The Victorian Parliament recently passed legislation[1] (the ‘Act’) to give effect to the National Cabinet’s Mandatory Code of Conduct for Commercial Tenancies. The Regulations[2] released on 1 May 2020 (‘Regulations’), provide commercial landlords and tenants some clarity about the rent relief measures which will apply to eligible leases during the COVID-19 period. Following is an outline of the key matters addressed in the Act and the Regulations.
What period do the Regulations apply?
The Regulations are effective from 29 March 2020 and will end on 29 September 2020.
To which leases do the Regulations apply?
The Regulations apply to ‘eligible leases’. A lease is an eligible lease, if the following criteria are met:
1. There must be in place (whether or not in writing):
o a retail lease[3] covered by the Retail Leases Act (Vic) 2003; or
o a non-retail commercial lease[4] used solely or predominately to carry on a business; or
o a commercial licence[5], to occupy, non-exclusively part of premises, solely or predominately for carrying on a business. This would include franchise and shared workspace type arrangements.
2. The eligible lease must have existed on 29 March 2020;
3. At 29 March 2020, the tenant must be a SME entity[6] (small to medium enterprise) with annual turnover less than $50 million; and
4. The tenant must qualify and be a participant in the JobKeeper scheme.
To which tenancies do the Regulations NOT apply?
The following leases are expressly excluded and the Regulations will not apply if:
1. premises are used wholly or predominately for:
o agricultural, pastoral, horticultural or apicultural activities;
o poultry farming, dairy farming, aquaculture, tree-farming, cultivation of soils, gathering crops, rearing livestock;
o grazing including agistment; or
o any other activity prescribed under the definition of ‘farming operation’ under the Farm Debt Mediation Act (Vic) 2011;
2. the tenant is a member of a prescribed group of entities[7] whose aggregate annual turnover exceeds $50 million;
3. there is a relationship or connection between the tenant and another entity[8] and the aggregate annual turnover of those entities exceeds $50 million;
4. an entity has a prescribed method of control or influence, through the holding of a prescribed interest, right or power, in relation to acts or decisions relating to the ownership, management or affairs of a corporate tenant.
If you are a tenant whose business is part of a group structure with aggregate turnover near $50 million, it is recommended you seek expert advice to determine if you fall within the Regulations.
How should a tenant apply for rent relief under the Regulations?
A tenant under an eligible lease may request rent relief from its landlord. To do so, the tenant must give written notice to the landlord accompanied by:
1. a statement by the tenant that the lease is an eligible lease that is not excluded by the Act; and
2. information evidencing the tenant is an SME entity and qualifies for and is a participant in JobKeeper.
What happens after a tenant applies to the landlord for rent relief?
Within 14 days of receipt of a rent relief request from a tenant, the landlord must make an offer for rent relief.
What must be included in a landlord’s rent relief offer?
A landlord’s rent relief offer must be based on all the circumstances of the eligible lease and:
1. relate to up to 100% of the rent payable under the lease during the COVID-19 period;
2. provide that no less than 50% of the rent relief offered by the landlord will be waived. The Regulations do not specify how the remaining rent relief should be offered however it is anticipated this will can be by way of a reduction, remission or deferral of rent;
3. apply to the COVID-19 period;
4. “take into account” the following:
o reduction in the tenant’s turnover associated with the premises. It is not clear what information is required to be provided by a tenant to evidence a reduction in turnover. In the writer’s opinion, it would be reasonable for a landlord to require the tenant’s sales from the premises for comparable quarters and/or for the months preceding COVID-19, and for that information to be certified by an accountant;
o a waiver of outgoings or other expenses (e.g. rates, marketing levy etc) during a period the tenant is ‘not able to operate’ its business. It is unclear whether ‘not able to operate’ covers the scenario where a tenant elects not to open for business;
o whether a failure to offer rent relief would compromise a tenant’s capacity to fulfil its ongoing obligations under the lease (e.g. will the tenant be able to meet its ongoing obligations under the lease if rent relief if not provided?);
o a landlord’s financial ability to offer rent relief (e.g. is the landlord receiving any reprieve from its bank which it can pass on to the tenant?); and
o any reduction to any outgoings charged, imposed or levied in relation to the premises (e.g. how much is the reduction, when and how will such reduction be passed on to the tenant?).
Landlords and tenants must negotiate in good faith to agree the rent relief. Any rent relief agreement should be documented by variation of lease or other agreement.
If rent is deferred when does it need to be paid?
A landlord cannot require deferred rent to be paid until the earlier of 29 September 2020 and the expiry date of the lease (disregarding any agreed extension of the lease term). The deferred rent must be amortised over the balance of the term of the eligible lease (including any extension) or a period of at least 24 months, whichever period is greater. The landlord and tenant must agree the method by which the deferred rent is amortised. A landlord cannot charge interest or other fees on deferred rent.
Can the term of the eligible lease be extended?
If payment of rent is deferred, the landlord must offer the tenant an extension to the lease equivalent to the period that the rent is deferred. The extension of lease will be on the same terms and conditions as the lease that was in place pre-COVID-19. The parties can agree that this regulation does not apply.
Where the liability to pay the deferred rent extends beyond the expiry date of the eligible lease, it is anticipated that a number of eligible leases will allow landlords to hold any security provided by a tenant when the lease was entered into until the tenant satisfies all of its lease obligations, including the obligation to repay deferred rent. Parties should check their leases to determine when security is required to be returned to the tenant or the expiry date of any bank guarantees.
