The Victorian Parliament recently passed the Commercial Tenancy Relief Scheme Act 2021 (Vic) (the ‘Act’) to facilitate rent relief assistance to eligible commercial tenants that have experienced trading downturn due to the ongoing impacts of the COVID-19 pandemic. The Commercial Tenancy Relief Scheme Regulations 2021 (Vic) (‘Regulations’), released on 24 August 2021, details the rent relief scheme and its application.
SUMMARY
Eligible tenants, under eligible leases may apply for rent relief for the period between 28 July 2021 until 15 January 2022 if their turnover during a comparative period has declined by at least 30%.
The rent reduction must be at least proportionate to the decline in turnover and at least half of the reduced rent must be waived.
An eligible tenant under an eligible lease cannot be evicted during this period if the tenant has applied for rent relief and continues to pay the agreed or determined reduced rent.
Rent increases will not apply during the rent relief period.
If the landlord and tenant cannot agree as to the rent relief, the matter may be referred to the Small Business Commissioner (SBC).
WHAT IS THE PROTECTION PERIOD?
The Regulations apply to eligible leases from 28 July 2021 to 15 January 2022.
IS THE LEASE AN ‘ELIGIBLE LEASE’?
Eligible Lease
In order to be eligible for rent relief under the Regulations, the lease must meet the following criteria:
the lease must be a ‘retail lease’[1] or a ‘non-retail commercial lease or licence’[2];
the lease must have been in effect on 28 July 2021 (or after 28 July 2021 if renewed or extended by exercise of an option or otherwise varied, extended or renewed on substantially the same terms);
the tenant under the eligible lease is an ‘eligible tenant’ (see below); and
the lease is not an excluded under the Regulations (see below).
Excluded Leases
The following leases are not ‘eligible leases’ and do not qualify for rent relief under the Regulations:
a lease under which the premises are used wholly or predominately for specified farming activities[3];
a lease under which the tenant is a listed corporation or listed on a stock exchange outside of Australia (or a subsidiary of such company)[4].
IS THE TENANT AN ‘ELIGIBLE TENANT’?
Eligible tenant
A tenant is an eligible tenant if the tenant:
as at 28 July 2021, is an entity that carried on a business in Australia (or a non-profit body or a deductible gift recipient); and
is an SME entity (that is, turnover of less than $50 million in FY 2021); and
satisfies the ‘decline in turnover test’ (see below); and
is not a listed corporation or a body corporate, company or corporation whose securities are listed on a stock exchange outside of Australia (or a subsidiary of such company); and
is not an excluded tenant under the Regulations (see below).
Excluded tenants
Under the Regulations[5], a tenant is not an eligible tenant if it is:
one of the major banks (that is, CBA, NAB, Westpac, ANZ and Macquarie bank);
an Australian government agency, a local governing body, wholly owned by an Australian government agency or a local governing body, or a sovereign entity;
a company and a liquidator or provisional liquidator has been appointed or an individual and a trustee in bankruptcy has been appointed;
connected with[6] another entity/entities, and the aggregated turnover of that group in FY 2021 exceeded $50 million (or if the tenant did not carry on a business for the whole of FY 2021, the tenant is likely to exceed $50 million turnover for FY 2022); or
an affiliate of[7] another entity or other entities, and the aggregated turnover of the tenant and the other entity or entities exceeded $50 million (or if the tenant did not carry on a business for the whole of FY2021, the tenant is likely to exceed $50 million turnover for FY2022).
DOES THE TENANT SATISFY THE DECLINE IN TURNOVER TEST?
What is included in turnover?
Turnover includes the tenant’s GST turnover[8], all Victorian government COVID-19 business support grants received during the relevant period and the tenant’s internet sales[9].
What is the turnover test period and comparison turnover periods?
