Legal Insights

Victorian COVID-19 Commercial Tenancies Legislation & Regulations

By Marine Nincevic, Guy O'Connor, Stella Wild

• 05 May 2020 • 16 min read

Status of Legislation

The COVID-19 Omnibus (Emergency Measures) Act 2020 (the Act) came into operation on 24 April 2020.

On 1 May 2020, the Governor in Council made the COVID-19 Omnibus (Emergency Measures) (Commercial Leases & Licences) Regulations 2020 (the Regulations).

The Act and Regulations implement the leasing principles contained in the National Cabinet Mandatory Code of Conduct – SME Commercial Leasing Principles During COVID-19 (Code). In Victoria, it is the Act and the Regulations, rather than the Code, which now govern the rights and obligations of landlords and tenants in relation to the commercial leasing principles that are to apply to address the consequences of the COVID-19 pandemic.

While the Act and the Regulations broadly reflect the principles in the Code, there are some differences.

The Act and the Regulations now also provide answers to many of the questions raised by the Code and provide landlords, tenants and practitioners with greater certainty regarding the practical and legal application of the leasing principles. There are however still some areas of uncertainty.

Commencement of Regulations

The Regulations are retrospective and have effect as from 29 March 2020. Landlords and tenants are bound to comply with the requirements of the Regulations as from 29 March 2020, even though the Regulations were not in force at that date. Any agreements reached between, or actions taken by, tenants and landlords under an eligible lease from 29 March 2020 will need to be assessed to ensure that those agreements or actions comply with the requirements of the Regulations.

Nothing in the Act or the Regulations outlines how agreements previously entered into will be treated. We think that the better view is that those agreements will be able to be re-negotiated by a tenant where the agreement does not comply with the Act or the Regulations. It is less clear whether a landlord can re-negotiate an agreement which is more favourable to a tenant than the Act and the Regulations require, but consider this to be unlikely.

What is an ‘eligible lease’?

The Act defines those tenancies to which the Act applies as being “eligible leases”.

It is now clear that an “eligible lease” includes a retail lease (being a lease to which the Retail Leases Act applies) and a non-retail commercial lease or licence, in both cases where the tenant/licensee is a participant in the JobKeeper scheme and has a turnover of less than $50 million per annum.

A non-retail commercial lease or licence is a lease or licence of a premises which is let for the sole or predominant purpose of carrying on a business at the premises.

Licences are included where the licensee has the right to occupy, non-exclusively, a part of the premises for the purpose of carrying on a business at the occupied premises. The incorporation of licences in the definition of “eligible lease” captures franchise arrangements where the franchisor is the tenant under the lease and grants a licence to the franchisee to occupy the premises, and also captures other licence arrangements eg co-working space licences etc.

The Regulations have now defined “turnover” as being the following amounts:

  • the proceeds of sale of goods and/or services;
  • commission income;
  • repair and service income;
  • rents, leasing and hiring income;
  • Government bounties and subsidies;
  • interest, royalties and dividends; and
  • other operating income.

Although not specifically stated, we consider that this includes on line sales, and is to be calculated net of GST.

The Regulations expressly exclude from the definition of “eligible lease” any premises which is used wholly or predominantly for farming, grazing or other agricultural type purposes. This is a new exclusion which was not previously reflected in the Code.

Leases which would otherwise be an eligible lease are also excluded where the tenant/licensee is:

  • connected, within the meaning of section 328/125 of the Income Tax Assessment Act 1997 (Commonwealth) with another entity or other entities; or
  • an affiliate of another entity, or the entities are affiliates, within the meaning of section 328/130 of the Income Tax Assessment Act 1997 (Commonwealth),

and the combined turnover of the tenant / licensee and those other entities earned or received in the most recent financial year exceeds $50 million.

This exclusion is intended to ensure that the whole corporate structure of individual tenants is taken into account when determining whether a lease is an “eligible lease”. This reflects the principle that the $50 million annual turnover threshold needs to be applied in respect of corporate groups at group level, rather than at the individual tenant/retail outlet level.

If a lease or licence is not within the definition of “eligible lease”, the Act and the Regulations will not apply to that lease, and the ordinary legal principles applicable to leases and licences will continue to apply to that lease or licence. See our earlier e alerts on how those ordinary legal principles will apply.

Good Faith

The Regulations specify that a landlord and tenant under an eligible lease must cooperate and act reasonably and in good faith in all discussions and actions associated with matters to which the Regulations apply, namely, negotiating rent relief and other measures in accordance with the Act and the Regulations.

