A luxury sneaker store, repeated breaches of a lease and the National Cabinet Mandatory Code of Conduct for the COVID-19 Pandemic are featured in this recent Supreme Court case.  Elizabeth McDonald, Principal of the Property team, examines the decision.

The Facts

Sneakerboy Retail Pty Ltd (Sneakerboy) leased a shop at 56-58 York St, Sydney (Premises) from Georges Properties Pty Ltd and Georges Investments Pty Ltd (together, Landlord).  Sneakerboy sold luxury sneakers and streetwear from the Premises.  The lease, which had been assigned to Sneakerboy, was for a term of ten years commencing on 1 August 2013.  

Sneakerboy was frequently behind in rent payments and the Landlord issued five formal breach notices to Sneakerboy between 3 May 2017 and 2 October 2019. 

Commencing February 2020, Sneakerboy experienced a sudden decline in revenue which it attributed to the COVID-19 pandemic.  On 12 March 2020, Sneakerboy advised the Landlord that it would pay the February rent in 3 parts over the following 3 weeks.

On 20 March 2020, the Federal Government placed mandatory restrictions on non-essential gatherings which impacted Sneakerboy by limiting the number of people who could be in the Premises at any one time.

On or about 23 March 2020, the director of Sneakerboy decided to temporarily cease trading from the Premises from 25 March 2020.  The director said that this decision was based on the risk to staff, the decline in trade (which he said had dropped about 85% from the same time in the previous year) and the government restrictions.  He instructed the store manager to remove all items of stock and relocate them to Sneakerboy’s warehouse.  He also decided to remove the IT equipment to undertake a technology refresh.

On 25 March 2020, the Landlord purported to terminate the Lease on the basis of Sneakerboy’s overdue rental payments and alleged abandonment of the Premises.  On 26 March 2020, the Landlord took steps to draw down on the bank guarantee provided by Sneakerboy under the lease.

The COVID-19 Leasing Principles

The Landlord’s purported termination of the lease occurred before the National Cabinet Mandatory Code of Conduct: SME Commercial Leasing Principles during COVID-19 was adopted on 7 April 2020 (National Code) and before the commencement of the Retail and Other Commercial Leases (COVID-19) Regulation 2020 (NSW) (COVID Regulation) (together, the COVID-19 Regime).  As a result, the Court was not required to implement the National Code, but Robb J noted that it may have significance in a general to whether the relief sought by Sneakerboy should be granted. 

For more information on the COVID-19 Regime, please read our previous article.

Attempts to Resolve the Dispute

From 5 May 2020, the parties attempted to resolve the dispute with a view to Sneakerboy recommencing trading from the Premises, but these attempts failed.

On 15 May 2020, the lawyers for Sneakerboy wrote to the Landlord to assert that the notice of termination was invalid and to purport to trigger Sneakerboy’s rights under the COVID Regulation.

The Court Case

Sneakerboy commenced proceedings against the Landlord for relief against forfeiture.  Three key issues considered by the Court are outlined below.

Issue 1: Did Sneakerboy abandon the lease?

The Court was required to consider if Sneakerboy had abandoned the lease by removing all of its stock and equipment from the Premises.  Sneakerboy gave evidence that the removal of their stock and technical equipment was due to COVID-19 restrictions on the number of customers that could visit the Premises.  Due to such restrictions, Sneakerboy said they made the commercial decision to temporarily cease trading and move its stock to its Port Melbourne warehouse so that it could continue its business by selling the stock online. 

Based on this evidence, the Court held that Sneakerboy had not abandoned the lease and that this was a misunderstanding between the Landlord and Sneakerboy.

Accordingly, the only available ground of termination of lease available to the Landlord was Sneakerboy’s failure to pay rent.

Issue 2: Should the late payment of rent by Sneakerboy prevent the Court from granting relief to Sneakerboy?

The Court considered whether Sneakerboy’s history of late rental payments should prevent it from claiming relief against forfeiture. 

Robb J noted that Sneakerboy’s payment of rent was “serially delinquent”, however, the Landlord was protected by a bank guarantee which exceeded $250,000.  The Landlord had called upon the bank guarantee and, thereby, had already been compensated for the consequences of Sneakerboy’s default.   

The Court confirmed that the Court will generally grant relief against forfeiture where the outstanding rent will be paid (though it is a discretionary matter for the Court).

Issue 3: Did the Landlord terminate to pre-empt the COVID-19 Regime?

The Court did not find that the Landlord terminated the lease in order to pre-empt the COVID-19 Regime, however, it was noted that the termination as in some degree influenced by the initial effects of the COVID-19 pandemic.  

Decision

The Court held that Sneakerboy was entitled to relief against forfeiture of the Lease on the condition that Sneakerboy provided a new bank guarantee.  Sneakerboy was ordered to pay the Landlord’s costs of the proceedings. 

The judgment of Sneakerboy Retail Pty Ltd v Georges Properties Pty Ltd [2020] NSWSC 996 is important as it is one of the few property law cases to examine the impact of COVID-19.  It is also important reminder of the law relating to relief against forfeiture.

If you require any advice in relation to the contents of this article, please do not hesitate to contact us.

About us

Elizabeth McDonald, Principal leads the Property and Planning Team at SWS Lawyers.

This article was co-written by Lawyer, Laura Bain.

This article is not legal advice.  It is intended to provide commentary and general information only.  Access to this article does not entitle you to rely on it as legal advice.  You should obtain formal legal advice specific to your own situation.  Please contact us if you require advice on matters covered by this article.

Elizabeth McDonald

Elizabeth McDonald -

Principal

Property law specialist