Victorian landlords and tenants have finally received the last piece in the puzzle that is the government's framework for relief for commercial and retail tenants.
First, the National Cabinet released the Mandatory Code of Conduct (Code) that outlined guiding principles that would be incorporated into each state and territory's legislation. The Code raised many questions for landlords and tenants about how the principles would be applied in practice.
On 23 April 2020, the Victorian Parliament held an emergency sitting and passed the COVID-19 Omnibus (Emergency Measures) Act 2020 (the Act) which included a suite of legislation that covered a host of different areas including commercial tenancies.
The Act provided a clear definition of 'eligible lease' however did not include substantive law. Instead the Act gave the Minister for Small Business the broad power to recommend regulations to incorporate the Code.
On 1 May 2020, the COVID-19 Omnibus (Emergency Measures) (Commercial Leases and Licences) Regulations 2020 (the Regulations) were released which incorporated many of the Code's leasing principles.
What is an 'eligible lease'?
The Act defines an 'eligible lease' as a retail lease, commercial lease or licence under which the tenant or licensee is:
- an SME entity; and
- an employer who qualifies for and participates in the JobKeeper scheme.
An SME entity is an entity that (during the current year) carries on a business or is a non-profit body and:
- the entity's annual turnover is likely to be less than $50 million for the current financial year; or
- the entity carried on a business in the previous financial year or was a non-profit body and its annual turnover was less than $50 million.
For the purposes of determining whether an entity is an SME entity, annual turnover includes the proceeds of sales of goods and / or services as well as government subsidies, commission income and interest, royalties and dividends.
The Regulations expressly excludes leases or licences where:
- the premises is used wholly or predominantly for:
- agricultural or horticultural activities;
- poultry farming, dairy farming, aquaculture, tree-farming or a business that consists of the cultivation of soil, gathering of crops or rearing livestock;
- grazing, including agistment; or
- any activity prescribed as a farming operation under the Farm Debt Mediation Act 2011 (Vic),
- the tenant / licensee is a member of a group of companies (where one company controls at least one company or a discretionary trust) where the aggregate turnover for the group exceeds $50 million;
- the tenant / licensee is affiliated with a company or individual with whom the tenant / licensee acts with its directions or wishes or in concert with and the aggregate turnover of the tenant / licensee and the company or individual concerned does not exceed $50 million; and
- an entity controls or influences a tenant or licensee that is a body corporate.
Tenants that are part of a retail or corporate group should be cautious about seeking to strictly adopt the terms of the Act and Regulations. If the corporate group's aggregate turnover is above $50 million the lease will not be an eligible lease. Parties will likely take a more fluid approach to negotiating relief under their tenancy arrangements and tenants will not be able to strictly rely on the protections under the Regulations (for example, prohibition on rent increases, non-recovery of interest charges and others mentioned below).
From the National Cabinet's comments in relation to the Code, leases and licences that are excluded from the protection of the Code, may nonetheless seek to apply elements of the leasing principles in its negotiations. We expect that this will likely be the case, however landlords may try to mitigate their losses against those ineligible leases more readily in comparison to those governed by the legislation.
Rent Relief under the Regulations
The Regulations govern eligible leases for the "relevant period". Interestingly, "relevant period" is the six month period from 29 March 2020 to 29 September 2020 (Relevant Period). This contrasts from the Code which applied for the pandemic period in which the JobKeeper scheme is operational and a subsequent reasonable recovery period. It appears that the recovery period has not been factored into the Regulations.
Rent relief includes any form of relief provided to a tenant under an eligible lease to pay rent, including a waiver, reduction, remission or deferral of rent (Rent Relief).
A tenant may request Rent Relief from its landlord in writing accompanied with evidence that the tenant is an eligible tenant under the Act.
The landlord must offer Rent Relief to the tenant within 14 days of the tenant's request or within a further period agreed by the parties in writing. The landlord's offer must be based on all of the circumstances of the lease, apply for the Relevant Period and provide a rent waiver of no less than 50% of the Rent Relief (unless the parties agree otherwise). This minimum rent waiver reflects the Code.
The landlord's offer must also take into account:
- the reduction in the tenant's turnover during the Relevant Period;
- any rent waiver;
- whether a failure to provide further rent relief will compromise a tenant's ability to fulfil its ongoing obligations under the lease;
- a landlord's financial ability to offer rent relief (which includes any relief provided to a landlord by its lenders due to COVID-19); and
- any reduction in outgoings charged in relation to the premises.
If the landlord issues a counter-offer (rather than accepting the tenant's initial offer), the parties must negotiate in good faith with a view of agreeing to vary the lease for the Relevant Period.
The above largely reflects the principles in the Code save for the deferral proportion of rent. Under the Code, the proportion of rent deferred was directly attributable to the reduction in the tenant's turnover. The Regulations appear more fluid in this regard.
