee, but within a reasonable period of time and not immediately.

For landlords, His Honour further determined:

  • Pre-emptions of the effects of COVID-19 and subsequent actions taken to protect tenants should not be taken.

Finally, for tenants, His Honour specified:

  • Previous rental delinquencies, any leases for new premises, and alternative uses of already leased premises are irrelevant to a determination of relief against forfeiture during COVID-19.

Conclusion and takeaways

Ultimately granting Sneakerboy relief against forfeiture on the grounds of the drawdown of the bank guarantee by the landlord and notwithstanding Sneakerboy’s previous delinquencies, this case in several instances indicates the courts acknowledge the impact of COVID-19 upon the amount and timing of rental payments by tenants and therefore are likely to liberally apply tenant-favouring principles in similar cases moving forward.

Landlords should not be hasty to terminate leases for non-payment of rent and should first attempt to reach agreements which are both fair and compliant with the process and principles prescribed in COVID-19 Rent Relief Regime. It is yet to be seen whether the continuation of such a preference towards tenants is fair and reasonable on landlords who are also adversely affected economically and commercially during the COVID-19 pandemic.

Should you require any further advice or assistance in relation to the above or similar matters, please do not hesitate to contact Denis Hall, National Head Property Group on +61 2 8022 1222 or email denis.hall@madisonmarcus.com.au.

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