The Amended COVID-19 Commercial Tenancies Rent Relief Regulations – what are the changes and the implications for commercial tenancies?
On 29 September 2020, the COVID-19 Omnibus (Emergency Measures) (Commercial Leases and Licences) Miscellaneous Amendments Regulations 2020 (Amended Regulations) came into force.
The Amended Regulations implement the amendments to the rent relief provisions contained in the COVID-19 Omnibus (Emergency Measures) (Commercial Leases and Licences) Regulations 2020 (Existing Rent Relief Regulations) previously announced by the State Government on 20 August 2020.
The Amended Regulations make some significant changes to the operation of the Existing Rent Relief Regulations as detailed below, including:
- extending the application of the rent relief provisions from 29 September 2020 to 31 December 2020;
- imposing requirements on tenants to provide additional information in support of a rent relief application;
- the requirement for landlords to provide rent relief in proportion with a decline in tenant turnover;
- the ability for existing rent relief agreements negotiated between landlords and tenants to be revisited and renegotiated in certain circumstances;
- the loss of the ability of a tenant to claim rent relief for the period up to 29 September 2020 if a formal application for rent relief has not been made, or an agreement entered into, before that date;
- new powers for the Small Business Commission and VCAT to make binding determinations in relation to applications for rent relief; and
- providing for certain of the provisions of the Existing Rent Relief Regulations and the Amended Regulations to continue to apply to tenants under eligible leases who subsequently become ineligible for the JobKeeper scheme.
Except where amended by the Amended Regulations, the existing provisions in the Existing Rent Relief Regulations continue to apply to applications for rent relief for the extended period up to 31 December 2020.
Commencement of Amended Regulations
The Amended Regulations came into operation on 29 September 2020 and take effect as from 29 September 2020. They are not retrospective. The Existing Rent Relief Regulations apply up to 29 September 2020.
Extension to rent relief period
The Amended Regulations extend the period of rent relief available to tenants beyond 29 September 2020 to 31 December 2020.
However, a lease still needs to have been in place on 29 March 2020 for the Amended Regulations to apply. Leases entered into after 29 March 2020 are not covered by the Existing Rent Relief Regulations or the Amended Regulations.
If a tenant has not made an application for rent relief under the Existing Rent Relief Regulations prior to 29 September 2020, then rent relief can no longer be sought for the period 29 March 2020 to 29 September 2020. This is because the Amended Regulations provide that any new offer of rent relief which a landlord is required to make in response to an application for rent relief made under the Amended Regulations only applies from the period starting on the date that the formal request for rent relief is made under the Amended Regulations.
There is no savings provision in the Amended Regulations which operates to preserve any right for a tenant to make an application for rent relief relating to the period prior to 29 September 2020 under the Existing Rent Relief Regulations, if it has not already done so.
This will have a material impact on any tenants who have not yet commenced a formal application for rent relief, or reached an agreement with the landlord, relating to the period from 29 March 2020 to 29 September 2020.
If a tenant has grounds for making an application for rent relief post 29 September 2020 (see below), the tenant should make that application as soon as possible because any rent relief will only apply from the date that the application for rent relief is made.
Changes to definition of eligible lease
Changes have been made to the definition of an “eligible lease” to reflect recent changes made to the Commonwealth JobKeeper scheme. However, the key requirements for an eligible lease remain that the tenant is a SME entity (being an entity with a turnover of less than $50m per annum) and entitled to JobKeeper payments under the JobKeeper scheme.
The principal change is that a sole trader is now able to be an eligible lease. This was not previously the case which was an anomaly under the Existing Rent Relief Regulations.
The same exclusions for grouped entities and agricultural leases continue to apply.
The Amended Regulations clarify that for the purposes of calculating turnover, any coronavirus economic response payment received by a tenant (which includes JobKeeper payments and other Commonwealth benefits paid in respect to the coronavirus pandemic) is not to be included when calculating turnover.
Additional information required for rent relief
The Amended Regulations impose additional information requirements which must be satisfied by a tenant in an application for rent relief. Additional information now required from the tenant as part of its application for rent relief includes:
- a statement setting out the tenant’s decline in turnover that is associated with the premises (and no other premises). This now makes it clear that rent relief is to be granted on a premises by premises basis. This will exclude internet sales or sales from other premises when determining whether a decline in turnover has occurred. Conversely, a landlord will only be required to grant rent relief if there is a decline in turnover in the specific premises, and not for any decline in turnover in another premises which may have incurred greater reductions in turnover.