Process for Rent Relief

The Regulations now detail the process to be followed by a tenant in order to obtain rent relief. A formal request for rent relief must be made by the tenant in writing and must be accompanied by:

  • a statement by the tenant that the lease is an eligible lease and is not otherwise excluded from the operation of the Regulations;
  • information and evidence that the tenant:
    • qualifies for, and is a participant in, the Job Keeper Scheme; and
    • has turnover of less than $50 million.

Following receipt of a request for rent relief, a landlord must offer rent relief to the tenant within:

  • 14 days after receiving the request; or
  • a timeframe as agreed between the landlord and the tenant in writing.

A landlord’s offer of rent relief must be based on all the circumstances of an eligible lease and:

  • be up to 100% of the rent payable under the lease during the period 29 March 2020 to 29 September 2020 (relevant period);
  • provide that no less than 50% of the rent relief offered for the relevant period must be in the form of a waiver of rent, unless the landlord and the tenant otherwise agree in writing; and
  • take into account:
    • the reduction in a tenant’s turnover associated with the premises during the relevant period;
    • any waiver of outgoings by the landlord;
    • whether a failure to offer sufficient rent relief will compromise the tenant’s capacity to fulfil the
    • tenants ongoing obligations under the lease, including the payment of rent;
    • 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 in outgoings in relation to the premises.

The reference to ‘all of the circumstances of an eligible lease’ is quite broad, and allows significant flexibility regarding what is included in a landlord’s offer, and effectively requires each application to be treated on a case by case basis. This potentially allows the landlord to take into account the decision of a tenant to completely close the premises, when other reduced operating options for operating the business were available.

The phrase ‘take into account’ is also broad, and allows for a case by case analysis of the various factors when determining the appropriate rent relief to be offered. Specifically, the rent relief does not necessarily need to be directly proportional to the reduction in a tenant’s turnover (either at the premises or overall across multiple premises), and issues such as the landlord’s capacity to provide relief as well as the ongoing ability of the tenant to comply with the lease are also relevant factors to be taken into account.

Although it is obliged to provide certain financial information as part of an application for rent relief, it still remains unclear what additional financial information a landlord can require from a tenant. In our view, the requirement to act in good faith together with the specific new confidentiality provisions (see below) would entitle a landlord to at least require the tenant to provide financial information necessary to substantiate the existing and ongoing impact on the tenant’s turnover during the relevant period.

The Regulations also do not address how a landlord’s offer can address changes during the relevant period which materially improve the tenant’s turnover (compare the right of the tenant to claim further relief as discussed below). Landlords need to take this potential into account when determining the structure of the rent relief offered, and should consider a process which enables regular review and variation to the rent relief offered to reflect any substantial improvement in the tenant’s turnover during the relevant period.

If the financial circumstances of the tenant materially change after a variation to the lease has been made or agreed, the tenant may make a further request for rent relief. This only applies to a tenant, so (as noted above), when negotiating any variation of lease, it is important for landlords to take into account the potential for there to be a material improvement in the tenant’s turnover during the period where rent relief is provided.

The requirement for a minimum 50% waiver does not apply to any subsequent application by a tenant for rent relief, and therefore 100% of any further reduction may be by way of deferral or reduction.

Prohibition on rent increases

The landlord must not increase the rent payable under the lease at any time during the relevant period unless the landlord and the tenant agree in writing that this restriction does not apply to their lease.

The restriction does not apply to a retail lease to the extent that it provides for rent to be determined by reference to the volume of trade of the tenant’s business.

Extension of Term

If there is an agreement to defer rent under an eligible lease, the landlord must offer to extend the term of the lease on the same terms and conditions as applied before the commencement of the Regulations for a period equivalent to the period for which the rent is deferred. There is no obligation on a tenant to agree to any extension of the term.

There is some uncertainty regarding the period of extension required to be offered. In our view, the period of the extension is for the period during which the payment of rent is reduced and deferred to a later date, and not the period over which the amount of any deferred rent is to be repaid. For example, a period of 3 months where the rent is reduced and wholly or partly deferred to a later date, would allow for a 3 month extension to the term, even if the deferred amount was payable over a longer period not less than 24 months (see below).

Recovery of outgoings

The Regulations require that the landlord must consider waiving recovery of any outgoings or other expense payable by a tenant for any part of the relevant period that the tenant is not able to operate their business at the premises.

If any outgoings charged or imposed on the premises are reduced, e.g. land tax relief, the landlord must pass the benefit of that reduction onto the tenant and if the amount has already been paid by the tenant, the landlord must reimburse the excess amount to the tenant as soon as possible.

