Sneakerboy Retail Pty Ltd trading as Sneakerboy v Georges Properties Pty Ltd (No 2)

[2020] NSWSC 1141

Supreme Court

New South Wales

Medium Neutral Citation:

Sneakerboy Retail Pty Ltd trading as Sneakerboy v Georges Properties Pty Ltd (No 2) [2020] NSWSC 1141

Hearing dates:

27 July 2020; 7 and 10 August 2020; last submissions 17 August 2020

Decision date:

26 August 2020

Jurisdiction:

Equity

Before:

Robb J

Decision:

See pars [102], [153], [158]-[159] and [165]-[170]. Parties should submit short minutes of order to my Associate to give effect to these reasons.

Catchwords:

EQUITY — Equitable remedies — Relief against forfeiture — Leases — where it was found that the plaintiff was entitled to relief against forfeiture — whether the Court should make any orders concerning compliance with the COVID-19 regime — where the Court does not have jurisdiction to make orders varying the terms of commercial leases that are subject to the COVID-19 regime — where there are various considerations under the Retail and Other Commercial Leases (COVID-19) Regulation 2020 (NSW) and the leasing principles of the National Code of Conduct — where the Court has a discretion to impose conditions regarding the reinstatement of a bank guarantee — where the Court is required to estimate the outcome of a good faith rent renegotiation

Legislation Cited:

COVID-19 Legislation Amendment (Emergency Measures) Act 2020 (NSW)

Retail and Other Commercial Leases (COVID-19) Regulation 2020

Retail and Other Commercial Leases (COVID-19) Amendment Regulation 2020

Retail Leases Act 1994 (NSW)

Cases Cited:

Sneakerboy Retail Pty Ltd trading as Sneakerboy v Georges Properties Pty Ltd [2020] NSWSC 996

Texts Cited:

J D Heydon, M J Leeming and P G Turner, Meagher, Gummow and Lehane’s Equity: Doctrines & Remedies (5th ed, 2015, LexisNexis Butterworths)

Category:

Procedural and other rulings

Parties:

Sneakerboy Retail Pty Ltd trading as Sneakerboy (plaintiff)
Georges Properties Pty Ltd (first defendant)
Georges Investments Pty Ltd (second defendant)

Representation:

Counsel: B Lloyd (plaintiff)
M Young SC (defendants)

Solicitors: Bartier Perry (plaintiff)
Finn Roache Lawyers (defendants)

File Number(s):

2020 / 212550

Judgment

1. Following a hearing on 27 July 2020, I published reasons for judgment on 31 July 2020, in which I found that the plaintiff, Sneakerboy, was entitled to an order against the defendants, who I called the Lessors, relieving it from forfeiture of a lease of a retail shop in Temperance Lane, Sydney: Sneakerboy Retail Pty Limiting trading asSneakerboy v Georges Properties Pty Ltd [2020] NSWSC 996 (the principal judgment).

2. In these reasons I will assume knowledge of the principal judgment and will use the same terms as were therein defined. Parenthetical paragraph references are to the principal judgment except as otherwise expressly noted.

3. A number of matters required further consideration, and at [121] I directed the parties to confer and to submit to my Associate short minutes of order to give effect to the reasons for judgment.

4. Notwithstanding my expectation that the parties would cooperate and compromise their outstanding differences – particularly given the good faith requirements of the COVID-19 regime – they were unable to do so.

The issues

5. There were three outstanding issues: namely; (1) the timing of the provision of a replacement bank guarantee by Sneakerboy [116]; (2) the costs order that should be made in favour of the Lessors [117]; and (3) whether the Court should make any orders concerning the compliance by the parties with the COVID-19 regime, and if so what those orders should be: [119], [120].

6. These reasons for judgment deal with issues (1) and (3). In relation to issue (2), Sneakerboy has accepted that the Lessors are entitled to retain out of the drawn-down bank guarantee an amount equal to the total of the legal costs that they have claimed, together with the costs of certain repairs they have carried out. As the Lessors’ claims will be secured in that way, Sneakerboy’s contest of those claims can be dealt with later. The parties have not made submissions on issue (2), and case management orders will be required to deal with that outstanding issue.

7. As to issue (1), the parties contend for substantially different orders for the reinstatement of the bank guarantee as a condition of the relief against forfeiture of the Lease. For the present, it is only necessary to record that both parties accept that the Court must make a finding as to the outcome of a notional renegotiation of the terms of the Lease that would have been required by the COVID-19 regime had the Lease not been terminated. The need for that finding arises because the Lessors now hold more funds from the drawn-down bank guarantee than, on any view, they are owed by Sneakerboy. The amount of the excess in the hands of the Lessor is a factor in the determination of how the bank guarantee should be reinstated.

8. The need to make this finding requires the Court to undertake an examination of the manner in which the COVID-19 regime operates. But that is only in the context of allowing the Court to make a finding of the likely outcome of the COVID-19 regime if the parties had implemented it themselves.

9. The difference between the parties in respect of issue (3) is that the draft short minutes of order propounded by Sneakerboy include orders that would vary the Lease in respect of the payment of rent, in a manner that Sneakerboy submits is an appropriate implementation of the COVID-19 regime. The Lessors’ short minutes of order provide only for an order that the parties commence the renegotiation of the Lease between themselves at an early time.

10. This contest between the parties requires the Court to consider the role of the Court in the COVID-19 regime and whether, in the case of disputes between landlords and tenants subject to the COVID-19 regime, the Court has jurisdiction to determine the variations that ought to be made to the lease.

11. Further hearings were required on 7 and 10 August 2020, and on the latter date I made case management orders for the exchange of submissions on the basis that the Court would decide the orders to be made in chambers on the papers. In the manner that I will explain below, aspects of the remaining dispute between the parties are not really suitable for determination on the papers.

12. Sneakerboy delivered written submissions on 13 August 2020, together with an affidavit of its solicitor dated the same date. The affidavit contained information about Sneakerboy's financial affairs that is relevant to the reinstatement of the bank guarantee.

13. The Lessors delivered written submissions in response dated 17 August 2020, together with an affidavit of their solicitor made on 17 August 2020, which contained updated evidence as to the legal and other costs incurred by the Lessors, following an earlier affidavit of 6 August 2020 on the same subject made by the solicitor.

Need for reinstatement of the bank guarantee

14. Issue (1) arises in the following way. Clause 7.1 of the Assignment obliged Sneakerboy to give to the Lessors a bank guarantee to secure unconditional payment to the Lessors of the amount of $253,668.90, which was equal to 10 months' rent plus GST: [14]. By clause 7.4, if the Lessors were required to call on the bank guarantee, Sneakerboy was obliged to procure for the Lessors a further bank guarantee in the amount called on, in order to reinstate the initial bank guarantee: [15]. The Lessors called on the Commonwealth Bank of Australia for payment of the $253,668.90 on 26 March 2020, even though Sneakerboy did not then owe the full amount guaranteed to the Lessors: [31]. The Bank paid $253,668.90 to the Lessors on 15 June 2020: [54]. The Lessors accepted that, if the Lease had remained on foot, the full amount due under the Lease up to 21 July 2020 would have been $197,913.59. Consequently, on any view, even ignoring the effect of the COVID-19 regime, the Lessors then had $55,754.95 in hand: [98]. Once the order relieving against forfeiture of the Lease is made, the Lease will be retrospectively reinstated, in the sense that a new Lease should be granted for the balance of the term. The COVID-19 regime will then apply to the Lease. Aspects of the COVID-19 regime will have the effect of causing a substantial reduction in the rent payable under the Lease for a period, and the deferral of another part of the rent. Moreover, the Lessors will be precluded from calling on the bank guarantee.

15. These circumstances gave rise to a novel issue as to what order the Court should make in respect of the reinstatement of the bank guarantee. The Court must consider the ambit of its discretion concerning the terms on which it grants relief against forfeiture, and how the COVID-19 regime should impinge upon the exercise of that discretion.

The parties’ contentions concerning reinstatement of bank guarantee

16. I will now explain the parties’ contentions concerning the orders that the Court should make for the reinstatement of the bank guarantee. As the parties’ submissions raise a number of contentious questions, I will then set out a summary of the issues.

Sneakerboy’s submissions

17. The starting position for Sneakerboy's submissions is its acceptance that, of the $253,668.90 received by the Lessors on 15 June 2020 on the drawdown of the bank guarantee, they are entitled to retain $65,084.56 (being the rental arrears as at 25 March 2020).

18. Sneakerboy then noted that the Lessors assert that they are entitled to a further $65,271.96, being the full amount of their legal costs to date, together with the cost of repairing damage they allege was caused by Sneakerboy. Sneakerboy does not concede that the Lessors are entitled to all of this money, although it said that, in the spirit of compromise, it is content to allow the Lessors to hold this amount until the Lessors’ entitlement to the amounts claimed is determined.