If the financial circumstances of the tenant materially change after agreement is reached and / or the variation of lease finalised, the tenant may make a further request to the landlord for relief and the above procedure will apply (regulation 11). If subsequent relief is sought, the landlord need not provide a 50% waiver. We expect the intention of this regulation is to mitigate the adverse effect on a landlord who has already waived 50% (or more) of rent for the six month period into providing an additional 50% reduction on the varied rent.
In the agreement for Rent Relief, a portion of rent may be deferred (regulation 16). The landlord cannot request that payment of deferred rent commence until the earlier of 29 September 2019 and the expiry of the term of the lease. Further, the payment of deferred rent will be repaid to the landlord over the balance of the term (including an extension granted in accordance with the Regulations) and a period of no less than 24 months (whichever is greater).
It will be interesting to see how parties reach agreement on the repayment of deferred rent especially where tenants opt not to continue with leases at the premises once the lease has expired.
A tale of two texts: the Regulations and the Code
The Regulations have also incorporated further certain principles from the Code outlined below:
- Prohibition on rent increases (regulation 12) – unless agreed otherwise between the parties, rent during the Relevant Period must not be increased. This excludes turnover rent under a retail lease.
- Extension of the term (regulation 13) – if payment of rent is deferred, the landlord must offer to extend the lease by the same period for which rent is deferred (which will likely be the Relevant Period). An extension of a lease term is a deemed new lease at law. Parties should be cautious about the implications this may have for leases that are also governed by the Retail Leases Act 2003 (Vic).
- Recovery of outgoings or expenses (regulations 14,15) – a landlord must consider waiving recovery of any outgoing or expense under a lease for any part of the Relevant Period that the tenant is not able to operate its business from the premises. If the tenant is not able to operate its business (for example, on account of a government order) the landlord may cease providing a service (e.g. cleaning of the premises) if reasonably requested by the tenant. Further, if an outgoing charged or imposed on the premises is reduced (e.g. government rates and taxes or service charges), the tenant must not pay more than its proportional share once the reduction has been applied. If the tenant has already paid this amount in advance or this is determined to have occurred, the landlord must reimburse the tenant for the excess paid as soon as possible.
- Fees, interests and charges (regulation 17) – a landlord must not require a tenant to pay interest, fee or charge in relation to any payment deferred by variation of the lease.
- Protection for tenants for non-compliance with lease obligations (regulation 9) – the tenant will not be in breach of its lease if it has complied with the protocol outlined in regulation 10(1) – (5) or during the Relevant Period it complies with the variation any other agreement between the parties.
- Prohibition from landlord evictions or re-entry (regulations 9(2), 9(3)) – a landlord to an eligible lease must not (or attempt to) evict or a tenant or re-enter the premises. Contravention of these regulations may lead to an offending landlord receiving a penalty up to 20 penalty units (currently $3,304.40).
- Prohibition from recourse (regulation 9(4)) – a landlord must not seek recovery under a security for non-payment of rent. This includes any security, deposit, bond, indemnity or guarantee provided under the lease to secure the tenant's performance of its obligations. Contravention of this regulation may lead to an offending landlord receiving a penalty up to 20 penalty units (currently $3,304.40).
- Tenant may reduce business hours or cease business trading (regulation 18) – a tenant will not be in breach of its lease if, during the Relevant Period, it reduces its opening hours or ceases trading from the premises for a period of time. Landlords must not (or attempt to) evict, re-enter or seek recourse from a tenant who ceases trading or reduces its operational hours.
- Confidentiality (regulation 19) – parties must not divulge or communicate protected or personal information unless an exemption under the Regulations applies. This is likely to encourage tenants to share financial records for the purpose of reaching a reasonable agreement on Rent Relief.
And if at first you don't succeed...
Where a landlord and tenant cannot reach agreement for Rent Relief (or any other matter covered by the Regulations), the matter may be referred to the Small Business Commission for mediation.
The Regulations incorporates the relevant provisions of the Retail Leases Act 2003 (Vic)(RLA), that allows the Small Business Commission to conduct mediation or another form of alternative dispute resolution that it deems fit.
As with retail leases under the RLA, if the mediation (or alternative dispute resolution) has failed and the dispute is unlikely to be resolved, the Small Business Commission will issue a certificate that allows for the parties to initiate proceedings in VCAT or an appropriate court.
We expect that the Small Business Commission will be inundated for mediations however understand that they are putting procedures in place to best deal with these pressures.
Parties may only bypass the mediation process if they wish to initiate proceedings for an injunction.
The Regulations have shed more light on the rights and obligations of landlord and tenants navigating their tenancy arrangements in the wake of COVID-19.
Whilst the Regulations deviate in some respects from the Code (as outlined above), it appears that parties do have some latitude to reach agreements given their own specific circumstances.
Parties should seek advice in relation to their rights and obligations under the Regulations and in relation to which of the regulations are mandatory or discretionary.
Variations of leases and agreements between parties in light of COVID-19 should be clearly documented to avoid later disputes.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances. Madgwicks is a member of Meritas, one of the world's largest law firm alliances.