Victorian COVID-19 Commercial Tenancies
The COVID-19 Omnibus (Emergency Measures) Act 2020 (the Act) came into operation on 24 April 2020. On 1 May 2020, the Governor in Council made the COVID-19 Omnibus (Emergency Measures) (Commercial Leases & Licences) Regulations 2020 (the Regulations).
The Act and Regulations implement the leasing principles contained in the National Cabinet Mandatory Code of Conduct – SME Commercial Leasing Principles During COVID-19 (Code). In Victoria, it is the Act and the Regulations, rather than the Code, which now govern the rights and obligations of landlords and tenants in relation to the commercial leasing principles that are to apply to address the consequences of the COVID-19 pandemic.
While the Act and the Regulations broadly reflect the principles in the Code, there are some differences.
The Act and the Regulations now also provide answers to many of the questions raised by the Code and provide landlords, tenants and practitioners with greater certainty regarding the practical and legal application of the leasing principles. There are however still some areas of uncertainty.
Commencement of regulations
The Regulations are retrospective and have effect as from 29 March 2020. Landlords and tenants are bound to comply with the requirements of the Regulations as from 29 March 2020, even though the Regulations were not in force at that date. Any agreements reached between, or actions taken by, tenants and landlords under an eligible lease from 29 March 2020 will need to be assessed to ensure that those agreements or actions comply with the requirements of the Regulations.
Nothing in the Act or the Regulations outlines how agreements previously entered into will be treated.
Eligible leases
The Regulations apply only to “eligible leases” which by definition must meet all of the following four criteria:
the lease must be a retail lease (under the Retail Leases Act 2003) or a commercial lease or licence for the sole or predominant purpose of carrying on a business at the premises;
the lease must have been ‘in effect’ on 29 March 2020;
the tenant must be an ‘Small to Medium Enterprise entity’ (see further below); and
the tenant must be an employer who qualifies under and participates in the JobKeeper scheme.
What is a “Small to Medium Enterprise” (SME)?
To determine whether a tenant is an SME, its turnover must be examined (and thus disclosed) and must be under $50million. Annual turnover can include various types of income from sales of goods, services, commissions, rental, subsidies, interest and other operating income.
The Regulations have, as anticipated, better defined the eligibility of franchises and corporate groups however it requires an analysis of the Income Tax Assessment Act (ITAA). If this eligibility is in dispute, we would suspect that a forensic analysis may be required to prove whether the tenant’s turnover is to be assessed individually or as a “prescribed group” being a tenant that is connected with other entities (within the meaning of s328-125 or 328-130 of the ITAA) with another entity or other entities.
What must a tenant do to obtain rent relief?
The Regulations place the onus on the tenant to begin the process for rent relief if they want to obtain protection by the Regulations. In this regard, a tenant must:
meet the eligibility criteria mentioned above; and
make a written request to its landlord for rent relief which includes:
a statement that the tenants lease is an eligible lease; and
evidences that the tenant is an SME; and
evidences that the tenant qualifies for and participates in the JobKeeper Scheme.
It follows therefore that until a tenant has requested such relief and proven their eligibility, they are not strictly protected and a landlord may potentially issue a notice for a breach of lease.
The Regulations do not specify what financial information is required to be provided to the Landlord though The Small Business Commission is expected to provide guidelines soon. We would expect, as a minimum, trading figures along with comparatives from pre-Covid periods would be necessary and that these would need to be provided either directly from accounting software or verified by a bookkeeper/accountant.
If the tenant’s financial circumstances change during the Relevant Period of the Regulations, the tenant can make a further request for rent relief following the same procedures.
What must a landlord do if a tenant requests relief?
Once a landlord receives a request from a tenant in line with the Regulations, the landlord must respond with an offer of rent relief within 14 days (unless otherwise agreed).
There is a freeze on rent increases, no fees, interest or charges can be levied on deferred rent and any outgoings refunds obtained must be passed on to tenants. Unlike the Code however, which specified a directly proportionate reduction, a landlord’s offer of relief can now be ‘based on all the circumstances of the eligible lease’ which will allow significant flexibility to the offer made by the landlord. Such offer must:
relate to up to 100% of the rent payable under the lease;
provide that no less than 50% of the rent relief package offered must be in the form of a waiver (see below)
apply to the 6 months of the Relevant Period; and
take into account the following:
the reduction in a tenants turnover associated with the (specific) premises during the relevant period;
whether a failure to offer rent relief would compromise a tenants ability to fulfil the lease obligations (ie. the tenants current and future solvency);
the landlords’ financial ability to offer rent relief (including any relief provided by lenders); and,
any reduction to any outgoings offered or any waiver of outgoings that a landlord may decide to give (if a business entirely shuts down);
Importantly, the landlords’ financial ability to offer relief is included as this was not part of the Code in detail. Consequently, a rent relief offer from a landlord who is a retiree with no income other than the particular leases rental may look very different to what would be expected of a corporate landlord.
At least 50% of the rent relief must be in the form of a waiver (unless otherwise agreed between the parties in writing). It follows, therefore, that the balance must be provided by way of a rent deferral. Regulation 16 provides that:
a landlord must not request payment of any part of the deferred rent until the earlier of:
the expiry of the Relevant Period (29 September 2020); and
expiry of the term of the eligible lease.
the lease must be varied to pay the deferred rent amortised over the greater of:
balance of the term (including any extension of the term); and
a period of no less than 24 months.
What if the parties cannot reach agreement?
Once an eligible tenant has received the landlord’s offer, the parties must negotiate in good faith to agree on the rental relief to apply during the Relevant Period. Given all circumstances of the tenant and landlords financial situation are relevant, it will require the parties to provide accurate and honest representations to one another and all such information must remain confidential.
If a dispute exists, either a landlord or tenant may refer a dispute about the terms of the lease under the Regulations to the Small Business Commission via an online application form for a free mediation.
Despite the outcome of the tenant’s request for rent relief, provided the tenant has complied with the provisions of Regulation 10 summarised above, the tenant will not be in breach of that lease if they fail to pay rent required under that lease. Furthermore, civil penalties of up to approximately $3,600 can be imposed on landlords for terminating a lease, taking possession or claiming against securities based on the non-payment of rent or reduction in trading hours during the period of the regulations.
What to do once an agreement is reached?
Once agreed, rent relief under the Regulations can be given effect by a variation to the lease or a separate side agreement. However, as is always the case when dealing with land, it is important to record the agreement and have it signed by both parties.
Let’s Talk
For an in-depth discussion of how the Act and the Regulations may affect you and your business, please contact us on + 61 3 9527 5041.