19. That leaves a balance of $123,313.38 from the drawn down bank guarantee.

20. For reasons that I will explain shortly, Sneakerboy submitted that the Lessors are not entitled to recover any rent for the period from 1 April 2020 to the present, or alternatively the Lessors are only entitled to additional rent of $22,919.18. Thus, according to Sneakerboy, the Lessors hold either $123,313.38, or $100,394.20 from the drawn down bank guarantee that they are obliged to return to Sneakerboy. Whichever case is correct, Sneakerboy submits that the Lessors should pay this amount to Sneakerboy, and then Sneakerboy will reinstate the bank guarantee in that amount within seven days.

21. Sneakerboy then offered, in addition, to provide a further interim bank guarantee in the amount of $65,000 by 24 August 2020. The result would be that the Lessors would have the benefit of a total interim bank guarantee of either $165,394.20 or $188,313.38 by 24 August 2020. That would involve a shortfall from the $253,668.90 required by the Lease of either $65,355.52 or $88,274.70. Sneakerboy submitted that it should not be required to reinstate this balance of the bank guarantee until 31 March 2021, as its financial position is such that it is neither reasonable nor sustainable to require Sneakerboy to reinstate the balance more quickly.

22. Sneakerboy approached the question of the determination of the excess from the drawn down bank guarantee held by the Lessors by making submissions concerning the rent that will be payable during the period of operation of the COVID-19 regime and a reasonable recovery period thereafter.

23. Sneakerboy divided that period into the period between 1 April 2020 and the date it regains possession of the Premises, which it assumed would be in the near future, and then the balance of the period of operation of the COVID-19 regime and the reasonable subsequent period.

24. Sneakerboy submitted that the first period should begin on 1 April 2020, because the rent of $65,084.56, which the Lessors have received out of the drawn down bank guarantee, covered the period to 1 April 2020.

25. Sneakerboy then submitted that the Lessors would be entitled to either no rent for the subsequent period until Sneakerboy regained possession of the Premises or $22,919.18. The alternatives depended, in a manner that I will explain below, on whether the phrase "tenant's trade" in leasing principle 3 in the Code, which requires landlords to offer tenants proportionate reductions in rent payable, meant the tenant's trade from the particular premises the subject of the Lease, or alternatively the entirety of the tenant's business, even if conducted from a number of premises.

26. Sneakerboy's position was that the preferable interpretation of the phrase "tenant's trade" is that it is related to the turnover from the premises the subject of the particular lease.

27. If that is the case, then Sneakerboy submitted that the amount of rent to which the Lessors are entitled during the period when Sneakerboy has been excluded from possession of the Premises is nothing, because Sneakerboy's turnover from its trade from the Premises has been nil.

28. Sneakerboy provided calculations to support a finding that, if "tenant's trade" required consideration of the entirety of its turnover, then the total amount of rent actually payable over the first period is $22,919.18.

29. Sneakerboy separately made submissions concerning how the rent payable by it should be quantified for the period after it regained possession of the Premises. I will deal with this submission below.

The Lessors’ submissions

30. The Lessors started by accepting Sneakerboy's acknowledgement that it was entitled to retain $65,084.56 that represented the pre-25 March 2020 rent and outgoings, as well as the $65,271.96 for legal and repair costs.

31. The Lessors submitted that the amount payable by Sneakerboy under the Lease on the first day of each calendar month in advance for that month is $30,156.76, plus monthly outgoings of $1,744.87, giving a total of $31,901.63.

32. The Lessors then submitted that, as the Code was not announced until 7 April 2020, and the COVID-19 Regulation did not commence until 24 April 2020, an instalment of rent and outgoings fell due on 1 April 2020. As the COVID-19 regime was not in then existence, had the Lease remained in place after 25 March 2020, Sneakerboy would have been required to pay an additional $31,901.63 on 1 April 2020.

33. Consequently, the Lessors submitted, they are entitled to retain out of the drawn down bank guarantee $97,172.63, before consideration of the additional rent that would have become payable from 1 May 2020, after adjustment pursuant to the COVID-19 regime.

34. The Lessors then addressed the issue of the meaning of the phrase "tenant's trade" in leasing principle 3 of the Code. Contrary to the position adopted by Sneakerboy, the Lessors submitted that it referred to the whole of the turnover of Sneakerboy's business, instead of only the turnover from the Premises.

35. The Lessors then addressed the issue of the rent and outgoings to which they would become entitled after 1 May 2020 up to the time of Sneakerboy regaining possession of the Premises.

36. The Lessors pointed to evidence given by Sneakerboy at the original hearing to the effect that Sneakerboy's turnover from all of its business had been reduced by 60%. It then referred to Sneakerboy's latest evidence that the turnover from the parts of its business that have been able to trade showed reductions of between 95% and 73% for the months of April to July 2020.

37. The Lessors submitted that, given the tender of conflicting evidence by Sneakerboy, and the inability of the Lessors to contest the issue by cross-examining Sneakerboy's witness, the Court should not ignore the lower figure of a 60% reduction in turnover originally given.

38. Then, assuming a 60% reduction and that "tenant's trade" referred to the whole of Sneakerboy's turnover, the Lessors calculated that they would be entitled to $12,062.70 rent per month plus $1,744.87 per month for outgoings, giving a total of $13,807.57 per month. That would give a total for May, June and July 2020 of $41,422.71.

39. The Lessors then addressed the fact that Sneakerboy had submitted a calculation that, on the assumption that the whole of its turnover was required to be taken into account, the total amount of rent payable for May, June and July would be $21,411.30. The Lessors submitted that this calculation ignored outgoings, and if $5,234.61 was added to Sneakerboy's figure for rent, the total would be $26,645.91.

40. Then, the Lessors then submitted that the inconsistency in Sneakerboy’s evidence concerning the proportional reduction in its turnover should be dealt with by the expedient of averaging the amounts of $41,422.71 and $26,649.91, with the result being $34,034.31 in total for the three months.

41. As 1 August 2020 has now passed, the Lessors submitted that, using Sneakerboy's figures for the percentage reduction in turnover for the whole of Sneakerboy's turnover for July, and adding August outgoings, a further $9,887.19 is payable to the Lessors.

42. The aggregate effect of this reasoning is that the Lessors claimed that they are entitled to $65,271 for rent and outgoings to 25 March 2020, April 2020 rent and outgoings of $31,901.63, an averaged calculation for May to July 2020 rent and outgoings of $34,034.31, and an estimate for rent and outgoings due on 1 August 2020 of $9,887.19. The total is $141,094.13.

43. The Lessors submitted that, if the legal costs of $65,258.14 and repair costs of $7,821 are added to that sum, the total amount to which the Lessors are entitled is $214,173.27. The amount remaining out of the drawn down bank guarantee of $253,668.90 is $39,495.63. (According to my calculation from the Lessors’ solicitor’s 6 August 2020 affidavit, the total legal and repair costs are $64,780.93. The difference between this amount and $65,258.14 is immaterial. However, the lessors’ submission set out above, which is taken from par 21 of their written submissions, counts the repair cost twice. That cost is already included in the $65,258.14).

44. The Lessors then addressed the alternative possibility that, contrary to their submission, the phrase "tenant's trade" means the turnover from the Premises. The Lessors based their submission on evidence given on behalf of Sneakerboy that, if the Lease had not been terminated on 25 March 2020, Sneakerboy would have recommenced trading from the Premises sometime between 21 and 27 May 2020.

45. The Lessors then accepted that, on this hypothesis, no rent would have been immediately payable on 1 May 2020 because at that time the turnover from the Premises would have been zero. However, by 1 June 2020 trading would have recommenced.

46. The Lessors then suggested a reasonable estimate for the rent that would be payable from June to August 2020. It is not necessary to set out the assumptions made by the Lessors for this counterfactual estimation, but it led to the estimate that the amount of rent and outgoings for the three months would have been $35,089.80.

47. It is also not necessary to refer to the calculation in detail, but because there was one month when Sneakerboy would not have traded from the Premises, the amount of rent is less than the amount to which the Lessors would have become entitled if the calculation depended upon the whole of Sneakerboy's turnover. The amount remaining out of the $253,668.90 drawn down on the bank guarantee would, on the assumption that “tenant’s trade” was limited to the turnover from the Premises, be $48,327.33. (This calculation repeats the arithmetical error of double-counting the repair costs).

48. The Lessors then made submissions concerning the appropriate timing of the reinstatement of the balance of the bank guarantee by Sneakerboy, and the significance of Sneakerboy's submissions that the financial consequences of the COVID-19 pandemic are relevant to the timing of when it should be required to reinstate the guarantee.

49. The Lessors submitted that, as the amount that they have in hand from the drawn down bank guarantee is less than $50,000, whichever meaning of “tenant’s trade” is correct, Sneakerboy should be required to reinstate the bank guarantee in full by no later than 31 October 2020.

30. This submission was supported by reliance on clause 12 of the COVID-19 Regulation, which will have the effect that the regulation will be repealed on 24 October 2020. Consequently, the Lessors submitted, at that time Sneakerboy will no longer be able to rely upon the COVID-19 Regulation, and the rent will return to its full amount.

