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COVID-19 and lease extensions: more red tape

There’s good ‘practical advice’ here and it’s COVID-19 related. Leases have been extended to match up to negotiated rent deferral periods. But what about notices regarding ‘end of lease’? What happens to the requirements for both landlords and tenants regarding options? It’s a new situation; unprecedented.

The COVID retail lease regulations have created unforeseen problems that the industry is now starting to unravel. For instance, in varying degrees, the COVID regulations require landlords to offer lease extensions to tenants, to match up to negotiated rent deferral periods.

This is fine until you get tangled up in the other man-traps buried in the retail lease legislation.

In NSW, s 44 of the Retail Leases Act 1994 requires the lessor to give notice to the lessee of its intentions regarding the premises at the end of the term. The notice is to be given in the window between 12 months and six months before the end of the term. The legislation in Queensland is to the same effect.

If the lessor does not give the notice, the term of the lease is extended to the date six months after the lessor does give the notice, but only if the lessee requests the extension before the end of the term.

Victoria, unsurprisingly, has taken a bad idea and made it worse. In Victoria, under s 64 of the Retail Leases Act 2003, it is not necessary for the tenant to request the notice before the end of the term. The six-month obligation continues to rattle around indefinitely.

Pausing here, you could be forgiven for asking what purpose is served by wrapping this piece of nanny-state bureaucracy around the landlord’s neck?

I mean, if a tenant is not aware that its lease term is coming to an end, then no amount of paper-waving will assist.

All the enactment requires is that the landlord tells the tenant what it intends to do; re-lease or not. This is a conversation the tenant can have with the landlord at any time, without legislation dropping land-mines into the jungle.

All of which is pretty irritating nonsense. But the pandemic regulations add a cheeky twist.

If we assume that the landlord gives notice in accordance with the Act, say seven months before the end of the term, then the landlord has complied.

However, if the term is subsequently extended by a year, pursuant to the pandemic regulations, then at the same time, the landlord has not complied. The notice will have been given 19 months before the end of the term, outside the statutory window. You are damned if you do, and damned if you don’t.

The easy answer to this is to simply shrug the shoulders and say that the landlord just has to give a second notice during the new 12 to six month window that will shortly arrive.

But let’s put the shoe on the other foot for a moment. Imagine the lease contained an option for the tenant to renew, the option to be exercised in the window between 12 months and six months before the end of the term. Assume the tenant validly exercises the option, inside that window, and then negotiates an extension of the term by one year, pursuant to the pandemic regulations.

The tenant will have validly exercised the option, but will not have validly exercised the option at the same time.

If the tenant, having validly exercised the option before the extension, assumed it was not necessary to re-exercise the option during the new window period, it could find the landlord arguing that the option had not been validly exercised.

It would be a hard world that would deprive the tenant of its further term in those circumstances. And yet would the same hard world visit the s 64 consequences on a landlord if it overlooked serving its notice a second time?

Unfortunately, the better-safe-than-sorry approach means that landlords will need to buckle up and do some more pointless paper-waving. Lucky their arms are strong. It is an all too familiar exercise.