6 May 2020 - Insights

Navigating Leases and the COVID-19 Outbreak - Part 6

Victoria has now passed the COVID-19 Omnibus (Emergency Measures) (Commercial Leases and Licences) Regulations 2020 (VIC) (“Regulations”).

The Regulations broadly follow the principles of the Mandatory Code of Conduct announced by the Federal Government in April 2020 with a number of significant exceptions.

The exceptions include that the amount of rent relief offered by landlords to tenants does not need to be directly proportionate to the reduction in the tenant’s turnover. Also, a formal rent relief offer process must be followed.

Below is a summary of the Regulations.

Objectives

The objectives of the Regulations are:

  • 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.

Relevant Period

The Regulations apply retrospectively, commencing on 29 March 2020, and concluding on 29 September 2020 (they operate for a 6 month period).

Eligible Leases

The Regulations only apply to “eligible leases”.

An eligible lease is a lease under which the tenant is a small-medium sized business, has an annual turnover of up to $50 million and qualifies for and participates in the JobKeeper program.

A formal rent relief offer process must be followed in accordance with the Regulations.

Rent Relief is defined in the Regulations to mean any form of relief provided to a tenant in respect of the obligation under an eligible lease to pay rent, including a waiver, reduction, remission or deferral of rent.

Rent Relief Request by Tenant to Landlord

In order to have the benefit of the protection of the Regulations:

  • The tenant must make a written request to the landlord for rent relief that complies with the requirements of the Regulations. This includes 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. The tenant has the right to make a further request for rent relief, even after an agreement has been reached, if the tenant’s financial circumstances have changed since the agreement was reached.

Landlord’s Offer under the Regulations

  1. On receipt of the tenant’s rent relief request, the landlord has 14 days (or a different timeframe by agreement) to make an offer for rent relief. The terms of the landlord’s offer are governed by the Regulations as follows:
  2. A landlord’s offer of rent relief must be based on all the circumstances of the eligible lease and:
  3. relate to up to 100% of the rent payable under the eligible lease during the relevant period; and
  4. provide that no less than 50% of the rent relief offered by the landlord must be in the form of a waiver of rentunless a landlord and a tenant otherwise agree in writing; and
  5. apply to the relevant period; and
  6. take into account –
    1. the reduction in a tenant’s turnover associated with the premises during the relevant period; and
    2. any waiver given pursuant to the regulations; and
    3. 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
    4. 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
    5. any reduction to any outgoings charged, imposed or levied in relation to the premises.

Does a Tenant need to provide financial material to its Landlord?

It should be noted that a landlord’s offer of rent relief must be based on “all the circumstances” of the eligible lease. Such a construction is obviously broad and allows some latitude in terms of the landlord’s offer. The Regulations are unfortunately unclear as to what financial information a tenant is required to provide to their landlord.

The Small Business Commission has foreshadowed guidelines on the financial information to be provided. In the meantime, given the landlord’s discretion in terms of any rent relief offer, in our view it would be important for a tenant to provide at least some financial material for consideration by their landlord. It would be difficult for a landlord to properly consider the tenant’s ability to pay different prospective rents without at least some financial information.

Landlord’s Financial Position

In determining the rent relief to be offered by a landlord, the Regulations entitle the landlord to take into account its own financial ability to offer rent relief, including any relief provided to the landlord by any of its lenders, and any reduction in outgoings levied (including land tax waivers and the like).

Whilst these provisions could be interpreted to entitle a landlord to reduce any offer based on its own precarious financial position, the alternative interpretation is that these provisions are designed to ensure that any financial allowances received by a landlord are passed on to their tenant.

Prohibition on rent increases

A landlord under an eligible lease must not increase the rent under the lease between 29 March and 29 September 2020, unless otherwise agreed or the relevant rent is based on turnover.

Next Steps

Any agreements for rent relief must be confirmed in writing by a variation to the lease or a side agreement. We again recommend that the landlord and tenant enter into a deed of variation of lease to formalise the agreement.

If the landlord and tenant cannot reach an agreement, either party can refer the matter for mediation at the Small Business Commission for determination. If the mediation fails to resolve the dispute, the parties can elect to go either to VCAT or Court to have disputes under the Regulations determined. If the parties go to VCAT, each party would bear its own legal costs.

Wisewould Mahony will continue to provide assistance to both our landlord and tenant clients with respect to lease negotiations.  If you require our assistance with these negotiations, or to prepare a Deed of Variation of Lease, or to refer a dispute to mediation if you are unable to reach an agreement, please do not hesitate to contact any member of our leasing team.

General Enquiries

+61 3 9629 8333

enquiries@wisemah.com.au

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Paul Snow

Partner

Paul Ryan

Partner

Julie Barkla

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