More certainty for Victorian landlords and tenants with release of new COVID-19 Regulations

Regulations have now been made in Victoria to give landlords and tenants greater certainty on the relief available to commercial tenants as a result of the COVID-19 pandemic.

This gives landlords and tenants the further information they have been waiting for to commence or continue negotiations in relation to granting COVID-19 rent relief. To ensure relief is properly sought and granted, landlords and tenants should ensure they are fully aware of the requirements for requesting and granting relief and comply with those requirements.

The COVID-19 Omnibus (Emergency Measures) (Commercial Leases and Licences) Regulations 2020 are effective from 29 March 2020 and apply until 29 September 2020 (Relevant Period), and reflect the principles set out in the Mandatory Code of Conduct for commercial tenancies released by the Prime Minister on 7 April 2020.

What leases are covered by the Regulations?

The Regulations apply to "eligible leases" as defined under the COVID-19 Omnibus (Emergency Measures) Act 2020, which are retail leases or non-retail commercial leases or licences under which the tenant:

• carries on a business or is a non-profit body and has a likely annual turnover in the current financial year of less than $50 million (or its annual turnover in the previous financial year was less than $50 million) (SME Entity);
• is an employer who qualifies for the JobKeeper scheme; and
• is a participant in the JobKeeper scheme.

Grouping provisions have been included in the Regulations so that a tenant is part of a group for the purposes of determining turnover if it is connected to another entity (ie. a “connected entity”) within the meaning of section 328-125 or an "affiliate" of another entity within the meaning of section 328-130 of the Income Tax Assessment Act 1997 (Cth) (ITAA 1997). In very broad terms for the purposes of the aforementioned provisions of the ITAA 1997:

• an entity is connected to another entity (ie. a “connected entity”) if one of the entities “controls” the other entity or if the two entities are “controlled” by the same third entity (of which the relevant “control” tests generally have a 40% threshold); and
• an “affiliate” of an entity is an individual or company that acts or could reasonably be expected to act, in accordance with the direction or wishes of the entity or in concert with the entity in relation to the business affairs of the individual or company.

Unlike in New South Wales, the Regulations do not specifically prescribe whether turnover from internet sales or services is to be included in turnover calculations.

Commercial leases not covered by the Regulations

Eligible leases do not include:

• leases entered into after 29 March 2020 (whether or not pursuant to an option); and
• leases for various agricultural purposes.

Things to consider: This means that if you are currently negotiating a new lease, tenants will need to expressly negotiate relief or other rights required due to the impact of COVID-19 as they will not be entitled to the protections afforded by the Regulations.

What protection is provided to tenants under eligible leases?

Many of the Regulations are stated to form part of eligible leases and therefore act, in effect, as amendments to those leases. This includes a general provision that landlords and tenants under eligible leases must co-operate and act reasonably and in good faith in discussions and actions relating to the requirements of the Regulations.

The Regulations set out a methodology for landlords and tenants to negotiate rent relief under eligible leases. If a tenant complies with this process and pays an amount of rent in accordance with the resulting re-negotiated agreement:

• a tenant is taken not to be in breach of its lease for failing to pay the full amount of rent otherwise payable under the lease;
• a landlord cannot rely on any such failure to attempt to evict the tenant or re-enter the premises; and
• a landlord cannot seek to call on any security that it may hold for the tenant's performance under the lease to recover any shortfall in rent.

A tenant under an eligible lease that reduces its trading hours or closes its business during the Relevant Period will not be in breach of its lease. A landlord is also prohibited from exercising its rights set out above in those circumstances.

Things to consider: These provisions only relate to a failure to pay rent during the Relevant Period. Any prior defaults under an eligible lease are not subject to this regime. Further, it is not entirely clear at what point a landlord's rights in relation to non-payment of rent, eviction, re-entry and calling on security are curtailed. On a literal reading of the Regulations, they require:

• the tenant to have initiated a request for rent relief;
• the landlord to have made an offer;
• the parties to have negotiated in good faith; and
• the tenant to have paid rent in accordance with a re-negotiated agreement,

in order for the landlord's rights to be affected. Some may argue that until all of those things occur, a landlord may continue to exercise its rights unaffected. However, we would strongly advise landlords to assume their rights under an eligible lease have been diminished once a tenant has initiated the process referred to above, unless the tenant subsequently fails to comply with that process.

