Following NSW’s passing of the Retail and Other Commercial Leases (COVID-19) Regulation 2020, Victoria has enacted the COVID-19 Omnibus (Emergency Measures) (Commercial Leases and Licences) Regulations 2020 (Regulations)
What is different from the NSW legislation:
The Regulations go quite a bit further than the NSW legislation, including measures to provide for:
- How deferred rent is to be repaid.
- Landlords passing on any relief provided to them by their financier(s) to their tenants
- A more comprehensive dispute resolution regime.
- Penalties for landlords who act in breach of the Regulations (although some might question whether those penalties constitute a sufficient deterrent).
- Landlords using the information provided to them by tenants applying for rent relief, to make their own applications for tax relief.
Similarly to NSW, however:
- The Regulations rely on landlords and tenants acting in ‘good faith’ which, again, is not defined. Generally speaking, however, this requires all parties to act honestly and not arbitrarily, and also act reasonably having regard to the interests of the other party, without being obliged to subordinate their own interests.
- The Regulations prohibit landlords from imposing any fees, interest or charges with respect to unpaid rent, but there is no similar constraint on the banks with respect to loan deferral arrangements (with the banks thus far requiring interest to continue to accrue through any deferral period).
- The Regulations do not address how, where a lease expires before the end of the relevant period (or the pandemic), a landlord can retain the contractual right to recover deferred rent
When were the Regulations passed, when did they commence, and what are their objectives?
On 1 May 2020 the Victorian Parliament passed the Regulations under the COVID-19 Omnibus (Emergency Measures) Act. The Regulations are retrospective and operate from 29 March 2020, with the objectives of implementing:
- Temporary measures to apply to tenants and landlords under certain eligible leases to mitigate the effect of measures taken in response to the COVID-19 pandemic and
- To implement mechanisms to resolve disputes concerning eligible leases,
and provide that landlords and tenants under eligible leases/licences must co-operate and act reasonably and in good faith in all discussions and actions associated with matters to which the Regulations apply.
What does ‘temporary’ mean?
The Regulations run for the ‘relevant period,’ defined as being the period between 29 March 2020 to 29 September 2020.
What is an eligible lease?
An eligible lease is a retail lease or a non-retail commercial lease or licence that is in effect on the day the Regulations came into operation (29 March 2020) and under which the tenant is, on or after the commencement of the Regulations, an SME entity AND an employer who qualifies for, and is participant in, the Federal JobKeeper scheme.
Note that the Victorian legislation expressly includes licence agreements in the definition of ‘eligible lease’, with ‘licence’ defined as ‘any licence under which a person has the right to occupy, non-exclusively, a part of premises for the sole or predominant purpose of carrying on a business at the occupied premises. In addition, the definition of ‘rent’ includes any licence fee payable under a licence.
What is an SME entity?
An SME entity is an entity which carries on a business or is a not-for-profit body, and one or both of the following applies:
- The entity’s annual turnover for the current financial year is likely to be less than $50m
- The entity carried on a business or was a not-for profit body in the previous financial year and its annual turnover for that year was less than $50m.
Who qualifies for JobKeeper?
To qualify for JobKeeper, the tenant must evidence a more than 30% downturn in its turnover resulting from the COVID-19 pandemic, unless the tenant is a not-for-profit entity (including charities), in which case the downturn to be evidenced is 15%.
What leases are excluded?
- The tenant entity is a member of a corporate group and the aggregate turnover of that group exceeds $50m or
- There is a relationship or connection between the tenant entity and another entity and the aggregate turnover of the tenant and the other entity exceeds $50m or
- Another entity has control or influence with respect to acts or decisions relating to the ownership, management or affairs of the tenant entity
Generally, leases/licences with respect to farming operations
- agricultural, pastoral, horticultural or apicultural activities
- poultry or dairy farming
- aquaculture, tree-farming or any business that consists of the cultivation of soils, the gathering of crops or rearing of livestock, grazing and/or agistment.
How do the Regulations protect tenants?
A tenant under an eligible lease may request rent relief from the landlord. The request must be in writing and must include a statement by the tenant that the lease is an eligible lease, together evidence that the tenant is an SME entity and qualifies for and is participant in the JobKeeper scheme.
On receipt of the tenant's request, the landlord must offer rent relief to the tenant within 14 days (unless the parties agree in writing to another time-frame). The rent relief offered by the landlord must apply to the relevant period and:
- relate to up to 100% of the rent payable during the relevant period
- unless the parties otherwise agree in writing, provide that no less than 50% of the rent relief must be in the form of a waiver of
- Take into account:
- the reduction in a tenant's turnover
- whether a failure to offer sufficient rent relief will compromise the tenant's capacity to fulfil its ongoing lease obligations, including the payment of rent;
- the landlord's financial ability to offer rent relief, including any relief provided to a landlord by its financier(s)
- any waiver of or reduction to any outgoings charged, imposed or levied in relation to the premises.
- Following receipt of a landlord's offer by a tenant, the tenant and the landlord must negotiate in good faith with a view to agreeing on the rent relief to apply during the relevant period.
How will any agreed rent relief be documented?
