On 1 May 2020 the Victorian Government passed regulations for the COVID-19 Omnibus (Emergency Measures) (Commercial Leases and Licences) Regulations 2020 (the Regulations) giving substance to the National Cabinet Mandatory Code of Conduct (the Code).
- The Regulations provide guidance to small to medium enterprises to negotiate rent relief in Victoria;
- They only apply to eligible leases;
- They do not provide a specific method to calculate a tenant’s rent relief;
- They will operate retrospectively from 29 March 2020 through to 29 September 2020 (the Relevant Period); and
- They cannot be contracted out of.
While many of us had been expecting the Regulations to follow the Code, the Regulations do not reference the Code. Unlike the Code, the amount of relief offered by landlords to tenants is not directly related to any reduction in the tenant’s turnover. The Regulations have provided small wins for both the landlord and the tenant.
Some important terms
The Regulations apply only to “Eligible Leases”.
“Eligible Leases” is defined in the Covid-19 Omnibus (Emergency Measures) Act. For a lease to be classified as ‘Eligible’, four criteria must be satisfied:
- the lease must be either:
- 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 (SME) entity’; and
- the tenant must be an employer who qualifies under and participates in the JobKeeper scheme.
Small to Medium Enterprise
In determining the tenant’s eligibility as an SME, it’s turnover must be examined.
For the purposes of the Regulations, a tenant is an SME if:
- the entity carries on a business in the current year, or is a non profit body during the current year; and
- one or both of the following applies:
- the entity’s annual turnover for the current year is likely to be less than $50 million;
- the entity carried on a business in the financial year (the previous year) before the current year or was a non profit body during the previous year, and its annual turnover for the previous year was less than $50 million.
The annual turnover of an entity for a financial year is the total of the following that is earned in the year in the course of the business:
- the proceeds of sales of goods and/or services;
- commission income;
- repair and service income;
- rent, leasing and hiring income;
- government bounties and subsidies;
- interest, royalties and dividends; and
- other operating income.
Tenant Rent Relief
The Code was specific in its guidance to calculate a tenant’s relief and by its own description was mandatory to follow. However, Regulation 10 differs and stipulates that a tenant must apply to the landlord for rent relief by:
- making a written request to its landlord for rent relief;
- include a written statement that it is an eligible lease;
- confirm that the tenant is a small to medium enterprise; and
- that it qualifies for and participates in the JobKeeper scheme.
The landlord must respond within 14 days.
It is unclear what financial information the tenant is required to provide to the landlord. The Small Business Commission is to provide guidelines soon. We will provide an update on this as soon as it is available.
It would seem sensible that a tenant provides its landlord with as a minimum, trading figures so that the landlord can take into account the tenant’s ability to pay a reduced rent. If the tenant’s financial circumstances change during the period of the Regulations, the tenant can make a further request for rent relief following the same procedures. This will all be considered on a case by case basis
Despite the outcome of the tenant’s request for rent relief, provided the tenant has complied with the provisions of Regulation 10, the tenant will not be in breach of that lease if they fail to pay rent required under that lease.
Unlike the Code, the landlord’s offer of relief will be based on all the circumstances of the eligible lease and relate to up to 100% of the rent payable under the lease. The offer must provide that no less than 50% of the rent relief offered must be in the form of a waiver of rent unless otherwise agreed between the parties in writing.
The offer must take into account:
- The reduction in the tenant’s turnover associated with this premises (only) during the Relevant Period.
- any waiver given by the landlord;
- whether any refusal of the landlord to offer enough rent relief would compromise the tenant’s capacity to fulfill its ongoing obligations;
- a landlord’s financial ability to offer any such rent relief; and
- reduction to any outgoings charged in relation to the premises.
It is important to note in bullet point 1 above, that the economic position of a tenant’s business across several premises or venues will not be considered by a landlord. The landlord need only consider the facts of the premises subject to the eligible lease. This means the tenant must apply individually to the landlord for each lease it holds.
Once the 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. The rent relief under the Regulations may be given effect by a variation to the lease or some other form of agreement that gives effect to the agreement between the landlord and tenant either directly or indirectly.
As the Regulations allow for the landlord’s offer to be based on all the circumstances of the eligible lease it will allow significant flexibility to the offer made by the landlord.
The Code provides instruction where relief would be directly proportionate to the reduction in the tenant’s turnover. However, under the Regulations rental reductions do not need to be directly proportional to the reduction in the tenant’s turnover. Further, what has been expanded upon is that consideration must be given to the tenant’s ability to fulfil its obligations under the lease. This will include considering the tenant’s current and future solvency. Importantly, the landlord’s financial capacity to provide relief is also given consideration.
The Regulations provide greater comfort to landlords than what the Code had first presented.
At least 50% of the rent relief must be in the form of a waiver. However, unlike the Code, it is not clear whether the other 50% must be in the form of a deferral. The definition of rent relief states that it can be any form of relief including a waiver, reduction, remission or deferral of rent.
If rent deferral is utilised, 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; and
- expiry of the term of the eligible lease.
- The landlord and tenant must agree to vary the lease 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.
- Any amortisation method is to be agreed to between the landlord and tenant.
Mediation of disputes
As outlined in the Code, 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 mediation. Mediation is free and is not limited to formal mediation and extends to preliminary assistance to either party.
Parties to a mediation are entitled to legal representation, but the mediator may meet with the landlord or tenant without legal practitioners being present.
A lease dispute may only be the subject of VCAT or court proceedings (other than the Supreme Court) if the Small Business Commission has certified in writing that the mediation has failed or is unlikely to resolve the dispute.
The parties can choose to either go to VCAT or to court to have disputes under the Regulations determined. If parties go to VCAT, the ‘no cost’ rule in s 92 of the Retail Leases Act 2003 (Vic) will apply (if applicable).
The Regulations retain the principles of the Code by requiring parties to cooperate and act reasonably and in good faith with all discussions and actions associated with matters to which the Regulations apply. Civil penalties up to 20 penalty units (approximately $3600) 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.
Taking into consideration all circumstances affecting the tenant and landlord’s financial situation will require a great deal of ‘good faith’ cooperation. The Regulations have given landlord’s more comfort to negotiating a rent relief package and tenant’s less power than may have previously been expected.
Now is the time to act. The Regulations now provides law that any variations are to be in writing, including the time of and nature of relief agreed to. Rigby Cooke’s Property Team are available to assist you with negotiating and drafting the appropriate variation of lease.
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