Supreme Court finds in favour of tenant in COVID-19 lease dispute

On 21 December 2020, Justice Black delivered judgment In the matter of Ryals Hotel Pty Ltd [2020] NSWSC 1906. His Honour considered the interaction between the Retail and Other Commercial Leases (COVID-19) Regulation 2020 (NSW) (Regulation) and a winding up application brought under the Corporations Act 2001 (Cth).

Of particular relevance to creditors of commercial leases, the Court dismissed a winding up application brought without reliance on a creditor’s statutory demand. His Honour found that the application was brought, in part, in an effort to bypass the Regulation and held such efforts to be an abuse of process.

The case concerned Zhaos, a creditor lessor of hotel premises, and Ryals Hotel, a debtor lessee. Evidence was led of a rental debt accruing to Zhaos under the relevant lease. However, the debt relied on in respect of the winding up application was subject to dispute, arising from various issues, including a previous judgment Ryals had obtained against Zhaos.

Importantly, Justice Black held that in addition to Zhaos being unable to establish Ryals was insolvent, Zhaos had failed to comply with negotiation obligations arising under the Regulation in respect of non-payment of rent accruing from March 2020.

His Honour held that the application, even when narrowed to avoid reliance on the debt from March 2020 onwards, placed in issue the wider dispute between the parties, concluding that debt disputes could not be properly resolved in an application of this kind.

The Court further determined that where the lessor sought payment but had not regarded the obligation of negotiation under the Regulation, the application was an abuse of process as the Court would necessarily have to determine the amount that would be payable, if a negotiation had occurred. Such an application was deemed effectively an attempt to circumvent the Regulation.

The application was dismissed.

This case serves as an important warning to creditor lessors to consider the statutory obligations imposed under the legislation introduced in response to the pandemic, prior to taking significant legal action.