The Victorian government was quick to pass new regulations following the introduction of the COVID-19 Omnibus (Emergency Measures) Act 2020 (Vic) on 24 April 2020 (Act).
The detail of the new leasing requirements is contained in the COVID-19 Omnibus (Emergency Measures) (Commercial Leases & Licences) Regulations 2020 (Vic) (Regulations), made by the Governor in Council on 1 May 2020.
As noted in our earlier blogs ‘COVID-19 – Commercial Tenancies – legislative implementation of the Mandatory Code of Conduct’ and ‘COVID-19 Moratorium on Evictions of Residential and Commercial Tenants and Mandatory Code of Conduct’ the intention was for the states and territories to each implement the good faith leasing principles under the Mandatory Code of Conduct (Code) released by the National Cabinet on 7 April 2020.
In Victoria, The Act and the Regulations standalone and do not incorporate the Code.
The Regulations provide the answers to many questions raised by the Code and have effect for 6 months from 29 March 2020, until 29 September 2020 (Relevant Period).
The Regulations override the terms of leases, so landlords and tenants cannot ‘contract out’ of them (except where specified). Because no two leases are the same this article addresses only the highlights of the Regulations.
Eligible Lease under the Act – what are the criteria?
As we outlined in our earlier blog, the Act defines the commercial tenancies caught by the Regulations.
These are the criteria for an ‘eligible lease’:
- a retail lease under the Retail Leases Act 2003 (Vic) (Retail Leases Act); or
- a non-retail commercial lease or licence where the premises is used for the sole or predominant purpose of carrying on a business;
- a lease that was ‘in effect’ as at 29 March 2020;
- the tenant or licensee must be an ‘SME entity’. This is defined to mean an entity with an annual turnover of less than $50m; and
- the tenant or licensee must be an employer who both qualifies for and participates in the JobKeeper scheme (Eligible Lease).
In this blog a reference to a lease includes a licence, reference to a tenant includes a licensee and reference to a landlord includes a licensor.
What are the exclusions detailed in the Regulations?
The Regulations clarify what leases are excluded which was unclear from the wording in the Code and not detailed in the Act.
A lease or licence is not an Eligible Lease if:
- the tenant is a member of a prescribed group of entities and the aggregate turnover of the group exceeds $50 million;
- the tenant is an affiliate of another entity and the aggregate turnover of the tenant and that other entity exceeds $50 million; or
- the lease is a farming or agricultural lease.
The exclusions under the Regulations reflect the principle that turnover is to be assessed at a corporate group level.
The rent relief procedure - what do landlords and tenants need to do?
Some requirements are mandatory and others can be varied by agreement between the parties.
The tenant must make a written request to the landlord and provide information
The request must include a statement that the lease is an Eligible Lease and is not excluded under section 13 of the Act and that the tenant qualifies for and is participating in the JobKeeper scheme.
The tenant must provide information showing that the tenant is an SME and is participating in the JobKeeper scheme.
The tenant must provide evidence of eligibility for the JobKeeper scheme.
The Regulations do not prescribe the extent of the evidence required to be submitted by tenants. They refer landlords and tenants to the Small Business Commissioner for clarity on this. The Small Business Commission has published guidance material with frequently asked questions to assist with understanding the information that should be provided to satisfy the requirements, as well as other matters.
The landlord must make an offer within 14 days (or otherwise by agreement)
The Regulations do not strictly follow the Code, mainly because there is no set formula to determine the amount of relief. Simply because a tenant suffers a 30% loss in revenue does not entitle the tenant to 30% relief.
Instead, the landlord’s offer of rent relief must be based on all the circumstances of the Eligible Lease and must “take into account” a wide range of factors, many of which will be unknown to a landlord.
So, landlords have fairly broad discretion in determining the amount of rent relief they offer. However, landlords must take into account those matters in good faith and acting reasonably (or be in breach of the lease).
The landlord’s offer:
- Must relate to up to 100 percent of rent payable during the Relevant Period; and
- May include a waiver, reduction, remission or deferral of rent;
- Must take into account the reduction in the tenant’s turnover, any waiver or reduction in the landlord’s outgoings and the financial ability of the landlord to provide relief including any relief provided by a bank or other lender. The passing on of reductions in outgoings is mandatory and the Regulations provide that an Eligible Lease is amended to provide that any such reduction must be passed to the tenant;
- Must include an offer of a rental waiver of at least 50% of any rent reduction, unless the parties otherwise agree; and
- May waive the recovery of outgoings. The landlord has a good faith obligation to consider waiver of outgoings where the tenant is unable to operate at the premises but it is not a mandatory requirement.
