New Victorian Regulations designed to mitigate the effect of the COVID-19 (coronavirus) pandemic on “eligible leases” in Victoria have finally been released. They shall apply retrospectively from 29 March 2020.
A Mandatory Code was announced by the Federal Cabinet in April 2020, but this contained high level “leasing principles” only and did not represent the law in Victoria.
The new Regulations provide much needed legislative clarity on the specific rights and obligations of commercial tenants and landlords in Victoria during the COVID-19 pandemic. The Regulations broadly follow the scheme of the Mandatory Code, but with a number of important exceptions.
These exceptions include that the amount of rent relief offered by landlords to tenants does not need to be directly proportional to the reduction in the tenant’s turnover – arguably a win for landlords. Also, a formal rent relief offer process must be followed in order for the tenant to avoid being evicted, sued for non-payment of rent or the security deposit being used. An influx of compulsory mediations is expected to follow.
Rent relief period
- The Regulations operate retrospectively from 29 March 2020 until 29 September 2020.
- The Regulations (and relevant rent relief entitlements) only apply to “eligible leases”. An eligible lease is a lease under which the tenant:
- is a small-medium sized business (i.e. has an annual turnover of up to $50 million, including turnover of a corporate group the tenant is a member of or affiliated with – various technical definitions are adopted to determine this); and
- qualifies for and participates in the JobKeeper scheme.
Agricultural leases (or leases permitting the tenant to carry out farming activities) are not eligible leases. This is surprising and not previously foreshadowed in the Mandatory Code.
The Tenant under an eligible lease is not automatically protected under the Regulations
- The tenant does not get any protection under the Regulations, and the provisions of the lease continue to apply (including provisions giving the landlord the right to evict a tenant, use the security deposit to make good its loss and sue for unpaid rent) unless:
- the tenant has made a written request to the landlord for rent relief that strictly complies with the technical requirements of the Regulations. These include ensuring the request contains a statement by the tenant that it is an “eligible lease” that is not excluded by the corporate group provisions of the legislation and evidence that the tenant is an SME that qualifies for and participates in the JobKeeper scheme.
- The tenant follows the negotiation procedure set out in the Regulations, which may include participating in a compulsory mediation; and
- If an agreement regarding rent relief has been reached, the tenant complies with that agreement (noting that the tenant has the right to re-request rent relief, even after an agreement has been reached, if the tenant’s financial circumstances have changed since that agreement was reached).
The landlord must make the tenant a written rent relief offer
- Upon receiving a request under (3)(a) above, the landlord has 14 days (or a different timeframe by agreement) to make an offer for rent relief. The offer must, among other things:
- be based on all the circumstances of the eligible lease;
- apply to the relevant period up to 29 September 2020;
- provide that no less than 50% of the rent relief offered is in the form of a waiver of rent, unless a landlord and a tenant otherwise agree in writing;
- take into account:
- the reduction in a tenant’s turnover associated with the premises during the relevant period; and
- whether a failure to offer sufficient rent relief would compromise a tenant’s capacity to fulfil the tenant’s ongoing obligations under the eligible lease, including the payment of rent; and
- a landlord’s financial ability to offer rent relief, including any relief provided to a landlord by any of its lenders as a response to the COVID-19 pandemic; and
- any reduction to any outgoings charged, imposed or levied in relation to the premises.
VCAT or a Court may ultimately need to determine if the landlord’s offer complies with the above, if the parties cannot come to agreement (see below).
Issues arising from terms of the offer the landlord must make
- There are some interesting issues that arise from the above offer requirements. The requirement that the landlord’s offer:
- Must take into account “a landlord’s financial ability to offer rent relief” is important, as the ”leasing principles” in the Mandatory Code made little reference to the landlord’s financial capacity and this has been a source of significant consternation.
Consequently, if the landlord is a retiree with no income except the income from the lease, this may be taken into account in the landlord’s offer. Similarly, if the landlord is highly leveraged and its lenders have provided only limited extensions on its loans, then this, too, is a consideration.
- must ‘be based on all the circumstances of the eligible lease” is quite broad and allows significant latitude in the terms of the landlord’s offer. It remains unclear what financial information the tenant will need to provide to its landlord.
The Small Business Commission has foreshadowed a guideline on the financial information to be provided. However, whatever that guideline ends up saying, given the discretion in the terms of the offer given to the landlord, we think it would be prudent for a tenant to provide at least some trading figures to their landlords because it is difficult for the landlord to take into account the tenant’s ability to pay the reduced rent without at least some financial information.
- “must provide that no less than 50% of the rent relief offered by the landlord be in the form of a waiver of rent” leaves things unclear in terms of whether the other 50% must be a deferral (which was the case under the Code).
If a deferral is offered, the deferred rent is not repayable until after the earlier of the expiry of the lease and 29 September 2020 (unless otherwise agreed). The landlord must also offer an extension to the lease (on the same terms at the end of the lease) if required to ensure the tenant has at least 24 months to repay the deferred rent.
How to document a rent relief agreement
- Agreements for rent relief must by confirmed by an amendment to the lease or a side agreement. However, as is always the case when dealing with land, it is still important to record the agreement in a formal document to ensure it complies with the rapidly changing legal landscape and there is a clear record of the agreed terms.
What if the parties cannot come to an agreement
- If the parties cannot agree on the terms of the rent relief, either party can refer the matter to mediation at the Small Business Commissioner and have a lawyer present to represent them. Failing resolution through mediation, parties can choose to go to either VCAT or Court to have disputes under the Regulations determined. If parties go to VCAT, the ‘no cost’ rule in s 92 of the Retail Leases Act 2003 (Vic) applies (i.e. each party bears its own costs).
- If outgoings are reduced (eg land tax for non-retail leases or Council rates), then the landlord must reduce the amount payable by the tenant and reimburse them for overpayments since 29 March 2020.
Interest or fees
- No fees, interest or charges can be levied for late payment of rent or deferred rent.
- Leases cannot be terminated for closures or a reduction in trading hours.
- Landlords and tenants must not divulge or communicate personal, business process or financial information obtained under or in connection with the Regulations, save in specified circumstances.
GET LEGAL ADVICE
Landlords and tenants should obtain legal advice from an expert in commercial leasing and have any agreement carefully documented to ensure it complies with the rapidly changing legal landscape.
Pointon Partners have developed a comprehensive COVID-19 Lease Variation Document which can be adapted to each circumstance and each lease situation. It is important that agreements are documented carefully to take into consideration the present but also the future including future changes to the landlord and tenant’s interests (such as a sale of the land or a transfer of the tenant’s business). Don’t rely on email correspondence for any agreement. Document it properly. A poorly drafted document or agreement will have a longer lasting impact than COVID-19.
Pointon Partners also has significant experience negotiating COVID-19 related amendments to leases on behalf of both landlord and tenants.
Whether you are a tenant or a landlord, if you are seeking assistance as to how to best proceed in this uncertain environment please contact us on (03) 9614 7707.