In order to be an ‘eligible tenant’, the tenant’s turnover in the turnover test period must fall short of the tenant’s comparison turnover and the shortfall must equal or exceed 30% (or 15% for ACNC registered charities[10]). A tenant’s turnover test period and comparison period is determined by the period the tenant commenced its business:
|
DATE TENANT COMMENCED TRADING (FROM THE PREMISES OR OTHERWISE) |
TURNOVER TEST PERIOD |
COMPARISON PERIOD |
|
Before 1 April 2019 |
Consecutive 3 month period (elected by the tenant) between 1 April 2021 and 30 September 2021, commencing on the first of the month |
The corresponding 3 month period in 2019 |
|
1 April 2019 - 31 March 2020 |
The sum of the tenant's turnover for each whole month after the tenant commenced trading and before 1 April 2020 divided by the number of whole months of trade, multiplied by 3 (that is 3 month average turnover to 31 March 2020) |
|
|
1 April 2020 - 31 March 2021 |
The sum of the tenant's turnover for each whole month after the tenant commenced trading and before 31 July 2021 divided by the number of whole months of trade, multiplied by 3 (that is. 3 month average turnover to 31 July 2021) |
|
|
After 1 April 2021 |
Such period agreed by the landlord and tenant in good faith |
The tenant's turnover from the date the tenant began trading to 31 July 2021, divided by the number of days the tenant was trading, multiplied by 92 |
Are there alternative tests to determine a tenant’s comparison turnover?
The Regulations provide alternative comparison turnover methods to satisfy the decline in turnover test in the following circumstances:
there was an acquisition or disposal of part of the tenant's business on or after the start of the relevant comparison period and before the applicable turnover test period which changed the tenant’s comparison turnover[11];
there was a restructure of a tenant's business on or after the start of the relevant comparison period and before the applicable turnover test period which changed the tenant’s turnover[12];
if the tenant had a substantial increase in turnover[13];
the tenant conducted its business in a declared drought zone or natural disaster zone during the relevant comparison period which changed the tenant’s turnover[14];
if the tenant had irregular turnover[15];
the tenant is a sole trader or small partnership with no employees who did not work for all or part of the relevant comparison period due to sickness, injury or leave which affected the tenant’s turnover[16];
the tenant temporarily ceased trading for one week or more during the relevant comparison period due to circumstances outside the ordinary course of the tenant's business but resumed trade before 28 July 2021[17].
WHAT SHOULD BE INCLUDED IN AN ELIGIBLE TENANT’S REQUEST FOR RENT RELIEF?
Initial Request
A tenant under an eligible lease may make a written request for rent relief to the landlord accompanied by a statement from the tenant:
that the tenant is an eligible tenant; and
the tenant satisfies the decline in turnover test, including setting out:
the tenant’s turnover for the turnover test period, including the turnover test period used;
the tenant’s comparison turnover, including the method used;
if an alternative comparison turnover method was used, the method and how the comparison turnover was calculated;
the tenant’s decline in turnover;
the reduction in rent; and
any other circumstances that the tenant would like the landlord to consider.
Evidence of Turnover
Within 14 days of making a request for rent relief, the tenant must provide evidence of the tenant’s turnover figures to the landlord, including one of the following:
extracts from the tenant's accounting records;
the tenant's business activity statements (BAS);
statements issued by an ADI (bank) in respect of the tenant's account;
a statement prepared by a practising accountant,
and must include a statutory declaration made by the tenant or an authorised officer of the tenant, stating that the tenant is an eligible tenant and that the information provided by the tenant is true to the best of the tenant's knowledge and belief.
Invalid requests
If a tenant fails to provide the information required, the tenant’s request for rent relief lapses. The tenant can subsequently re-apply for rent relief where a previous request for rent relief has lapsed, however the tenant can only allow 3 requests for rent relief to lapse, before it loses its right to rent relief under the Regulations.
CAN A LANDLORD EVICT A TENANT?
A tenant under an eligible lease will not be in breach of that lease for non-payment of rent or outgoings (and cannot be evicted) if during the period 28 July 2021 to 15 January 2022:
the tenant requests rent relief from the landlord which complies with the Regulations and continues to pay a portion of rent equivalent to the rent reduced by the same percentage as the tenant’s decline in turnover as set out in the tenant’s request for rent relief;
after a rent relief agreement is made, the tenant pays rent and outgoings in accordance with the rent relief agreement; or
the tenant is unable to trade due to sickness or injury affecting the tenant or its employees or due to a natural disaster affecting the tenant or the premises.
WHAT SHOULD A LANDLORD DO IF IT RECEIVES A REQUEST FOR RENT RELIEF FROM A TENANT?
Within 14 days of receipt of a compliant rent relief request from a tenant (or such other period agreed by the parties), the landlord must make an offer which meets the minimum requirements prescribed by the Regulations to the tenant for rent relief.