31. As it is likely that half of the unpaid rent will be waived, and half merely postponed and amortised over the remainder of the term of the Lease, the Lessors submitted that it is likely that the rent from 1 November 2020 onwards will actually be significantly increased from the rent stipulated in the Lease. On that basis, the Lessors submitted that the need for the full bank guarantee will be correspondingly higher.

32. The Lessors relied upon the fact that Sneakerboy has committed itself to enter into a new lease for a larger store in Sydney: [92]-[96]. The Lessors submitted that Sneakerboy should not be permitted to prioritise the provision of the bank guarantee required under the lease for the new store over the full reinstatement of the bank guarantee required by the Lease.

33. The Lessors further submitted that any financial difficulty faced by Sneakerboy in reinstating the full bank guarantee is not material, as it is a necessary requirement and condition of relief against forfeiture for Sneakerboy to put the Lessors back in the same position they would be in if the default had never occurred.

34. The schedule for reinstatement of the bank guarantee proposed by Sneakerboy is, according to the Lessors, entirely inadequate, because Sneakerboy has a history of almost constant default, Sneakerboy's financial difficulties show that the risks of non-payment have greatly risen rather than subsided, Sneakerboy will have to find the money to provide the larger bank guarantee required for the new Sydney lease, and, after 31 October 2020, the amount of the rent payable under the Lease will rise because of the deferral of rent during the pandemic being amortised over the balance of the Lease.

35. The lessors submitted that they should not be required to repay any of the drawn down bank guarantee to Sneakerboy for the purpose of funding a partial reinstatement of the bank guarantee by Sneakerboy, because the money may not in fact be used for that purpose.

36. Finally, the Lessors submitted that the limited financial evidence provided by Sneakerboy directed at proving that Sneakerboy was unable to fund the reinstatement of the whole bank guarantee from cash on hand and trading profits was insufficient, as a bank guarantee is intended to provide security, and there was no evidence that established that other companies related to Sneakerboy, or the shareholders in Sneakerboy, did not have capital assets that were sufficient to enable them to secure any necessary part of the reinstatement of the bank guarantee.

Summary of the parties’ positions

57. Given the complexity of the differences in the positions adopted by Sneakerboy and the Lessors, it will be convenient to summarise the parties' positions, as follows:

1. Sneakerboy submitted that the Lessors should only be entitled to retain the $65,088.56 outstanding rent at the time of termination of the Lease. The Lessors submitted that they are entitled also to retain the rent and outgoings due in advance on 1 April 2020;

2. Both parties agreed that the issue of retention should be determined on the basis of a notional renegotiation of the rent payable in accordance with clause 7(3) of the COVID-19 Regulation;

3. Both parties also agreed that the Court should carry out the notional renegotiation separately for each month on the basis of monthly turnover;

4. The Lessors included outgoings calculated under the Lease without reduction for each month. Sneakerboy has omitted outgoings in its calculations for the period from 1 April 2020;

5. Sneakerboy submitted that the preferred interpretation of "tenant's trade" in leasing principle 3 of the Code is that it is restricted to the trade from the Premises. The Lessors’ position is that the preferred interpretation of “tenant’s trade” is that it encompassed the whole of Sneakerboy's turnover from the different locations at which it conducts its business plus its online sales.

6. Sneakerboy submitted that rent under the COVID-19 scheme from 1 April 2020 should be estimated on the basis of the evidence of the comparison in turnover figures between April to July 2019 and April to July 2020. The Lessors added an allowance for outgoings, and submitted that an average rent should be estimated on the basis of the inconsistent evidence provided by Sneakerboy.

7. Sneakerboy submitted that the Court has a discretion not to impose a condition on relief against forfeiture that requires a relatively immediate reinstatement of the bank guarantee as required by the Lease. The Lessors accepted, apparently for practical purposes, that the Court could give Sneakerboy some grace, but only within the general principle that Sneakerboy had to put the Lessors in the same position as they were in before the Lease was terminated.

8. The Lessors required full reinstatement of the bank guarantee by 31 October 2020, while Sneakerboy submitted that it would not be financially able to do so until 31 March 2021.

9. The Lessors submitted that, as the COVID-19 Regulation would be repealed on 24 October 2020, it would cease to have effect, and the rent under the Lease would return to normal by the 1 November 2020 rent payment date. Sneakerboy submitted that the COVID-19 Regulation could have the effect of reducing the rent for a period after 24 October 2020 up to 31 March 2021, in Sneakerboy’s case.

10. The Lessors submitted that they should not be required to pay any money to Sneakerboy because Sneakerboy might not in fact use the money to partially reinstate the bank guarantee. From Sneakerboy’s perspective, repayment is essential to its ability to partially reinstate the bank guarantee.

11. The Lessors submitted that the need for Sneakerboy to provide a larger bank guarantee under the lease for the new Sydney premises is relevant to the timing of the reinstatement of the bank guarantee. Sneakerboy has not taken that obligation into account.

12. The parties are at issue about whether Sneakerboy's financial circumstances caused by the COVID-19 pandemic are relevant to the timing of the reinstatement of the bank guarantee, and whether the financial information that is relevant is limited to Sneakerboy's own financial circumstances.

Relevant aspects of the COVID-19 regime

58. I will start by considering the COVID-19 regime in a general way before I deal with how the principles of that regime influence the terms on which Sneakerboy should be ordered to reinstate the bank guarantee (issue (1)), and the order that should be made in respect of the parties’ renegotiation of the terms of the Lease (issue (3)).

59. I have set out a brief analysis of the COVID-19 Legislation Amendment (Emergency Measures) Act 2020 (NSW), the National Cabinet Mandatory Code of Conduct: SME Commercial Leasing Principles during COVID-19 (the Code), and the Retail and Other Commercial Leases (COVID-19) Regulation 2020 (the COVID-19 Regulation) in the principal judgment at [36]-[51]. The COVID-19 Regulation was amended by the Retail and Other Commercial Leases (COVID-19) Amendment Regulation 2020, which was published on 3 July 2020 (the Amending Regulation). It is the combined effect of those instruments that I have referred to in the principal judgment and in this judgment as the COVID-19 regime.

60. The most direct source of the law responding to the COVID-19 pandemic in this State is the COVID-19 Regulation, as amended by the Amending Regulation. Clause 12 of the COVID-19 Regulation has the effect that it will be repealed on the day that is six months after the day on which it commenced. I understand that the commencement date was 24 April 2020, so the COVID-19 Regulation will cease to be in force on 24 October 2020, unless it is extended by a new regulation. I will consider the effect of the imminent repeal of the COVID-19 Regulation below.

61. I propose to decide the issues for determination on the assumption that the parties will comply with the COVID-19 regime before the COVID-19 Regulation is repealed. The imminence of the repeal date has the practical effect, given the time that the parties have lost, that the Court should be open to making orders that have the effect of compelling the parties to comply with their obligations under the COVID-19 regime while it is still in operation.

62. Clause 3 includes in the definition of "prescribed action": “…(b) exercising a right of re-entry to premises or land the subject of the commercial lease…(h) recovery of the whole or part of the security bond under the commercial lease…(k) termination of the commercial lease, (l) any other remedy otherwise available to a lessor against the lessee at common law or under the law of this State".

63. By clause 5, the COVID-19 Regulation “applies to the exercise or enforcement of rights under a commercial lease in relation to circumstances occurring during the prescribed period".

64. "Prescribed period" is defined in clause 3 as meaning “the period ending at the end of the day that is six months after the day on which this Regulation commences”.

65. In respect of actions that are prescribed actions under the COVID-19 Regulation, clause 5 does not have the effect that the prescribed actions are prohibited during the six-month period, but all such actions can be taken after that period. Rather, the regulation has the effect that, in relation to “circumstances occurring during the prescribed period" (emphasis added), the COVID-19 Regulation prohibits the prescribed actions whenever the rights are sought to be exercised or enforced. Put another way, the wording of clause 5 suggests an intention that the factor that is operative is when the circumstances occur. If they occur during the prescribed period, then the described actions cannot be taken during or after the period. The effectiveness of that intention may depend upon the consequences of the repeal of the COVID-19 Regulation under clause 12, if it is not extended.

66. Clause 6 contains prohibitions and restrictions relating to commercial leases. The effect of the clause, for a lessee in the position of Sneakerboy, is that a lessor must not take any prescribed action against the lessee on the grounds of a breach of the commercial lease during the prescribed period consisting of: (a) a failure to pay rent, (b) a failure to pay outgoings, or (c) the business operating under the lease not being open for business during the hours specified in the lease.

67. Consequently, the Lessors will be prohibited from terminating the Lease, or recovering the whole or part of any reinstated bank guarantee, for any breach of the Lease of the type referred to in clause 6 committed by Sneakerboy during the prescribed period. Although the Lessors will be free to call on the reinstated bank guarantee following any breach of the Lease committed by Sneakerboy after the end of the prescribed period, if the rent is reduced or deferred by operation of the COVID-19 scheme for a period that extends beyond the end of the prescribed period, there will be less likelihood of Sneakerboy committing a relevant breach, because Sneakerboy will only be required to pay a lower rent under the Lease.

