Most recent Supreme Court commercial leasing decision brings comfort to the retail industry
In April, the National Cabinet Mandatory Code of Conduct (Code) and the Retail and Other Commercial Leases (COVID-19) Regulation 2020 (NSW) (Regulation) were implemented to mitigate the impact of Coronavirus on renters. The recent case of Sneakerboy Retail Pty Ltd v Georges Properties Pty Ltd (2020) is the first to reflect the combined capability of the Code and Regulation.
Why was Sneakerboy’s Lease terminated?
To provide context, Sneakerboy Retail Pty Ltd (Lessee) became the Lessee of the premise in Sydney’s CBD in March of 2015. Over the term of the Lease the Lessee has a history of failing to make payments on time, this issue was only aggravated by the unfolding of the coronavirus pandemic. The effect of COVID-19, particularly on the retail industry saw a steep decline in the Lessee’s revenue and meant that they were unable to make payments in the months of February and March 2020. The Lessee as a result chose to cease business operations temporarily and was met with termination by way of re-entry by the Lessor in late March. Following the termination, Georges Properties Pty Ltd (Lessor) made a request for the bank guarantee under the Lease, being an amount of $253,668.90 which is equivalent to 10 months’ rent. The actions taken by the Lessor in this case are classified as “prescribed action” and are those exactly protected against under the Code and Regulation. Consequentially, the Lessee applied to the Supreme Court to have their Lease reinstated.
What arguments were in favour of the Lessee having their Lease reinstated?
It was essentially found that, in the contextual climate, and based on the common law stance provided by Wilkinson v S & S Gikas Pty Ltd [2006], the termination of the Lease by the Lessor was invalid. This was founded upon Robb J’s finding that the bank guarantee was an amount substantial enough to cover the outstanding rent with money to spare, on the basis that rent payable due to COVID-19 would be reduced. In this instance, the Lessor was not only to the position that they were in before the forfeiture or re-entry, they were evidently placed in a better position.
What factors could result in a termination of Lease being valid?
Robb J noted in his judgement that if the Lessor could have shown evidence that it had another lessee lined up to occupy the premises then the termination could be seen as “commercially preferable” and therefore validate the termination.
What did the court ultimately decide?
Despite the court highlighting that to some degree the Lessee was in default, Robb J concluded that the primary “trigger” for the Lessor terminating the Lease was related to the initial effects of Coronavirus on the retail industry. Furthermore, the court found that one of the essential reasons for the termination was also due to a miscommunication regarding whether the Lessee had vacated the premises of not. Finally, the court decided that the Lease should be reinstated and the Lessees should restore the value of the bank guarantee.
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