WHAT ARE THE MINIMUM REQUIREMENTS FOR A LANDLORD’S RENT RELIEF OFFER?
Minimum requirements for landlord’s rent relief offer
A landlord’s rent relief offer must be in writing and:
relate to up to 100% of the rent payable under the lease during the rent relief period;
at a minimum, be proportional to the tenants decline in turnover;
provide that no less than 50% of the rent relief offered by the landlord will be waived (unless otherwise agreed by the parties in writing);
take into account:
any part payments of rent paid by the tenant;
any other circumstances that the tenant would like the landlord to consider.
If the rent is inclusive of outgoings (that is, a gross lease), the landlord must offer rent relief in respect of the gross amount.
Rent relief period
The rent relief period is:
if the tenant makes a compliant request for rent relief on or before 30 September 2021, from 28 July 2021 to 15 January 2022;
if the tenant makes a request for rent relief after 30 September 2021, from the date the tenant makes a compliant request for rent relief until 15 January 2022.
In order to receive the full benefit of rent relief afforded by the Regulations, tenants should ensure their request for rent relief complies with the Regulations and such request is submitted to the landlord before 30 September 2021.
Tenant’s deemed acceptance of landlord’s rent relief offer
A tenant is deemed to have accepted the landlord’s rent relief offer 15 days after receiving the landlord’s rent relief offer, if:
the landlord and the tenant have not agreed on a rent relief agreement; and
the tenant has not referred the matter to the SBC; and
the landlord's offer of rent relief complies with the minimum offer requirements outlined above.
If a tenant does not agree with the landlord’s rent relief offer, the tenant should, after negotiating in good faith, refer the matter to the SBC within 14 days of receipt of the landlord’s rent relief offer to ensure the landlord’s offer is not deemed to apply. This may result in a large volume of disputes being referred to the SBC.
HOW SHOULD RENT RELIEF AGREEMENTS BE DOCUMENTED?
A rent relief agreement can be documented by variation of lease or by other means which gives effect to the rent relief.
WHAT IF THERE IS A CHANGE IN THE TENANT’S TURNOVER AFTER A RENT RELIEF AGREEMENT IS MADE?
The mandatory reassessment provisions in the Regulations[18] provide an opportunity for landlords and tenants to assess whether a rent relief agreement that was made on or before 30 September 2021 should be adjusted in respect of a tenant that began trading before 1 April 2021.
The tenant must on or before 31 October 2021 provide the following information to the landlord:
the tenant’s turnover for the turnover test period (as detailed in the table below);
the tenant’s comparison turnover (as detailed in the below table), including the method used; and
the change in turnover, being the difference between the tenant’s turnover for the reassessment turnover test period and the tenant’s reassessment comparison turnover, expressed as a percentage of the tenant’s comparison turnover
and must include a statutory declaration made by the tenant or an authorised officer of the tenant, stating that the tenant is an eligible tenant and that the information provided by the tenant is true to the best of the tenant's knowledge and belief.
|
DATE TENANT COMMENCED TRADING |
REASSESSMENT TURNOVER TEST PERIOD |
REASSESSMENT COMPARISON PERIOD |
|
Before 1 July 2019 |
The quarter ending 30 September 2021 |
The quarter ending 30 September 2019 |
|
1 July 2019 to 31 March 2021 |
The quarter ending 30 September 2021 |
The quarter ending 30 June 2021 |
If the change in turnover differs from the initial change in turnover, then from 31 October 2021 to 15 January 2022, the rent relief agreement is adjusted to reflect the (reassessed) change in turnover.
If the tenant fails to provide to the landlord the information required for the mandatory reassessment of turnover by 31 October 2021, the rent relief agreement is deemed to be varied by removing any right to a waiver of rent from 31 October 2021.
CAN A TENANT REQUEST FURTHER RENT RELIEF AFTER A RENT RELIEF AGREEMENT IS MADE?
A tenant may make a further request to a landlord for rent relief if a rent relief agreement has been made and subsequently, the financial circumstances of the tenant materially change. Any new rent relief agreement will substitute the original rent relief agreement.
IS THE TERM OF THE LEASE EXTENDED IF PAYMENT OF RENT IS DEFERRED?
If payment of rent is deferred under a rent relief agreement, the landlord must offer the tenant an extension to the lease equivalent to the period that the rent is deferred (unless agreed otherwise). The extension of lease will be on the same terms and conditions as the lease that was in place before 28 July 2021.