The decline in turnover is to be calculated in accordance with the decline in turnover test utilised by the tenant in respect of their JobKeeper application and in relation to the tenant’s most recent decline in turnover test period (see below);
- the provision of a receipt number issued by the ATO when the tenant elected to participate in the JobKeeper scheme and a copy of the tenant’s most recent notice under the JobKeeper rules to the ATO. This clarifies the previous ambiguous requirements relating to the information which a tenant was required to provide to support the statement that it qualified for, and was a participant, in the JobKeeper scheme;
- evidence of the tenant’s stated decline in turnover at the premises, including at least one of the following:
- extracts from the tenant’s accounting records;
- the tenant’s business activity statements relating to the relevant turnover test period;
- statement issued by an authorised deposit taking institution in relation to the tenant’s account; or
- a statement prepared by a practising accountant.
- extracts from the tenant’s accounting records;
The requirement to provide “at least 1” of the stated items, departs from the earlier guidance from the Small Business Commission that only 1 of those items was required to be provided by a tenant.
Amendments to the basis for calculating rent relief
Post 29 September 2020, landlords are now required to provide a rent relief offer that is “at a minimum” proportional to the decline in the tenant’s turnover associated with the premises consistent with the decline in turnover test utilised by the tenant (see above).
This alters the previous formula for calculating rent relief which provided that a decline in the tenant’s turnover was only one of the matters to be taken into account when determining an offer for rent relief. This means that rent relief will be proportional to a decline in turnover in a single period which will not necessarily be reflective of the decline in turnover for the whole period. This may lead to some unexpected results depending on the period used, and potentially allows tenants to manipulate the decline in turnover by delaying the issue of invoices to a later period to maximise the decline in turnover for that period used by the tenant for the purpose of the tenant’s decline in turnover test.
The requirement that the waiver of rent must constitute at least 50% of the rent relief offered by a landlord remains unchanged.
The previous requirement under the Existing Rent Relief Regulations enabling a landlord to take into account its own financial ability to provide rent relief has been removed. The Amended Regulations now require landlords to provide a rent reduction proportional to the decline in the tenant’s turnover irrespective of the financial ability of a landlord to offer rent relief. Accordingly, there is no longer any balance against the potential financial hardship this requirement will impose on landlords, particularly those small landlords relying on rent for income support, or who will be liable for ongoing mortgage payments.
The Amended Regulations still require ‘all of the circumstances of the lease’ to be taken into account. However, it is not clear what weight any circumstance other than the decline in turnover will have on determining the appropriate rent relief.
The Amended Regulations also make it clear that in the case of a gross lease where the rent charged is inclusive of outgoings, the landlord must offer rent relief with respect to the rent payable inclusive of outgoings. This increases the benefit to tenants, and the corresponding burden on landlords, who have entered into gross leases. The effect of the provision is to provide a tenant under a gross lease with a greater benefit than would be available to a tenant under a net lease, because the tenant under the gross lease will also have its proportion of outgoings reduced in proportion to its reduction in turnover. The same entitlement does not apply to tenants under a net lease.
Impact on existing agreements
Under the Amended Regulations, a tenant is entitled to apply for subsequent rent relief if:
- the tenant’s financial circumstances materially change;
- an existing agreement for rent relief entered into prior to 29 September 2020 does not allow for rent relief proportionate with a decline in turnover; or
- the agreement entered into pre 29 September 2020 does not apply to the period ending 31 December 2020.
Critically, the Amended Regulations enable tenants with existing rent relief agreements which do not reflect rent relief that is proportional to the decline in the tenant’s turnover, to reopen negotiations with a landlord, and require the landlord to provide a rent relief offer in line with the new requirement that the rent relief offer is to be “at a minimum, proportional to the decline in the tenant’s turnover associated with the premises”. This is likely to lead to the requirement to renegotiate existing rent relief agreements made in good faith between landlords and tenants even where there has been no material change in the financial circumstances of the tenant.
While there is some ambiguity in the drafting, the better view is that any request by a tenant for a new rent relief offer on the basis that the original agreement was not consistent with the proportionate reduction in turnover principle:
- will not alter the terms of the existing rent relief agreement prior to the date the tenant makes a further formal application for rent relief; and
- will only apply for the period starting from the time that the tenant makes a further application for rent relief, and apply for the period up to 31 December.
These new provisions replace the provision in the Existing Rent Relief Regulations which allowed a tenant to make a further request for rent relief after entering into a rent relief agreement in circumstances where the financial circumstances of the tenant materially changed.
Payment of deferred rent
The Amended Regulations now provide that a landlord must not request payment of any part of deferred rent until 31 December 2020. This requirement applies to any rent deferred by variation or other agreement entered into prior to 29 September 2020. If a rent relief agreement provided for deferred rent to commence to be payable as from 29 September 2020, this provision now makes it clear that the deferred rent is not required to be commenced to be repaid prior to 31 December 2020.