Payment of deferred rent

The landlord must not request payment of any part of the deferred rent until the earlier of 29 September 2020 and expiry of the term of the lease (before any extension agreed under the Regulations). The deferred rent must be amortised over the greater of:

  • the balance of the term of the lease, including any extension to the term agreed as part of the rent relief agreement; and
  • a period of not less than 24 months.

This means that the deferred rent must be amortised and repaid over a minimum period of 24 months (unless the landlord and tenant otherwise agree), even when the term of the lease expires earlier. In that case, the landlord will be an unsecured creditor for the amount of any unpaid rent, and is not entitled to require any additional security for the payment of that unsecured deferred rent.

The Regulations do not address whether a landlord can retain any existing security provided under a lease, for the period after the lease expires, until all the outstanding deferred rent is paid. In our view, a landlord can retain any security until the full amount of the deferred rent is paid unless the lease requires the security to be returned earlier. Whether a security can be retained, and the amount of any security which can be retained, will need to be assessed on a case by case basis having regard to the specific terms of the lease and the security. This is a key issue for landlords.

The method for amortisation of the deferred rent is to be agreed by the landlord and the tenant.

The landlord and the tenant can agree in writing that the provisions relating to the deferral of rent do not apply, and can agree alternative repayment provisions including repayment over a period of less than 24 months.

A landlord must not charge interest or any other fee or charge in relation to any payment of deferred rent.

Restrictions on rent recovery/termination

A tenant is not in breach of an eligible lease if it does not pay the amount of rent required to be paid under the lease during the relevant period, but only if the tenant:

  • complies with the application for rent relief procedure set out in the Regulations; or
  • during the relevant period, pays an amount of rent in accordance with the agreement reached with the landlord.

A landlord must not evict or attempt to evict a tenant where the tenant is complying with those obligations.

It is not clear by when a tenant must make an application for rent relief in order to be considered to be complying with the Regulations. Now the process for application is known, we expect that a tenant will be afforded a reasonable period within which to make an application. Again, what is a reasonable period to make an application will need to be assessed on a case by case basis.

A landlord must not have recourse, or attempt to have recourse, to any security relating to the non-payment of rent under an eligible lease where the tenant is complying with the provisions of the Regulations. Security includes a bond, security deposit, indemnity or guarantee.

Change in trading hours

A tenant is not in breach of the lease if during the relevant period it:

  • reduces the opening hours of the business they carry out at the premises; or
  • closes the premises and ceases to carry out any business at the premises.
  • the Small Business Commission has certified in writing that mediation has failed or is unlikely to resolve the dispute; or
  • the Supreme Court has granted leave to commence a proceeding in relation to the dispute.

Confidentiality of information

The Regulations impose specific restrictions on a landlord and tenant in relation to the confidentiality of information provided, and require that the landlord and tenant must not divulge or communicate protected information obtained in connection with the Regulations, e.g. financial information supporting the basis on which an application for rent relief is made or the amount of the relief provided etc, except to defined persons or as otherwise required by law.

A landlord may provide to the Commissioner of the State Revenue Office the statement and information provided by a tenant as part of an application for rent relief for the purpose of the landlord making application for a tax relief measure in relation to any tax payable by the landlord in relation to the premises, e.g. land tax relief.

Dispute resolution

The Regulations provide for the referral of a dispute under an eligible lease to the Small Business Commission for mediation. The relevant mediation procedures apply to the eligible lease dispute as if the dispute were a retail tenancy dispute.

VCAT is given jurisdiction to hear any disputes under the Regulations as if the dispute was a retail tenancy dispute under part 10 of the Retail Leases Act 2003.

An eligible lease dispute may only be the subject of a proceeding in VCAT or in a court (other than the Supreme Court) if the Small Business Commission has certified in writing that mediation has failed, or is unlikely to resolve the dispute.

An eligible lease dispute may only be subject of a proceeding in the Supreme Court if:

  • the Small Business Commission has certified in writing that mediation has failed or is unlikely to resolve the dispute; or
  • the Supreme Court has granted leave to commence a proceeding in relation to the dispute.

Next steps

While there is now greater clarity regarding the process and principles governing the basis on which tenants can apply for, and be granted, rent relief, landlords and tenants still need to review each of their leases and the application of the Act and the Regulations to each of those leases on a case by case basis to determine how the Act and the Regulations apply to that lease.

There remain a number of key issues which landlords and tenants need to ensure are properly reflected in any negotiated rent relief variation so as to ensure that their respective rights and obligations are properly protected.

If we can assist you in understanding your rights and obligations under your leases or licences, or assist with the negotiation and drafting of appropriate variations to agreements to reflect rent relief arrangements, please contact us.

Maddocks has produced guides to a range of legal issues raised by COVID-19. You can access these guides here.

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