68. Clause 6 does not prohibit the termination of the Lease, or the taking of any other prescribed action, for the failure of Sneakerboy to reinstate the bank guarantee, as required by clause 7.4 of the Assignment or the equivalent term in the Lease.

69. Clause 7 of the COVID-19 Regulation, however, imposes an obligation on the parties to commercial leases, if one party so requests, to renegotiate rent and other terms before taking a prescribed action. It provides:

7 Obligation to renegotiate rent and other terms of commercial leases before prescribed action

(1A)   This clause applies to a commercial lease to which an impacted lessee is a party (an impacted lease).

1. A lessor under an impacted lease must not take or continue any prescribed action against the impacted lessee concerned on grounds of a breach of the impacted lease consisting of a failure to pay rent during the prescribed period unless the lessor has complied with this clause.

2. Any party to an impacted lease may request the other parties to renegotiate the rent payable under, and other terms of, the impacted lease.

3. A party to an impacted lease must, if requested, renegotiate in good faith the rent payable under, and other terms of, the impacted lease.

(3A)   An impacted lessee must give the lessor the following in respect of the impacted lease—

(a)   a statement to the effect that the lessee is an impacted lessee,

(b)   evidence that the lessee is an impacted lessee.

(3B)   If the impacted lessee does not comply with subclause (3A), the lessor is taken to have complied with this clause.

1. The parties are to renegotiate the rent payable under, and other terms of, the impacted lease having regard to—

(a)   the economic impacts of the COVID-19 pandemic, and

(b)   the leasing principles set out in the National Code of Conduct.

70. Clauses (3A) and (3B) were inserted by the Amending Regulation and became effective on 3 July 2020.

71. An effect of this clause is that Sneakerboy will have a right, under the reinstated Lease, to request the Lessors to renegotiate the rent and other terms of the Lease. Following a request of that nature, the Lessors could not, during the prescribed period, take or continue any prescribed action unless the Lessors had complied with clause 7. The need for these proceedings for relief against forfeiture will delay Sneakerboy’s ability to exercise its rights under clause 7. As the legal effect of the relief against forfeiture will be to retrospectively reinstate the Lease, the Court may be required to consider the notional operation of the COVID-19 regime, following the termination of the Lease, as part of the exercise of its discretion to impose conditions on the relief against forfeiture.

72. Both parties will be, and would have been if the Lease had not been terminated, required to engage in the renegotiation in good faith. In doing so, the parties must have regard to the economic impacts of the COVID-19 pandemic and the leasing principles set out in the Code. The requirement in clause 7(4)(a) that the parties must have regard in good faith to the economic impacts of the COVID-19 pandemic is quite general, and may extend beyond even the very liberal requirements of the Code.

73. Leasing principle 3 in the Code would require the Lessors to offer Sneakerboy a proportionate reduction in rent payable in the form of waivers and deferrals. The aggregate of waivers and deferrals may be up to 100% of the ordinary rent payable. The reduction must be based on "the reduction in the tenant's trade during the COVID-19 pandemic period and a subsequent reasonable recovery period".

74. The period of the reduction is therefore not tied to the period in which the COVID-19 pandemic affects the tenant's trade, but must extend to a subsequent reasonable recovery period.

75. Leasing principle 4 requires that rental waivers must constitute not less than 50% of the total reduction in rent.

76. The effect of leasing principle 5 is that rental deferrals must be amortised over the balance of the lease term or for a period of no less than 24 months, whichever is the greater.

77. If the parties do not reach agreement as a result of the renegotiation process, whether or not the failure to agree was caused by one or both parties not acting in good faith, the dispute resolution process in Part 8 of the Retail Leases Act 1994 (NSW) (Retail Leases Act) would have applied by force of clause 8.

78. It is to be noted that the COVID-19 Regulation made the clauses that I have considered above under the Retail Leases Act. It also made an amendment to the Conveyancing (General) Regulation 2018 (NSW), which introduced Schedule 5 Commercial leases – COVID-19 pandemic special provisions (the Conveyancing COVID-19 Regulation). Those special provisions have substantially the same effect as the clauses of the regulation made under the Retail Leases Act. They apply to commercial leases that are not retail leases. As I understand the parties’ positions, they accept that the dispute in relation to the Lease in this case is covered by the regulations made under the Retail Leases Act. There is no suggestion that the application of the different regulations would lead to different results.

79. It is not entirely clear what is to happen if the parties to a lease to which the COVID-19 regime applies do not succeed in renegotiating the lease, or a party refuses to enter into the renegotiation, or does not do so in good faith. Clause 8(1) of the COVID-19 Regulation clearly states that Part 8 of the Retail Leases Act extends to an impacted commercial lease dispute, as if it were a retail tenancy dispute within the meaning of that part.

80. Clause 8(2) defines "impacted commercial lease dispute" as meaning any dispute concerning the liabilities or obligations under a commercial lease which concern circumstances occurring during the prescribed period "and includes a dispute regarding a renegotiation (or a failure to take part in a renegotiation) of rent payable under the commercial lease under clause 7".

81. This inclusive definition, which only refers to disputes concerning "rent payable" does not, in my view, exclude from impacted commercial lease disputes renegotiation of "other terms of the commercial lease" required by clause 7(2) and (3).

82. Section 66(1) of the Retail Leases Act permits any party to an impacted commercial lease dispute to refer the dispute to the Registrar of Retail Tenancy Disputes (the Registrar) for mediation of the dispute. Section 68 has the effect that the dispute "may not be the subject of proceedings before any court unless and until the Registrar has certified in writing that mediation under this Part has failed to resolve the dispute or matter or the court is otherwise satisfied that mediation under this Part is unlikely to resolve the dispute or matter". That section does not apply to proceedings before a court for an order in the nature of an injunction: s 68(3).

83. Division 3 of Part 8 of the Retail Leases Act vests jurisdiction in the NSW Civil and Administrative Tribunal (the Tribunal) to resolve certain retail tenancy claims. The meaning of "retail tenancy claim" is set out in s 70, by means of a list of claims "in connection with a liability or obligation with which a retail tenancy dispute is concerned". I will not set out the list of claims, but it may be observed that the consequences of an unsuccessful renegotiation under clause 7 of the COVID-19 Regulation, or the failure of parties to participate or to participate in good faith, do not fit neatly into the claims listed. Perhaps the consequences may fit into: "(ii) a claim for relief from payment of a specified sum of money"; or "(viii) a claim for the rectification of the lease". Given the technical meaning of rectification in equity, that concept would have to be considerably stretched by the Tribunal to encompass the compulsory renegotiation of the terms of a commercial lease in the manner required by clause 7 of the COVID-19 Regulation.

84. Section 72AB of the Retail Leases Act sets out the power of the Tribunal to order rectification of a lease in a manner that is generally consistent with the concept of rectification in equity, insofar as the power concerns the correction of an error or omission, or giving effect to the intention of the parties when the lease was entered into. Consequently, the Tribunal’s power to rectify a lease will not extend to correcting a failed renegotiation under clause 7 of the COVID-19 Regulation.

85. The powers of the Tribunal relating to retail tenancy claims are set out in s 72 of the Retail Leases Act. The powers effectively mirror the description of the individual types of retail tenancy claim in s 70, with the result that it is not clear that the Tribunal is given power to effectively resolve disputes concerning the failure of the renegotiation process required by clause 7 of the COVID-19 Regulation.

70. Sections 75 to 76A of the Retail Leases Act contain provisions for the removal of retail tenancy disputes from courts to the Tribunal, what happens when there is a jurisdictional overlap between a court and the Tribunal, and the removal of proceedings instituted in the Tribunal to the Supreme Court.

71. It is not necessary for the resolution of the present dispute for the Court to engage in a comprehensive analysis of the consequences of clause 8 of the COVID-19 Regulation, insofar as it has the effect that a dispute that arises out of the failure of a renegotiation conducted under clause 7 is included in the dispute resolution Part of the Retail Leases Act. As I have said, the effect of clause 8 is not entirely clear.

72. It is still an issue that requires some consideration however, as the determination of the conditions that the Court should impose when making an order for relief against forfeiture of a lease may be dependent on the forecast that this Court is able to make as to what will happen when the parties to a lease respond to a request for a renegotiation made by a party under clause 7(2) of the COVID-19 Regulation for the renegotiation of the rent payable under, or any other terms of, the lease.