The requirement that any deferred rent must be payable over the greater of the balance of the term of the lease or a period of not less than 24 months remains unchanged. Similarly, the right of the tenant to receive an extension to the lease term equivalent to any period during which the rent is deferred also remains unchanged.
Restrictions on termination
The restrictions on terminating a lease for non-payment of rent provided the tenant complies with the Amended Regulations remain unchanged, but have now been expanded to cover non-payment of rent ‘or outgoings’.
Provisions where tenant ceases to remain eligible for JobKeeper scheme payments
The Amended Regulations make provision for what is to happen if a tenant under an eligible lease subsequently becomes ineligible for the JobKeeper scheme. Generally, if the tenant was eligible for JobKeeper when it made its request for rent relief or agreed on rent relief, then the lease remains an eligible lease. The Amended Regulations provide as follows:
- where there is an existing rent relief agreement in place, while the rent relief agreement applies, regulations 9 (no termination for non payment of rent), 12 (prohibition on rent increases), 14 and 15 (reduction of outgoings or expenses) and 18 (reduction in business hours or ceasing business) under the Existing Rent Relief Regulations continue to apply;
- if before, on or after the commencement of the Amended Regulations, the tenant has made an application for rent relief, and the tenant subsequently ceases to be entitled to JobKeeper payments, the tenant’s lease will continue to be considered to be an eligible lease under the Amended Regulations until any agreement relating to rent relief ceases to apply or is revoked;
- if a rent relief agreement is in place and the tenant ceases to be entitled to JobKeeper payments, regulations 13 (extension of the term), 16 (payment of deferred rent) and 17 (no fees, interest or charges) continue to apply with respect to any rent deferred under the rent relief agreement until the rent relief agreement ceases to apply.
New powers to Victorian Small Business Commission to make binding orders for rent relief
One of the flaws in the Existing Rent Relief Regulations was the uncertainty regarding the power of the Victorian Small Business Commission (SBC) and VCAT to make binding orders for rent relief in the circumstances where mediation has failed.
The Amended Regulations provide that where mediation has failed, if the SBC is of the view that a landlord has not engaged in the mediation process in good faith (including refusing to respond to a dispute notice), it can issue a “regulation 20A certificate”. A tenant can then apply through the SBC website for a binding order from the SBC, if the dispute relates to a tenant’s request for rent relief under the Amended Regulations and the tenant has not commenced proceedings in VCAT or a court in relation to the dispute. There is no ability under the Amended Regulations for a landlord to apply to the SBC for a binding order.
The SBC will then provide written notice of the application to the landlord, and the landlord has up to 5 business days to respond with a written submission and any material that it considers the tenant has failed to provide. The SBC may also request more information from both parties, or that the tenant provide evidence that it has taken reasonable steps and has acted in good faith to seek to agree the rent relief with the landlord.
The SBC now has power to make a binding order directing landlords under eligible leases to give or agree to give specified rent relief to tenants under eligible leases. There is no hearing for an application for a binding order, so the SBC will make a binding order on the basis of the written materials provided to it by the tenant and the landlord.
Upon reviewing and considering all materials, the SBC can decide to make a binding order if, amongst other things:
- neither the tenant nor the landlord has commenced proceedings in VCAT or a court in relation to the eligible lease dispute to which the application relates; and
- the SBC is satisfied that it is fair and reasonable in all the circumstances to make the binding order, that directs the landlord to give specified rent relief.
Any binding order made comes into effect after a copy of the order is given to the landlord.
The order can require waiver of part or all of the rent payable under an eligible lease from the date of the tenant’s request for rent relief in respect of which the application for a binding order was made to 31 December 2020, and / or deferrals of rent for the same period.
A landlord or a tenant under an eligible lease can apply for amendment or revocation of a binding order, and the SBC also has the power to amend an order on its own initiative.
A landlord or a tenant under an eligible lease can also now apply to VCAT for a review of the binding order, or for a determination of whether the landlord has complied with the binding order. A tenant can also apply to VCAT for the determination of whether the landlord has complied with the binding order.
VCAT has now been given power to make binding orders on the application of a landlord or a tenant.
These new powers to make binding orders apply to existing lease disputes which are unresolved, even where the application for rent relief was made prior to the commencement of the Amended Regulations.
The introduction of the Amended Regulations has added a further layer of complexity and potential uncertainty regarding the process and principles governing the basis on which a tenant can apply for, and be granted, rent relief and/or reopen previous agreements reached in relation to rent relief.
If we can assist you in understanding your rights and obligations under your existing leases and licences, your rights and obligations in relation to existing rent relief agreements and rent relief agreements currently being negotiated, or assist with the negotiation and drafting of appropriate variations to agreements to reflect the Amended Regulations, please contact us.
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