Retail or Commercial Leases in Victoria and COVID-19

Retail or Commercial Leases in Victoria and COVID-19

The COVID-19 Omnibus (Emergency Measures) Act 2020  Vic (Act) came into operation on 24 April 2020, followed by the Commercial Leases and Licences Regulations on 1 May 2020.

The Act and Regulations give effect to leasing principals contained in the National Cabinet’s Mandatory Code of Conduct – SME Commercial Leasing Principles During COVID-19 (Code).

The stated objective of the COVID-19 Omnibus (Emergency Measures) (Commercial Leases and Licences) Regulations (Regulations) is:

• to implement 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.

These Regulations came into operation on 29 March 2020. The Act and Regulations provide answers to many questions raised by the Code and provide landlords and tenants with greater certainty regarding the practical and legal application of leasing principles during COVID-19.

Which leases are covered?

In order for a tenant to obtain the protections of the Regulations, they must be a party to an ‘eligible lease’, that is:

• the lease must have been in effect on 29 March 2020;
• the tenant must be an SME entity (i.e. has annual turnover of less than $50 million); and
• the tenant must be an employer who qualifies for the JobKeeper payment scheme and who is a participant in this scheme.

Do parties to an ‘eligible lease’ have to abide by the Regulations?

Yes. Reg. 8(2) provides 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 these Regulations apply.”

Reg. 8(1) and the associated drafting notes make it clear that the Regulations are effectively written into an eligible lease and form part of the lease. The parties must observe them.

However, in respect of some of the matters prescribed in the Regulations, parties can agree in writing that those matters will not apply to their lease.

Will a tenant be in breach of its lease if it doesn’t pay rent during the relevant period?

Reg. 9(1) prescribes that no breach will occur in the event of non-payment of rent, but only if:

• the tenant seeks rent relief from the landlord pursuant to reg. 10; and
• the tenant pays an amount of rent in accordance with any variation of lease or other agreement reached which gives effect to the agreed rent relief.

 

Reg. 9 provides that a landlord, in relation to a tenant to whom reg. 9(1) applies, must not:

• evict or attempt to evict a tenant;
• re-enter or otherwise recover the premises, or attempt to do so; or
• have recourse to any security relating to the non-payment of rent, or attempt to do so.

 

The parties are required to communicate with one another to agree on how the rent will be paid before the protections for a tenant will be triggered. If the tenant stops paying rent due to the pandemic but fails to communicate this with its landlord, then they will not be protected under the Regulations.

Rent relief

A tenant under an eligible lease may make a request for rent relief in writing, accompanied by a statement by the tenant that its lease is an eligible lease (and not excluded from the operation of the Regulations by s 13(3) of the Act) and information that shows the tenant is an SME entity, and qualifies for and is a participant in the JobKeeper payment scheme (reg. 10(1) & (2)).

If a tenant makes a request in the required form, then reg. 10(3) states the landlord must offer rent relief to the tenant within 14 days or some other time as agreed in writing.

Reg. 10(4) states that the offer of rent relief must be based on all circumstances of the eligible lease and:

• relate to up to 100 per cent of the rent payable during the relevant period (29 March 2020 to 29 September 2020); and
• provide that no less than 50 per cent of the rent relief offered by the landlord be in the form of a waiver of rent, unless otherwise agreed in writing and applied to relevant period.

 

It must also take into account the following matters:

• the reduction in the tenant’s turnover associated with the premises during the relevant period;
• any waiver given pursuant to reg. 14(2);
• whether a failure to offer sufficient rent relief would compromise the tenant’s capacity to fulfil its ongoing obligations under the lease, including the payment of rent;
• the landlord’s financial ability to offer rent relief, including any relief provided by the landlord’s lenders as a response to the pandemic; and
• any reduction to any outgoings charged, imposed or levied in relation to the premises.

 

The parties must negotiate in good faith to reach agreement (reg. 10(5)) and may document any agreed rent relief by a variation to the lease or any other agreement (reg. 10(6)).

If the tenant’s financial circumstances materially change after the rent relief has been agreed, then reg. 11 prescribes that a tenant may make a further request for rent relief, and the landlord and tenant must follow the process set out in reg. 10 in relation to the request.

Payment of deferred rent

Recovery of any deferred portion of a tenant’s rent payable during the relevant period must occur in accordance with reg. 16(2) (unless the parties otherwise agree in writing) and:

• a landlord must not request payment until the earlier of 29 September 2020 and expiry of the term of the lease (before any extension as provided under reg. 13 or otherwise); and
• the parties must vary the lease or otherwise agree so 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 as provided under reg. 13 or otherwise) and a period of no less than 24 months.

 

A landlord may not charge interest, fees or charges in respect of any deferred rent (reg. 17).

Rent increases

Reg. 12 prescribes that a landlord must not increase the rent payable under a lease during the relevant period, unless the parties agree in writing that reg. 12 does not apply to their lease.

The prohibition on rent increases does not apply to retail leases which provide for rent to be determined by turnover.

Extension of lease term

Reg. 13 prescribes that if payment of rent during the relevant period is to be deferred, then the landlord must offer the tenant an extension to the term of its lease on the same terms and conditions that applied prior to the commencement of the Regulations.

The extension must be for the period for which rent is deferred, unless the parties agree in writing that reg. 13 does not apply to their lease.

Recovery of outgoings and expenses

Reg. 14 prescribes that a landlord must consider waiving 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.

It also permits a landlord to cease or reduce services provided to the premises, if reasonable to do so, whilst the tenant is not operating its business.

If outgoings are reduced, the landlord must pass on the reduction to the tenant proportionally (reg. 15) and reimburse the tenant for any excess amount paid as soon as possible.

Reduction in trading hours

Reg. 18(1) prescribes that a tenant will not be in breach of its lease if, during the relevant period, it reduces its opening hours or closes the premises and ceases to carry out any business at the premises.

Reg. 18 provides that a landlord, in relation to a tenant to whom reg. 18(1) applies, must not:

• evict or attempt to evict a tenant
• re-enter or otherwise recover the premises, or attempt to do so; or
• have recourse to any security relating to the non-payment of rent, or attempt to do so.

Confidentiality

Reg. 19 imposes confidentiality obligations on the parties with respect to protected information obtained under or in connection with the Regulations.

Reg. 24 provides that a landlord may provide the tenant’s statement under reg. 10(2) to the Commissioner of State Revenue in support of an application for tax relief.

Disputes

The Victorian Small Business Commissioner (VSBC) will conduct mediations between parties to an eligible lease dispute (reg. 20).

VCAT and the courts will have jurisdiction to hear eligible lease disputes, but only if the VSBC first certifies that mediation has failed or is unlikely to resolve the dispute (reg. 23).

Should you have any queries regarding the legislative developments in Victoria and how they will apply to your business, please feel free to contact us for a discussion.