How does a tenant under an eligible lease take advantage of the protections afforded by the Regulations?

A tenant under an eligible lease may request rent relief from its landlord. This request must be in writing accompanied by:

• a statement by the tenant that it is a tenant under an eligible lease and is not excluded as an eligible lease under the grouping provisions;
• information to evidence that the tenant is an SME entity and is eligible for, and has registered to participate in, the JobKeeper scheme.

What must a landlord do if it receives a request for rent relief?

A landlord who receives a request for rent relief which complies with the above requirements must offer relief within 14 days of receiving the request unless the parties agree to a different time frame.

The landlord's offer must be based on all the circumstances of the lease and:

• relate to up to 100% of the rent payable during the Relevant Period;
• provide for at least 50% of rent relief offered by way of a waiver of rent for the Relevant Period, unless the landlord and the tenant otherwise agree in writing;
• apply to the Relevant Period; and
• take into account:
  • the reduction in the tenant's turnover during the Relevant Period;
  • any relief from payment of outgoings that has been provided to the tenant;
  • whether a failure to give rent relief would compromise the tenant's ability to meet its obligations under the lease;
  • the landlord's financial ability to provide rent relief including taking into account any relief provided by the landlord's lenders;
  • any reduction of outgoings charged, imposed or levied on the landlord for the premises.

Once the landlord makes an offer the parties must negotiate in good faith to reach an agreed position. If the financial circumstances of the tenant materially change after an agreement has been reached, the tenant can request further relief and the same process will apply, except that the landlord need not offer at least 50% of rent relief again by way of a waiver of rent.

Deferral of rent

Part of a landlord's offer may be to defer payment of part of the rent. If this forms part of the agreement with the tenant then, unless otherwise agreed in writing by the landlord and the tenant, the landlord must offer to extend the term of the lease for a period equal to the period during which rent was deferred. Further, the tenant cannot be required to pay any part of the deferred rent until the earlier of:

• the end of the Relevant Period; and
• the expiry date of the lease (disregarding any extension granted).

Unless otherwise agreed between the landlord and the tenant in writing, any deferred rent must be amortised (in a manner agreed by the landlord and the tenant) over the greater of:

• the balance of the term of the eligible lease after the Relevant Period ( including any extension period); and
• a period of not less than 24 months.

No interest or other charges can be made in relation to deferred rent.

Things to consider: These provisions mean that a tenant may continue to have an obligation to pay deferred rent after the lease has ended. Whether the landlord could continue to hold any security that it may have for this payment during the period after the end of the lease will depend on how the security provisions in the lease have been drafted, and may need to be considered when the parties are seeking to reach agreement.

Rent reviews

During the Relevant Period a landlord cannot increase the rent under an eligible lease unless the landlord and the tenant otherwise agree in writing.

This does not apply to rent payable under a retail lease that is determined by reference to turnover.

Outgoings

Under the Regulations:

• a landlord must consider waiving Outgoings or any other expense payable by a tenant under an eligible lease for any part of the Relevant Period that the tenant is not able to operate its business from the premises;
• a landlord may cease to provide all or some services at the reasonable request of the tenant if the tenant is not able to operate its business from the premises and it is reasonable in the circumstances to do so; and
• if any outgoings charged, imposed or levied in relation to the premises are reduced, a landlord can only require a tenant to pay its share of the reduced amount.

"Outgoings" cover both statutory outgoings and expenses incurred in operating, repairing and maintaining the building or complex in which premises are located.

What if the landlord and tenant cannot agree?

A dispute about any of the matters in the Regulations can be referred by either party to the Small Business Commissioner for mediation. Parties may be represented by lawyers at these mediations but the mediator may choose to meet with the parties without their lawyers.

The mediation provisions are generally the same as those under the Retail Leases Act 2003 (Vic). If the Small Business Commissioner certifies that mediation has failed or is unlikely to resolve the dispute, the dispute may be referred to VCAT or another Court (other than the Supreme Court). A dispute can only be referred to the Supreme Court if the Small Business Commissioner has certified that mediation has failed or is unlikely to resolve the dispute, and the Supreme Court gives leave for the matter to proceed.