NSW Retail Property Market

NSW Retail Property Market

At the end of March the Prime Minister announced that the States and Territories will be implementing a six month moratorium on evictions for eligible retail tenants.

On 24 April, almost one month after Scott Morrison’s announcement, NSW adopted the Retail and Other Commercial Leases (COVID-19) Regulation 2020 (“the Regulation”), which is in force until 24 October 2020.

The regulation defines a commercial lease as a retail shop lease, excluding leases that commenced after 24 April 2020, a lease under the Agricultural Tenancies Act 1990 or a commercial lease within the meaning of Schedule 5 to the Conveyancing (General) Regulation 2018.

Extract from the Regulation:

“4   Meaning of “impacted lessee”

(1)  A lessee is an impacted lessee if—

(a)  the lessee qualifies for the jobkeeper scheme under sections 7 and 8 of the Coronavirus Economic Response Package (Payments and Benefits) Rules 2020 of the Commonwealth, and

(b)  the following turnover in the 2018–2019 financial year was less than $50 million—

(i)  if the lessee is a franchisee—the turnover of the business conducted at the premises or land concerned,

(ii)  if the lessee is a corporation that is a member of a group—the turnover of the group,

(iii)  in any other case—the turnover of the business conducted by the lessee.

(2)  To avoid doubt, in this clause, turnover of a business includes any turnover derived from internet sales of goods or services.

(3)  In this clause, corporations constitute a group if they are related bodies corporate within the meaning of the Corporations Act 2001 of the Commonwealth.”

Both the Federal and NSW State governments expect banks, lessors and lessees to reach agreement in good faith to reflect the current economic circumstances.

Banks are deferring loan repayments on non-residential mortgages for certain small businesses although during the Covid-19 Crisis (“the crisis”) many retail tenants have been unable or unwilling to pay all or part of their rent during the various stages of lockdowns. Tenants cannot be evicted for non-payment of rent if their business is approved for the ATO’s Jobkeeper program. Shops have been closing in higher volumes during the crisis. It will not be possible to recover any money from a significant number of the tenants that are walking away from tenancies mid-lease. It is a system that places the most pressure on smaller owners, some of whom were already not receiving any rent as a result of the financial hardship their tenants were facing as well as certain, often large retail operators refusing to pay rent, despite being capable of doing so.

“6   Prohibitions and restrictions relating to commercial leases

(1)  If a lessee is an impacted lessee, 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, or

(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.”

A summary of the Regulation’s definition of prescribed actions:

Seeking orders or commencing proceedings for any of the following:

(a)  eviction of the lessee from premises or land,

(b)  exercising a right of re-entry to premises or land,

(c)  recovery of the premises or land,

(d)  distraint of goods,

(e)  forfeiture,

(f)   damages,

(g)  requiring a payment of interest on, or a fee or charge related to, unpaid rent otherwise payable by a lessee,

(h)  recovery of the whole or part of a security bond,

(i)   performance of obligations by the lessee or any other person pursuant to a guarantee under the commercial lease,

(j)   possession,

(k)  termination of the commercial lease,

(l)   any other remedy otherwise available to a lessor against a lessee at common law or under the law of this State.

Retail shopping strips, local and neighbourhood shopping centres appear to have been hit harder than District and Regional Centres. It is taking longer to find new tenants for the increasing number of vacant shops and the low level of transactions is making it more challenging to keep track of the market rent for many retail properties as conditions continue to evolve.

The lockdown will cause a significant reduction in retail floor space in Sydney. Many retailers have adjusted to selling online during the crisis. Retailers will increasingly invest in online sales while seeking to reduce their rent expenses. The crisis has accelerated the shift towards online retailing.

Michael Wright

(c) Aspect Valuation Services

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