Are Outgoings payable during the COVID-19 period?
A landlord must consider waiving recovery of outgoings or other expenses payable under an eligible lease for any part of the COVID-19 period that the tenant is ‘not able to operate’. Again, it is unclear whether ‘not able to operate’ covers the scenario where a tenant elects not to open for business.
If any outgoings are reduced, the tenant is only required to pay its proportion of the reduced outgoings and the landlord must reimburse the tenant for any overpayment made by the tenant.
Landlords are only required to pass on land tax reductions they receive to tenants if the tenant is required to pay or reimburse the landlord for land tax under the terms of the eligible lease.
Can rent be increased during the COVID-19 period?
If there is a rent increase which falls within the COVID-19 period, a landlord cannot increase the rent unless the parties agree. There is no prohibition on increasing rent which is based on turnover.
Can a landlord evict a tenant during the COVID-19 period?
A tenant is not in breach of its lease (and cannot be evicted) if it does not pay the rent prescribed in the eligible lease during the COVID-19 period only if:
1. the tenant submits a rent relief request to the landlord in the manner outlined above; or
2. the tenant pays rent in accordance with a rent relief agreement reached between the landlord and the tenant (as documented in a variation of lease or other agreement ).
Can a tenant reduce its trading hours or cease to trade during the COVID-19 period?
A tenant is not in breach of its lease if it reduces its trading hours or if it closes the premises and ceases to carry out any business during the COVID-19 period. A landlord must not evict, re-enter the premises or draw on any security if a tenant reduces its trade or ceases to carry out any business at the premises.
What if a tenant ceased to trade prior to the commencement of the COVID-19 period (i.e. before 29 March 2020)?
Tenants who took precautions to cease trading prior to 29 March 2020 are most likely to be required to pay rent (and outgoings etc), under the terms of their lease, unless otherwise agreed by the landlord.
Can a rent relief agreement be subsequently varied?
If a tenant’s financial circumstances “materially change” after a rent relief agreement has been reached between the landlord and tenant (as documented in a variation of lease or other agreement), the tenant may make a further request to the landlord for rent relief. The parties must follow the rent relief application process outlined above however, the landlord is not required to offer 50% of the rent relief as a waiver.
What if a tenant breaches a rent relief agreement?
If a tenant fails to pay rent in accordance with a rent relief agreement (as documented in a variation of lease or other agreement ) the tenant will be in breach of the lease for non-payment of rent, entitling the landlord to terminate the lease.
What if the parties cannot agree the rent relief to apply?
A landlord and tenant under an eligible lease must cooperate and act reasonably and in good faith in all discussions and actions. Where the parties cannot agree, disputes can be referred to the Small Business Commissioner for mediation. Parties can be represented by a lawyer at mediation.
If the matter is not resolved at mediation, proceedings may be initiated at VCAT (a no cost jurisdiction) or a Court.
Landlord Tax Relief
When applying to the Commissioner of State Revenue for a tax relief measure, a landlord can use the information provided by a tenant in a rent relief request. Certain information (e.g. financial information) must otherwise be kept confidential.
How should a rent relief deal be documented?
An agreement to rent relief should be documented by a variation of lease (or by other means which gives effect to the rent relief). This is to ensure the arrangement is legally binding on landlords, tenants and successors. The Regulations do not specify who is responsible for the cost of preparing the variation of lease. It is therefore recommended that this is agreed as part of the rent relief negotiations.
What about tenants NOT covered by the Act or the Regulations
Tenants not covered by the Act will need to commercially negotiate with their landlords, what rent relief measures (if any) the landlord is willing to offer. Such tenants should also consider obtaining legal advice to determine whether there are other grounds entitling the tenant to any relief of their lease obligations.
Kathy Tsiaplis is an Australian Legal Practitioner with extensive experience in Property Law. She has previously worked inhouse for both landlord and tenant operators and now as the Principal of KTSI Legal, services both landlord and tenant clients. Kathy is a member of the Law Institute of Victoria Leases Committee. For any enquiries, please contact Kathy directly on 0414 645 216 or by email Kathy@ktsilegal.com.au
The information in this article is intended to provide a general guide to the subject matter. Although we have made every effort to provide accurate information, we do not guarantee the information is accurate at the date it is received or that it will continue to be accurate in the future. Advice should be sought about your specific circumstances.
Photo by Victor He on Unsplash.
[1] The COVID-19 Omnibus (Emergency Measures) Act (Vic) 2020.
[2] The Covid-19 Omnibus (Emergency Measures) (Commercial Leases and Licences) Regulations (Vic) 2020.
[3] A retail lease includes a sublease and agreement for lease or sublease.
[4] A non-retail commercial lease includes a sublease and agreement for lease or sublease.
[5] A commercial licence includes a sub-licence or agreement for a licence or sub-licence.
[6] SME entity is defined under the Guarantee of Lending to Small and Medium Enterprises (Coronavirus Economic Response Package) Act (Cth) 2020.
[7] A prescribed group is a tenant that is connected within the meaning of s328-125 of the Income Tax Assessment Act (Cth) 1997, with another entity or entities.
[8] There will be a prescribed relationship or connection between a tenant and another entity if the entity is an affiliate within the meaning of s328-130 of the Income Tax Assessment Act (Cth) 1997.