Rent relief may be given effect by the landlord and tenant by varying the existing lease by agreement in writing, or by any other written agreement between them that gives effect to the rent relief, in which case:
- where the payment of any rent is deferred, the landlord must offer the tenant an extension to the term of their lease on the same terms and conditions that applied before the commencement of the Regulations and
- the extension offered must be equivalent to the period for which rent is deferred, unless a landlord and a tenant otherwise agree in writing.
When and how is deferred rent repayable?
The Regulations provide that, unless otherwise agreed in writing between the parties:
- the landlord must not ask for payment of the deferred rent (or any part of it) until the earlier of the end of the relevant period or the expiry date of the lease and
- the landlord and tenant must vary the lease to provide that the tenant must pay the deferred rent to the landlord amortised over the greater of the balance of the term of the lease, including any extension or renewal, and a period of no less than 24 months.
Can a tenant make more than one request for rent relief?
If the financial circumstances of a tenant materially change after a variation to its lease, then the tenant may make a further request to the landlord for rent relief and the landlord and the tenant must again follow the processes set out above. In this instance, however, the landlord is not required to comply with the requirement that no less than 50% of the rent relief offered be in the form of a waiver of rent.
What relief is available for landlords?
A landlord may:
- apply to the Commissioner of State Revenue for tax relief with respect to any tax payable by the landlord with respect to the premises and
- in support of any such application, provide the Commissioner with any statement/evidence from the tenant that the lease is an eligible lease and the tenant is an SME entity who is participant in the JobKeeper scheme.
Can a landlord act to enforce any terms of the lease?
Provided that the tenant makes a request for rent relief in accordance with the above requirements, it will be deemed not to be in breach of its lease/licence if, during the relevant period:
- it does not pay the rent (or part of the rent) due under the lease/licence and/or
- it reduces its opening hours or closes the premises and ceases to carry on business at the premises,
and in those circumstances, the landlord must not:
- evict or attempt to evict that tenant and
- re-enter or otherwise recover the premises and
- call on any security under the lease/licence relating to the non-payment of rent.
Are there any penalties for landlords who act in breach of the Regulations?
Yes, in some circumstances. Where a tenant has made a request for rent relief under the Regulations and a landlord takes any action to evict the tenant, re-enter or recover the premises, or call on any security, then that landlord may be penalised by a fine equivalent to 20 penalty units for each or any of those actions. it takes as set out in the preceding paragraph. The value of a penalty unit is set annually by the Victorian Department of Treasury and Finance, and is currently $165.22. Accordingly, the fine for non-compliance by the landlord is currently $3,304.40 per breach.
What else is prohibited?
- A landlord must not increase the rent payable under any eligible lease at any time during the relevant period, unless the landlord and tenant agree otherwise in writing. Note that this does not apply to a retail lease to any extent to which rent is determined by reference to the tenant’s turnover.
- A landlord must not require a tenant to pay interest or any other fees or charges with respect to any rent deferred by variation or other written agreement.
What about outgoings?
The Regulations provide that:
- Landlords must consider waiving the recovery of outgoings or other expenses payable by a tenant for any part of the relevant period that the tenant is not able to operate their business at the premises.
Note also that if a tenant under an eligible lease is not able to operate their business from the premises for any part of the relevant period, the landlord may cease or reduce the provision of services at the premises as is reasonable in the circumstances, and also if the tenant reasonably requests this.
- If any outgoings in relation to the premises are reduced, then the landlord must not require the tenant to pay any amount greater than the tenant's proportionate share of the reduced outgoing and, further, if the tenant has already paid an amount greater than its proportionate share, the landlord must reimburse the excess amount to the tenant.
Note that the Regulations require only that landlords consider waiving recovery of outgoings, which means that continuing to pass outgoings on to the tenant is not a prohibited action.
What happens in the event of a failure to agree on rent relief?
Either a landlord or a tenant may refer any dispute or failure to agree with respect to the terms of the lease, including rent relief, to the Small Business Commission for mediation. Any such mediation is not limited to formal mediation procedures, and may include preliminary assistance in dispute resolution, such as the giving of advice so that the landlord and the tenant are fully aware of their rights and obligations and there is full and open communication between the parties.
Note that a request for mediation must be in writing, and the Regulations provide that the parties must not use mediation to prolong or frustrate reaching agreement.
What if mediation fails to resolve the dispute?
- Where the Small Business Commission has certified in writing that mediation has failed or is unlikely to resolve the dispute, then the dispute may be the subject of a proceeding in the Victorian Civil and Administrative Tribunal (VCAT) or a court (excluding the Supreme Court).
- the Small Business Commission has certified in writing that mediation has failed or is unlikely to resolve the disput OR
- the landlord or tenant has sought leave to commence a proceeding in relation to the dispute, and the Supreme Court has granted such leave,
then the dispute may be the subject of a proceeding in the Supreme Court.
- Disputes may also be dealt with through compulsory conferences, mediation or any other alternative dispute resolution process under various other dispute resolution processes available in Victoria, including under the Civil Procedure Act 2010, any rules or practice directions of VCAT or the Magistrates’ Court, County Court or Supreme Court.
If this raises any concerns or you need to seek legal advice, please get in touch with our property team on 1300 565 846.