73. The following may be said. First, it is for the parties in the first instance to comply with the obligations imposed upon them by clause 7 of the COVID-19 Regulation. The Court has no power to decide an appropriate outcome of the renegotiation, before the parties have had the opportunity to conduct the renegotiation themselves. The fact that the Court may be required, as a practical matter, to contemplate the possible outcome of a renegotiation that conforms to the requirements of clause 7, for the purpose of making appropriate orders for relief against forfeiture of a lease, do not empower the Court to determine the outcome of the renegotiation on the run, as it were. It seems at least to be clear that, if the renegotiation required by clause 7 fails, a party has a right to refer the dispute to mediation by the Registrar under the Retail Leases Act, and proceedings cannot be commenced in a court until the Registrar has certified that the mediation has failed, or the court is otherwise satisfied that the mediation it is unlikely to resolve the dispute. It is at least doubtful that the Tribunal has the necessary powers to resolve a dispute arising out of a failed renegotiation, even though it is possible that the drafters of clause 8 of the COVID-19 Regulation intended that disputes could be resolved in the Tribunal.

74. It is not necessary for the Court to decide now the circumstances in which this or any other Court might have jurisdiction to resolve any dispute arising out of a failed renegotiation under clause 7 of the COVID-19 Regulation. This Court is not given any specific power to do so, and it does not fit comfortably within this Court's historical jurisdiction that it be required remake contracts on the basis of commercial considerations, although it must be acknowledged that it may do so to some extent under the Contracts Review Act 1980 (NSW). How this problem should be resolved must be left for the future when a case comes before the Court that requires its resolution.

75. A curious aspect of the relationship between the Code and the COVID-19 Regulation is that the Code, under the heading “Binding Mediation”, provides: “Where landlords and tenants cannot reach agreement on leasing arrangements (as a direct result of the COVID-19 pandemic), the matter should be referred and subjected (by either party) to applicable state or territory retail/commercial leasing dispute resolution processes for binding mediation, including Small Business Commissioners/Champions/Ombudsman where applicable” (emphasis added). The COVID-19 regime in New South Wales does not provide for binding mediation. That is also true for the Conveyancing COVID-19 Regulation, as clause 6 thereof only provides: “Lessor must not do any one or more of the following unless and until the Small Business Commissioner has certified in writing that mediation offered to be conducted by the Small Business Commissioner has failed to resolve the dispute and given reasons for the failure…” (emphasis added). Generally, it is not clear how failures in the required renegotiation process are to be resolved.

76. The fact sheet published by Service NSW called “NSW implementation of the National Code of Conduct for Commercial Leases” confirms this conclusion. It includes the following statement:

…

The mediator cannot impose any outcome but, if a mediation is successful, parties can enter a binding deed.

If commercial landlords breach their obligations under the NSW Regulation, the tenant must seek mediation in the first instance by contacting Service NSW, and then through the NSW Small Business Commission.

Where the landlord and tenant are unable to reach an agreement through the NSW Small Business Commission, the parties will be able to pursue action through the NSW Civil and Administrative Tribunal (NCAT), or the civil courts.

For urgent matters involving a threatened or actual eviction, interim arrangements can be sought through NCAT or the courts.

93. Service NSW is focusing on the effect of the Conveyancing COVID-19 Regulation in this fact sheet. It is not very helpful in identifying the powers of the Tribunal or the courts in respect of failed renegotiations.

Relevance of the COVID-19 regime to relief against forfeiture

94. I return, therefore, to a consideration of what this Court should do in relation to the reinstatement of the bank guarantee in connection with the making of an order for relief against forfeiture of the Lease.

95. Clause 9 of the COVID-19 Regulation provides:

9 Tribunal and court consideration of National Code of Conduct leasing principles

The Tribunal and any court, when considering whether to make a decision or order relating to any of the following, is to have regard to the leasing principles set out in the National Code of Conduct—

(a)   the recovery of possession of premises or land from a lessee,

(b)   the termination of a commercial lease by a lessor,

(c)   the exercise or enforcement of another right of a lessor of premises or land.

96. The decision that the Court must now make does not neatly fall into any of the categories of action set out in pars (a) to (c) of clause 9.

97. Nonetheless, in my view, it will be proper for the Court to have regard to the leasing principles set out in the Code, either on the basis of a liberal interpretation of clause 9, or on the basis that it is proper for the Court, having regard to clause 7(4)(b) of the COVID-19 Regulation, to have regard to the leasing principles set out in the Code wherever a decision that the Court is required to make makes the leasing principles relevant.

98. Clause 11 of the COVID-19 Regulation provides:

11 Equity and law preserved

Nothing in this Regulation excludes the rules of equity and of common law from applying to the determination of a dispute concerning—

(a)   the recovery of possession of premises or land from a lessee, or

(b)   the termination of a commercial lease by a lessor, or

(c)   the exercise or enforcement of another right of a lessor of premises or land.

99. The interrelationship between clauses 9 and 11 is not entirely clear. Clause 9 requires the Court to have regard to the leasing principles in the Code, but clause 11 preserves the rules of equity and of common law in the determination of a dispute concerning the exercise or enforcement of any right of the lessor of premises, which arguably would include the contractual right of the Lessors in this case to require Sneakerboy to replace the bank guarantee in full.

100. Any possible inconsistency in the operation of clauses 9 and 11 of the COVID-19 Regulation would be resolved if the rules of equity preserved by clause 11 vest in the Court, when considering an order relieving against forfeiture of a lease, a discretion that extends to making the order conditional on arrangements that give proper effect to the leasing principles set out in the Code.

101. The learned editors of Meagher, Gummow and Lehane’s Equity: Doctrines & Remedies (5th ed, 2015, LexisNexis Butterworths), at [18-330], make the following observations concerning a case where a party seeks relief from forfeiture on condition that a liability contained in the lease not be recreated (footnotes omitted):

… Controversy may arise where a party seeks relief on condition that a liability to which the plaintiff was subject when the forfeiture occurred (or to which the plaintiff would have become subject had the forfeiture not occurred) not be recreated. In equity, the ordinary relief afforded to a lessee is a re-grant of the lease on the same terms, except that the newly executed lease is for the remaining term of the lease rather than the full term. In Anon, it was said that the Court might order that 'any unreasonable covenants' might be omitted from the new lease. Allowing for shifts of meaning since 1690, this would appear to mean that, say, a term whose enforcement would necessarily be unconscionable by Commonwealth Bank of Australia Ltd v Amadio standards could be omitted, provided that the enforcement of the other terms would not be so offensive. Such a modification accords with principle: a broader variation of terms merely 'unreasonable' in an everyday sense does not. Although Lords Neuberger and Sumption in Cukurova Finance International Ltd v Alfa Telecom Turkey Ltd generally denied any equitable discretion to alter the terms of the bargain upon the grant of relief, they allowed that a discretion exists 'to impose more onerous terms than before on a person (whether lessee or mortgage) seeking equitable relief' from forfeiture or foreclosure. Their allowance of this seems curious, given the various rules in the law against imposing contractual obligations on those who do not voluntarily contract. Although their Lordships thought the plaintiff would never be relieved of an obligation owed under the original contract, equitable principle lies in between. It is not possible to state exhaustively the extent of equity's power to grant relief on terms that alter the parties' bargain. But it is clearly quite narrow. Alterations of the lease or mortgage, however, will tend to be uncontroversial where a term needs to be deleted or written in, in order to give effect to the parties' original intentions for…

102. I respectfully agree with the observations made by the learned editors that, although the power of equity to order relief against forfeiture of a lease on terms less onerous than the terms actually embodied in the lease is narrow, it does exist. The Court does have a discretion, and the fact that historically it has almost invariably been exercised by including all of the original terms in the new lease does not confine the Court's discretion. In a case such as the present, where the COVID-19 Regulation would have entitled Sneakerboy to request a renegotiation of the Lease in respect of the rent payable and the circumstances in which the bank guarantee will be restored, the Court is not obliged to impose a condition that requires Sneakerboy to reinstate the bank guarantee in the precise manner required by the Lease. The Court has the power to impose conditions that will be expected to have the result that the renewed Lease will operate conformably with the proper implementation of the COVID-19 regime.

Effect of relevant aspects of the COVID-19 regime

The COVID-19 pandemic period – 1 April 2020 rent and outgoings

103. Leasing principle 3 requires landlords to offer tenants proportionate reductions in rent "based on the reduction in the tenant's trade during the COVID-19 pandemic period and a subsequent reasonable recovery period".

104. The only definition of "COVID-19 pandemic period" is found in the statement of the purpose of the Code in the following terms: "as defined by the period during which the JobKeeper program is operational". According to the Australian Government Economic Response to the Coronavirus Fact Sheet JobKeeper Payment – Frequently Asked Questions published on the internet, the JobKeeper Payment will be available from 30 March 2020 until 27 September 2020. Putting aside the recent extension of the JobKeeper Payment, this at least means that the COVID-19 pandemic period commenced on 1 April 2020.

105. The result is, in my view, that the instalment of rent and outgoings due under the Lease on 1 April 2020, which was payable in advance, should not be treated as being a vested entitlement of the Lessors before the commencement of operation of the COVID-19 regime. Even though the COVID-19 Regulation came into effect at a later date, its terms, insofar as they required the application of the leasing principles, had retrospective effect to 1 April 2020 in relation to rent and outgoings for the period from that date.