Any deferred rent does not become payable until the earlier of either the end of the Relevant Period, or the expiry of the term of the lease.
The deferral is amortised over the balance of the lease term, or 24 months, whichever is the greater period.
The landlord must offer an extension of the lease to bring a deferral period to 24 months on the same terms of the lease, unless the parties otherwise agree.
The Regulations include a note stating that any amount of rent that is waived under an agreement cannot be claimed back by the landlord. This precludes ‘clawback provisions’ in agreements.
Prohibitions and restrictions on the landlord
No rent increases – mandatory obligation that can be varied by the parties
A landlord under an Eligible Lease must not increase the rent payable during the Relevant Period, unless the parties agree otherwise (in writing).
It appears this this is only a ‘postponement’ of any rent increase due during the Relevant Period until the end of the Relevant Period, rather than a total loss of the ability to increase the rent.
The prohibition on rent increases does not apply to turnover rent for retail leases only, insofar as the retail lease provides for rent to be decided by reference to the trade of the tenant’s business.
No eviction for non-payment of rent – mandatory obligation cannot be varied
The landlord is restricted under the Regulations from terminating an Eligible Lease and evicting a tenant for non-payment of rent or failure to trade, where the tenant:
- Has made a request under the Regulations for rent relief;
- Complies with the Regulations; and
- Complies with any agreement to vary the lease.
This is a mandatory obligation that cannot be varied by agreement of the parties.
No recovery of interest, fees or charges - mandatory obligation cannot be varied
Likewise, the restriction on the landlord from recovering interest, fees or charges from the tenant is a mandatory requirement under the Regulations. This requirement is included in the terms of an Eligible Lease by operation of the Regulations and the parties may not vary the requirement by agreement.
Obligation to cooperate and act reasonably in good faith
The parties must negotiate the landlord’s offer in good faith (or be in breach of the lease).
This obligation is to be implied into every Eligible Lease for the Relevant Period.
Tenants have a second go
While the Regulations are somewhat kinder to landlords than the Code, tenants are given a second chance. If the financial circumstances of a tenant materially change after a rent relief agreement has been reached under the Regulations, the tenant can commence the above process again. Landlords are not given the same right if a tenant’s financial circumstances improve.
If the tenant does not accept the landlord’s offer after negotiations in good faith, a party may refer the matter to mediation and if that fails, to the court or tribunal.
Any dispute under the Regulations is subject to the dispute resolution procedures under the Retail Leases Act, including mediation. This applies even if the Eligible Lease is not subject to that Act.
The Victorian Small Business Commission will mediate a dispute about temporary leasing arrangements under the Regulations. The application form and online platform can be found here on the Commission’s website. The mediator will not have power to make binding decisions.
If the Commission certifies in writing that a mediation has failed or is unlikely to resolve the dispute, then an eligible lease dispute may be the subject of a proceeding at the Victorian Civil and Administrative Tribunal, a court, or the Supreme Court. In addition, the Supreme Court may hear a proceeding if it gives leave to commence a proceeding in relation to a dispute concerning an Eligible Lease.
There will be more questions arising for both a landlord and a tenant depending on the circumstances of the parties, the characterisation of the lease and the terms of any given lease.
In order for a tenant to attract the protection under the legislative scheme, action is required as soon as possible if it has not already been taken. Landlords need to be aware of the mandatory obligations under the scheme. Ultimately both parties need to adhere to the good faith negotiation requirements under the scheme and wherever possible reach agreement avoiding referrals to mediation or potentially costly proceedings at VCAT or the Supreme Court.
If you require advice on your particular circumstances, please contact us.
Burke & Associates Lawyers have property and commercial lawyers who have vast experience in assisting clients to negotiate leases, with SME law, dispute resolution and mediation, as well as documenting agreements to vary a lease. We have mediators who can also assist with private mediation if that is an option that will assist in the particular circumstances of the negotiation of variations to your lease in COVID-19.
If you require assistance with tenancy law, please contact our Property Team at Burke & Associates Lawyers. To discuss further, please contact Kristy Muhlhan, Principal, who heads our Property and Property Development Team, Anthony Burke, Consultant or Stewart Davis, Lawyer.