FROM WHAT DATE MUST THE TENANT PAY DEFERRED RENT?
If payment of rent is deferred under a rent relief agreement, the landlord cannot require deferred rent to be paid until after 15 January 2022. The tenant must pay the deferred rent amortised equally over the balance of the term (including any extension) or a period of at least 24 months, whichever period is greater (unless agreed otherwise). A landlord cannot charge interest or other fees on deferred rent.
Any requirement to pay deferred rent under a rent relief agreement made under the 2020 Regulations, is also deferred until after 15 January 2022 if the eligible lease is the same as the 2020 lease (or a renewal, extension or replacement of the 2020 lease) and the tenant has requested rent relief under the Regulations.
CAN RENT INCREASE DURING THE PROTECTION PERIOD?
A landlord is prohibited from increasing the rent between 28 July 2021 to 15 January 2022, unless the parties agree otherwise. Any review of rent which increases the rent payable is voided and may never be claimed by the landlord. This will affect both incremental increases and market rent reviews during the term of the lease and on renewal.
ARE OUTGOINGS PAYABLE DURING THE PROTECTION PERIOD?
A landlord must consider waiving recovery of outgoings or other expenses payable under an eligible lease for any part of the protection period (28 July 2021 to 15 January 2022) that the tenant is ‘not able to operate’ at the premises. It is unclear whether ‘not able to operate’ covers the scenario where a tenant elects not to open for business. If 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.
CAN A TENANT REDUCE ITS TRADING HOURS OR CEASE TO TRADE?
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 during the period 28 July 2021 to 15 January 2022, regardless of whether the tenant satisfies the decline in turnover test.
WHAT IF THE LANDLORD AND TENANT CANNOT AGREE THE RENT RELIEF?
Mediation
Landlords and tenants must cooperate and act reasonably and in good faith[19]. Where the parties cannot agree on the rent relief to apply, disputes can be referred to the SBC for mediation. The Regulations specify the information that must accompany a party’s application for Mediation[20].
Dispute notices and section 41 certificates
If the VSBC receives an application for Mediation, it must issue a dispute notice to the respondent, requiring that party to respond to the application within 10 business days. If a party fails to respond to the VSBC’s dispute notice, the VSBC may arrange a mediation or issue a regulation 41 certificate. A regulation 41 certificate can be issued if a mediation has failed (or is unlikely to resolve the dispute) or if the VSBC is of the view that a party has not engaged in the mediation in good faith.
Binding Orders
A tenant may apply to the SBC for a binding order if the VSBC has issued a regulation 41 certificate. A binding order is a direction by the SBC requiring a landlord to give rent relief to a tenant. The SBC can make a binding order regarding rent relief where neither party has commenced proceeding and it is fair and reasonable to make the binding order. A party can apply to VCAT to review binding orders.
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Dated: 26 August 2021
Authored by: Kathy Tsiaplis and Lily Tell. Kathy Tsiaplis is a Principal at KTSI Legal. Lily Tell is a Principal at Tell Property Law. Kathy and Lily are current members of the Law Institute of Victoria Leases Committee.
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 WeLoveBarcelona.de on Unsplash
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[1] As defined in the Retail Leases Act 2003 (Vic)
[2] A non-retail commercial lease or licence is a lease of premises under which the premises are let for the sole or predominant purpose of carrying on a business at the premises or a commercial licence. A commercial licence is licence, sub-licence or agreement for a licence or sub-licence under which a person has the right to occupy, non-exclusively, a part of premises for the sole or predominate purpose of carrying on a business (this would capture franchise type licensing arrangements);
[3] Regulation 7;
[4] Regulation 8;
[5] Regulation 9(3);
[6] As defined in the Income Tax Assessment Act 1997 (Cth);
[7] Ibid;
[8] As defined in A New Tax System (Goods and Services Tax) Act 1999 (Cth) and modified by Regulation 11;
[9] Regulation 11(2);
[10] As defined in A New Tax System (Goods and Services Tax) Act 1999 (Cth);
[11] Regulation 17;
[12] Regulation 18;
[13] Regulation 19;
[14] Regulation 20;
[15] Regulation 21;
[16] Regulation 22;
[17] Regulation 23;
[18] Regulation 29;
[19] Regulation 24;
[20] Regulation 40.