106. The evidence at the hearing established that Sneakerboy had begun to feel the effect of the COVID-19 pandemic in February 2020, and that it was in the process of closing its retail store at the Premises in the period 23 to 25 March 2020: [20]-[29].

107. Accordingly, the Lessors are not entitled to treat the $30,156.76 that fell due on 1 April 2020 as a vested right not subject to reduction by the COVID-19 regime.

Entitlement of the Lessors to a share of outgoings

108. Although clause 7(2) of the COVID-19 Regulation permits a lessee to request the lessor to renegotiate any terms of the lease, Sneakerboy has not submitted that the Court should take into account the possibility that the terms of the Lease requiring the payment of a share of outgoings would be renegotiated.

109. Leasing principle 8 provides: "Landlords should where appropriate seek to waive recovery of any other expense (or outgoing payable) by a tenant, under lease terms, during the period the tenant is not able to trade. Landlords reserve the right to reduce services as required in such circumstances."

110. Leasing principle 8 of the Code only requires landlords to waive recovery of outgoings during the period the lessee is not able to trade. Sneakerboy’s Financial Controller gave evidence that, if the Lease had not been terminated, Sneakerboy would have reopened its shop in the Premises between 21 and 27 May 2020. It is likely that the renegotiation would have concluded after Sneakerboy had reopened the shop, so the Lessors would have been entitled to receive the share of outgoings payable under the Lease from 1 June 2020 onwards.

111. The evidence does not disclose whether the outgoings incurred by the Lessors were decreased to any extent because Sneakerboy and other tenants ceased to trade. I therefore consider that it is in this case appropriate to accept that Sneakerboy’s share of monthly outgoings would have been payable for April and May 2020 as well, notwithstanding that the Premises would have been shut. The monthly amount is only $1,744.87 inclusive of GST, and Sneakerboy did not provide any submissions as to why some lesser amount would have been payable.

Meaning of “tenant’s trade”

112. The issue of whether the phrase "tenant's trade" in leasing principle 3 refers to the whole of the tenant's turnover, or only the turnover at the premises the subject of the particular lease, does not in my view always require the same answer. The overarching principles stated in the Code include: "It is intended that landlords will agree tailored, bespoke and appropriate temporary arrangements for each SME tenant, taking into account their particular circumstances on a case-by-case basis". The overarching principles include that arrangements "will take into account the impact of the COVID-19 pandemic on the tenant with specific regard to its revenue, expenses and profitability". They also include: "All premises are different, as are their commercial arrangements; it is therefore not possible to form a collective industry position".

113. However, in my view it will generally be the case that the phrase "tenant's trade" in leasing principle 3 will require a consideration of the whole of the particular tenant's turnover, as well as costs and profit, from all locations at which the tenant conducts retail businesses.

114. Clause 4 of the COVID-19 Regulation contains a definition of "impacted lessee". In relation to the turnover qualification in the 2018-2019 financial year contained in rule 4(1)(b), the rule deals with: (i) franchisees, (ii) lessees that are corporations that are members of a group, and (iii) all other cases. Where the lessee is a franchisee, the relevant turnover is the turnover of the business conducted at the premises. That focuses on the individual premises, but that may be on the assumption that franchise agreements relate to individual premises. Where the lessee is a corporation that is a member of a group, it is the turnover of the group that is relevant. However, importantly, the clause provides: "(iii) in any other case – the turnover of the business conducted by the lessee" (emphasis added).

115. While this aspect of the definition of impacted lessee is concerned with the overall turnover qualification, rather than the turnover relevant to rent reductions, and even though there is an element of ambiguity about it, I consider that the expression "the business conducted by the lessee" is more likely to refer to the whole of its business than the business conducted at the particular premises the subject of the lease.

116. This conclusion is reinforced by clause 4(2) of the COVID-19 Regulation, which provides that the: "turnover of the business includes any turnover derived from internet sales of goods or services". Part of Sneakerboy's business included internet sales: [28]. As retailers are likely to conduct their internet businesses from a single location that may be remote from most of its retail stores, the purpose of the Code is more likely to be achieved if "tenant's trade" encompasses the whole of its turnover from different retail stores and internet sales.

117. This conclusion is also reinforced by the reference in leasing principle 4 to “compromising the tenant's capacity to fulfil their ongoing obligations under the lease agreement", as well as those parts of the overarching principles as make relevant the need "to ensure business continuity", the need to have "specific regard to [the tenant's] revenue, expenses and profitability"; and also the consideration of whether the "tenant has suffered financial hardship".

118. These aspects of the Code, taken as a whole, focus on the general circumstances of the tenant and not the financial consequences of the operation of the business at the particular premises the subject of the relevant lease.

Meaning of “tenant’s trade” in this case

119. In this case, in my view, the appropriate turnover of Sneakerboy to be taken into account as "tenant's trade" for the purposes of leasing principle 3 is the whole of Sneakerboy's turnover from its retail premises and internet business. Not only will that accord with what I consider to be the general position, but in this case it will avoid the outcome being skewed by the duration of Sneakerboy's dispossession of the Premises by reason of the termination of the Lease and the pendency of these proceedings. Sneakerboy's submissions ask the Court to treat Sneakerboy's turnover at the Premises as being nil for the whole of the period from the termination of the Lease to Sneakerboy regaining possession. Much of that time has been lost by the time taken by Sneakerboy to commence and prosecute these proceedings for relief against forfeiture.

120. I consider that, if the notional renegotiation required by clause 7(3) of the COVID-19 Regulation had occurred "as soon as practicable” after the commencement of the COVID-19 regulation on 24 April 2020, and been conducted in a good-faith manner, it would have been commenced in May 2020.

121. However, this conclusion masks an important practical problem that may arise when parties to leases attempt a renegotiation in accordance with the Code. Both the expression "the reduction in the tenant's trade during the COVID-19 pandemic period" in leasing principle 3, and the expression "Cash flow relief in proportion to the loss of turnover they have experienced from the COVID-19 crisis” in the examples in Appendix 1 to the Code, contain no explanation of how the appropriate proportional reduction is to be calculated. The examples given include "a 60% loss in turnover". That raises the question: how is the loss in turnover to be determined with reasonable accuracy as a proportion of past turnover in a timeframe consistent with the requirement that the renegotiation be completed as soon as practicable?

119. The process of renegotiation contemplated by the Code may not be problematic in cases where the turnover of the tenant’s business is regular and consistent, so that a substantial decline in turnover following the onset of the COVID-19 pandemic may reasonably be accepted as being representative of the tenant’s likely turnover for the period of the pandemic and a reasonable recovery period thereafter. The problem may be acute in the case of seasonal businesses, which I expect to be true for most clothing and footwear retailers. The exercise may require a comparison between the turnover for a month or so in 2020 with a longer trading period before the onset of the COVID-19 pandemic. If the seasonality of the business is sufficiently regular, it may be appropriate to compare the turnover for a month or so before the commencement of the renegotiation with the equivalent period in the previous year. These difficulties demonstrate why the solution to the consequences of the COVID-19 pandemic has required good faith commercial negotiations by the parties to the lease.

Timing and nature of renegotiation

123. Importantly, the chapeau to the leasing principles provides:

In negotiating and enacting appropriate temporary arrangements under this Code, the following leasing principles should be applied as soon as practicable on a case-by-case basis… [Emphasis added]

124. This is an important consideration because, as is notorious, government imposed social distancing policies and partial lockdowns had a dramatic and relatively immediate effect on retail trading operations, including, in many cases, businesses not being open for business (as is recognised by clause 6(1)(c) of the COVID-19 Regulation). The reference to "as soon as practicable" clearly assumes that the renegotiation process would take place quickly. The likelihood is that, in many cases, the effect of the COVID-19 pandemic would be relatively obvious at the time of negotiations conducted as soon as practicable after the commencement of the COVID-19 Regulation.

125. Clause 7(2) of the COVID-19 Regulation permits any party to a lease to request the other parties to renegotiate the rent payable under, and other terms of, the lease. That clause would permit multiple requests, where the circumstances warranted it, consistently with the obligation in clause 7(3) that renegotiations be conducted in good faith. However, as a practical matter, the COVID-19 regime contemplates that the usual case is that there will be a single renegotiation for the purpose of adjusting the rent and other terms of a commercial lease during the COVID-19 pandemic period and a reasonable recovery period thereafter. That usual case will involve a renegotiation on the basis of the financial circumstances of the tenant and the landlord as known at a time that is as soon as practicable after the commencement of the COVID-19 Regulation. The financial information available to make necessary comparisons in turnover may be for a period as little as a month, depending upon the adequacy of that information for the purpose of the renegotiation.

The reasonable recovery period

126. The effect of the part of leasing principle 3 that provides for a proportionate reduction in rent payable "during the COVID-19 pandemic period and a subsequent reasonable recovery period" (emphasis added) has the effect that rental waivers and deferrals that are required to be negotiated could be in effect not only during the COVID-19 pandemic period, but in addition for a subsequent reasonable recovery period.

127. The Lessors' submission that the COVID-19 Regulation will automatically be repealed on 24 October 2020, and thereafter the rent will necessarily return to the amount payable under the Lease is not correct. If clause 7(3) of the COVID-19 Regulation is complied with by the parties while the regulation is in force, then any renegotiated terms of the lease will take effect even after the regulatory requirement for the renegotiation is repealed.

128. However, the effect of clause 12 of the COVID-19 Regulation, in actually repealing the regulation on the day that is six months after the day on which it commenced, may have the effect that any renegotiations that are not completed by the date of repeal may be affected by the cessation of the regulatory requirement that the renegotiation occur. That may give rise to questions about whether enforceable rights are created during the period when the COVID-19 Regulation is in force, by reason of breaches by parties to leases during that period, which remain enforceable even after the repeal of the regulation.

129. That consideration provides a ground for the Court to require the parties to engage in the renegotiation as soon as possible, as part of the conditions to the relief against forfeiture of the Lease.

Example renegotiations of rent

130. In respect of the observation made above that the Code contemplates a renegotiation of the rent and other terms as soon as practicable, if requested by a party to the lease, the examples set out in Appendix 1 to the Code provide some insight. The examples take the form of an assumed percentage loss in turnover leading to the same percentage of rent relief, with a minimum of half of the rent being waived and the balance being deferred and to be recouped by the landlord over at least 24 months.

131. The examples in Appendix 1 appear to assume that the lessee’s proportionate reduction in turnover will be objectively clear in a timeframe consistent with the renegotiation being as soon as practicable. What is practicable is an elastic proposition. In cases where the lessee’s business is seasonal or variable for some other reason, there may be reasonable scope for dispute about the magnitude of the reduction in the lessee’s turnover, and trading figures for some months may be required before a reliable trend can be identified. I will return to this issue below when I consider the proportionate reduction in Sneakerboy’s turnover.

Reinstatement of the bank guarantee

Approach agreed by the parties

132. As noted, the parties are in agreement that the Court is entitled to take into account the results of a notional renegotiation of the rent that would have been required by clause 7(3) of the COVID-19 Regulation if the Lease had not been terminated on 25 March 2020.

133. If the Lease had not been terminated, then clause 7(1) would have precluded the Lessors from drawing down on the bank guarantee for any amount greater than the rent outstanding as at 25 March 2020, pending the conclusion of the renegotiation.

134. Sneakerboy accepts that the Lessors were entitled to draw down $65,084.56 for unpaid rent. It also accepts that the Lessors are entitled to retain $65,271.96 as security for its legal costs and the damage that required repair, pending the determination of the amount to which it is entitled. The total is $130,356.52. The amount of the bank guarantee of $253,668.90 that the Lessors had in hand at 31 March 2020 was therefore $123,312 (rounded).

Assessment of notional renegotiated rent and outgoings

135. The primary issue is the estimation of the reduction in rent that the parties would have agreed, the split of the reduced rent between rent that is waived and rent that is deferred, and the length of the amortisation period.

136. In the discussion that follows I do not propose to refer to the precise trading figures included in Sneakerboy’s evidence. Given that the effects of the COVID-19 pandemic have been almost universally damaging to businesses, I see no reason to publicise Sneakerboy’s confidential financial information. That will not be necessary to explain the Court’s reasons, as the COVID-19 regime requires proportional reductions in rent, which depends upon relative changes between trading figures before and after the advent of the pandemic.

137. It is necessary for the Court to deal with what appears to be an inconsistency in Sneakerboy’s evidence, which the Lessors relied upon in their submissions. In par 36 of his 17 July 2020 affidavit, Sneakerboy’s Financial Controller stated: “Based on my calculations, Sneakerboy has seen a reduction of approximately 60% of sales between March 2020 and the date of this affidavit”. In the more recent affidavit of its solicitor, Sneakerboy gave evidence of reductions in turnover for the months of April to July 2020 compared to the corresponding months of 2019, based upon Sneakerboy’s daily record of takings, ranging between 95% and 72%.

138. The Financial Controller did not in his 17 July 2020 affidavit explain the calculation of the 60% reduction in sales. He included in the exhibit to his affidavit Sneakerboy’s activity statements for each month from January to December 2019, and then simply expressed the conclusion set out in the preceding paragraph. The reduction in Sneakerboy’s turnover between the months of March and June in 2020 is probably, in any event, not the appropriate metric for the estimation of the proportionate fall in Sneakerboy’s turnover on an annual basis, which is probably the more correct basis for assessing an appropriate proportional reduction in rent.

139. I propose to act upon the basis that the financial information that Sneakerboy’s solicitor annexed to his affidavit permits a reasonably accurate comparison between Sneakerboy’s total turnover for the months of April to July 2019 and April to July 2020.

140. As suggested above, acting “as soon as practicable” as required by the leasing principles in the Code, the parties could be expected to have begun the renegotiation in May 2020 after Sneakerboy’s April 2020 turnover figures were available. The Lessors would have learned that all five of Sneakerboy’s stores were closed in April, and it only made a relatively small amount of online sales. An assessment of what the Lessors might then have done in good faith should take into account that the Lessors were able to defer concluding the renegotiation in order to get more representative turnover figures from Sneakerboy, because the Lessors could decide on their own account to accept the short-term non-payment of rent by Sneakerboy and the Lessor’s incapacity to terminate the Lease because of clause 6(1) of the COVID-19 Regulation. It is likely that the Lessors would have declined to agree a proportionate reduction in rent based upon only one month’s figures when all of Sneakerboy’s stores were closed. Acting commercially, the Lessors would have required Sneakerboy to disclose its intention to reopen its stores as soon as possible. If the Lessors had taken that course, they would have discovered that, although the April turnover was 95% less than for April 2019, the comparisons for May to July 2020 with the corresponding months in the previous year were reductions of 84%, 72% and 73% respectively. The amount of information that the Lessors learned would depend upon their judgment as to how long to wait in circumstances where they may not have been receiving rent from Sneakerboy.

141. Sneakerboy’s submissions in par 14, on the assumption that the whole of its turnover was relevant, proceeded upon the basis that there would be a separate proportionate reduction for each month between April and July 2020 of the base rent of $30,156.70 inclusive of GST to amounts of 5%, 16%, 28% and 27% of the base monthly rent respectively. Calculated on that basis, the total rent for the four months would be $22,919.18. As Sneakerboy accepted that the reduced rent should be split equally between the rent that was waived and the rent that was deferred, Sneakerboy calculated that rent of $48,853.95 would be waived and the same amount would be deferred.

142. The Lessors in their submissions in reply at par 12 accepted this calculation but for the following differences. They excluded April 2020 because of their argument that they were entitled to retain the whole of the rent payable on 1 April 2020. They derived different figures than did Sneakerboy because they did a calculation, as explained above, based upon a 60% reduction in turnover, and then averaged the turnover figures calculated on that basis with the figures calculated by Sneakerboy. I have rejected both of those variations from Sneakerboy’s calculations. The Lessors then added $5,234.61 for three month’s outgoings.

143. The COVID-19 regime does not contemplate that the rent payable under retail leases will be proportionately reduced on the basis of separate monthly calculations comparing turnover with the equivalent month in the preceding year. It contemplates a single renegotiation for the COVID-19 pandemic period and a subsequent reasonable recovery period. However, the COVID-19 regime does not prevent the parties to a commercial lease from agreeing some other formula, or from initiating more than one renegotiation.

144. The Court cannot rationally determine a single notional date when the parties would have completed the renegotiation of the terms of the Lease. As the parties have in fact accepted a process that has taken into account turnover comparisons for the four months, it will be reasonable for the Court also to accept that approach. Upon a consideration of the different monthly proportionate reductions set out above, I propose to adopt 75% as the notional reduction that would have been agreed between the parties, to be applied for the COVID-19 pandemic period and a subsequent reasonable recovery period.

145. Although it is now generally known that the JobKeeper scheme has been extended by the Australian Government on different terms to those that originally applied, the Court must proceed upon the basis that the COVID-19 Regulation will be repealed on 24 October 2020. The legal significance of the Code depends upon the force given to it by the COVID-19 Regulation. It is not now known whether the COVID-19 Regulation will be extended, and if so on what basis.

146. In line with the position accepted by the parties, I will adopt an equal split between the proportion of the rent waived and the proportion deferred. On that basis, the rent payable each month from 1 April 2020 to 31 October 2020 will be $30,156.76 (inclusive of GST) x 25% = $7,540 (rounded slightly). In addition, a $1,744.87 share of outgoings will be payable. The total notional monthly payment will be $9,285 (also rounded).

147. Each month, $11,308 will notionally be waived and $11,309 will be deferred.

148. I will accept Sneakerboy’s submission that the subsequent reasonable recovery period should be no less than six months. That is all that Sneakerboy has asked for, and it does not seem to be a long time for Sneakerboy’s trade to recover after the COVID-19 pandemic period. On that basis, the recovery period will end on 30 April 2021.

149. Between 1 April 2020 and 30 April 2021, Sneakerboy will notionally be liable to pay the Lessors for rent and outgoings $9,285 x 13 = $120,705.

150. In addition, Sneakerboy will accumulate deferred rent of $11,309 x 13 = $147,000 (rounded). After 30 April 2021, Sneakerboy will be required to pay the Lessors that amount in equal monthly instalments over 24 months. The instalments will be an additional $6,125 per month.

Terms of the order for the reinstatement of the bank guarantee

151. Sneakerboy’s proposal for the reinstatement of the bank guarantee, assuming that “tenant’s trade” in leasing principle 3 includes all of Sneakerboy’s turnover, varied slightly to conform to these reasons, and with an appropriate adjustment in timing, is:

1. Sneakerboy would establish a bank guarantee in the amount of $65,000 in partial reinstatement of the bank guarantee by, say, 4 September 2020.

2. The Lessors would repay Sneakerboy within seven days of the Court making the orders the sum of $67,602. That amount is determined by deducting from the sum of $123,312 (see [134] above) that the Lessors had in hand at 31 March 2020, rent and outgoings for the six months between April and September 2020 at $9,285 per month giving a total of $55,710 (see [146] above).

3. Sneakerboy would within a further seven days partially reinstate the bank guarantee by the further amount of $67,602. As the Lessors are concerned about paying money to Sneakerboy, there is no reason why the Lessors should not pay the money directly to the Bank, after Sneakerboy has made appropriate arrangements. The amount of the partially reinstated bank guarantee would then be $132,602.

4. Sneakerboy would reinstate the full required bank guarantee of $253,668.90 by 31 March 2021, which would require Sneakerboy to fund a further $121,066.90 by that date.

152. If an order is made for the reinstatement of the bank guarantee generally in these terms, it will have the practical effect of compromising the positions adopted by the parties. As the notionally adjusted rent for the period 1 October 2020 to 31 March 2021 at $9,285 per month will be $55,710, the partially reinstated bank guarantee will provide a substantial security to the Lessors that is consistent with the reality of the COVID-19 regime.

153. Having regard to the evidence given by Sneakerboy concerning its financial position, and also taking into account the likely consequences of the lockdown of the city of Melbourne, where Sneakerboy’s three stores generate approximately 70% of its revenue, I consider that Sneakerboy’s proposal for the reinstatement of the bank guarantee, adjusted in the manner described above, is the most onerous condition of the order for relief against forfeiture that could reasonably be imposed on Sneakerboy.

154. While there is some force in the Lessors’ submission that Sneakerboy’s evidence is deficient in failing explicitly to establish that Sneakerboy’s shareholders and any related companies that may exist do not have assets sufficient to secure the reinstatement of the bank guarantee more quickly, I consider that the evidence demonstrates that the consequences of the COVID-19 pandemic have been so devastating that adherence to the COVID-19 regime justifies the Court in acting upon the evidence that has been given. I also consider that Sneakerboy’s arrangements concerning the provision of a bank guarantee in relation to the proposed new Sydney store are irrelevant. Sneakerboy undertook those arrangements on a proper commercial basis before the inception of the COVID-19 pandemic, and it is entitled to respond to the consequences of the pandemic in the best way it can.

155. This mechanism for the full reinstatement of the bank guarantee assumes that Sneakerboy in fact pays the notional adjusted monthly rent of $9,285 between 1 October 2020 and 31 March 2021.

Terms of the order for the renegotiation of the Lease

156. Sneakerboy proposed short minutes of order that would have the effect that the COVID-19 regime would actually be implemented by order of the Court. Sneakerboy’s proposed order 10 would have the effect of changing the terms of the Lease for the period to 31 July 2020 in accordance with this Court’s finding as to what the parties notionally would have agreed. Proposed orders 11 to 12 would provide for the period after 31 July 2020, on the assumption that rent would necessarily be paid monthly in arrears because of the necessity for the parties to know Sneakerboy’s turnover for each month, so that the amount payable for that month could be calculated by reference to the proportionate reduction in the turnover for that month compared to the same month 12 months earlier. The proposed orders are in terms that conform with the leasing principles in the Code.

157. There may be much to commend the approach suggested by Sneakerboy, as the monthly rent payments would be determined on a moving basis, rather than on a basis such as the fixed notional 75% reduction that I have assessed.

158. However, for the reasons that I have given above, the Court does not have jurisdiction to make orders varying the terms of commercial leases that are subject to the COVID-19 regime. It is for the parties to renegotiate the terms, and in the absence of agreement a dissatisfied party must refer the dispute to mediation by the Registrar. Thereafter, it may be that the Tribunal or the Court has some jurisdiction to resolve the dispute, but that is not a question that is in issue in these proceedings; and in any event, the course to be taken would depend upon presently unknown future circumstances.

156. The short minutes of order proposed by the Lessors simply includes an order that within seven days of the Court making the orders as a result of these reasons, the parties meet for the purpose of attempting to renegotiate in good faith the terms of the Lease pursuant to the COVID-19 Regulation. That is the only type of order that the Court can make in the present circumstances.

157. If the parties do not successfully renegotiate the Lease, the Lessors will not be able to terminate the reinstated Lease for non-payment of rent as long as clause 6 of the COVID-19 Regulation is in force. That regulation may be repealed on 24 October 2020, but the situation is clearly fluid and it may be extended by further regulation.

158. On the other hand, if the parties do renegotiate the rent payable under the reinstated Lease, Sneakerboy will thereby become bound to pay some accumulated amount of rent and outgoings from 1 April 2020 on a basis that may be different to that which I have been required notionally to assess in these reasons. Sneakerboy will be legally obliged to pay that accumulated amount of rent to the Lessors, even if the effect of the COVID-19 regulation is, while it is in force, that the Lessors cannot terminate the reinstated Lease or call upon the reinstated bank guarantee.

159. I have not lost sight of the fact that my reasons for determining the appropriate mechanism for the full reinstatement of the bank guarantee depend fundamentally on the notional renegotiation of the rent under the Lease by the parties. I will make order 5 proposed by the Lessors, to the effect that within seven days of the making of the Court’s orders the parties meet for the purpose of attempting to renegotiate in good faith the terms of the Lease pursuant to the terms of the COVID-19 Regulation.

160. If the renegotiation is successful, it may lead to a variation to the Lease that is different to the notional variation that the Court has been required to make in the course of these reasons. The attempt to renegotiate the Lease may not succeed. If the renegotiation fails, that may lead to mediation by the Registrar and possibly to proceedings in the Tribunal or some court. This Court cannot reliably forecast the outcome.

161. As a result of this uncertainty, the following considerations must be addressed.

162. First, the Court must actually make the order granting relief against forfeiture of the Lease as soon as possible, so that Sneakerboy can regain possession of the Premises and reopen its retail business. Any further delay in that order being made will only prolong the time when Sneakerboy has to pay the reduced rent without being able to trade.

163. Secondly, although I am satisfied that the mechanism for the reinstatement of the bank guarantee that I propose is logically sustainable for the reasons given above, the reality is that Sneakerboy has not had the opportunity to respond to the proposal that the Court makes. Given the commercial significance of the proposal, the Court should give the parties one more brief opportunity to respond and to propose the precise formulation of the order for the reinstatement of the bank guarantee. This opportunity must be limited in time and scope.

164. Thirdly, even though I have concluded that the Court does not have power, at least at this stage, to decide how the terms of the Lease should be varied, the reality is that the mechanism for the reinstatement of the bank guarantee that I have proposed will only be effective if Sneakerboy actually pays the reduced rent each month up to the time of reinstatement. That logically requires that there be an additional condition to the relief against forfeiture of the Lease that Sneakerboy pay to the Lessors $9,285 on the first day of each month between 1 October 2020 and 1 March 2021 on account of whatever rent obligations it may ultimately be determined it owes to the Lessors.

165. Fourthly, the orders that are made should include leave to the parties to relist the proceedings before me. It may be that different or other orders should be made to those that are now contemplated if it appears unlikely that the parties will successfully renegotiate the Lease before the COVID-19 Regulation is rescinded. If the parties do successfully renegotiate the Lease, that may be on a basis that is different from the notional renegotiation that I have determined in these reasons. That may justify some variation to the orders that will be made.

166. The orders should include case management directions for the determination of the basis upon which Sneakerboy should be ordered to pay the Lessors’ costs of the proceedings and whether it is entitled to retain the cost of the repairs.

167. The proceedings should be stood over for further directions on a date after 31 March 2021, given that the parties will be able to act upon the leave to relist the proceedings on an earlier date if necessary.

168. I propose to request the parties to submit short minutes of order to my Associate to give effect to these reasons. The scope for further disputation should now be narrow. I expect that counsel for the parties will take primary responsibility for the terms of the short minutes of order, in the hope professional comity between counsel is not dead.

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Decision last updated: 26 August 2020