Commercial leases and rent relief during COVID-19: the Victorian position

 

Thinking | 5 May 2020

By Natalie Bannister and Ella Simmons

Victorians finally have some certainty about how the National Cabinet Mandatory Code of Conduct will be implemented, with the Victorian Government enacting new regulations on 1 May 2020 (but operating with effect from 29 March 2020).

The COVID-19 Regulations[1] create legally binding obligations that are generally, but not entirely, consistent with the Code. For a landlord and tenant to fall within the ambit of the COVID-19 Regulations, a tenant must qualify for and be a participant in Jobkeeper and must be an SME entity. If a tenant is not eligible under the Regulations, the landlord will continue to have all of its rights under the lease, including relation to enforcement, taking security and termination. The same applies if a tenant is eligible but does not seek relief.

To seek rent relief, the tenant has to write to the landlord seeking relief and must advise whether the Regulations apply to it, providing information that evidences that fact. If a landlord receives a complying request, it is obliged to offer ‘Rent Relief’ within 14 days or longer if agreed. If it doesn’t, the clock does not start to tick on the tenant’s offer.

Rent Relief is defined as ‘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.’ The Regulations state that a landlord must offer up to 100% of the rent payable and that the offer is to ‘provide that no less than 50% of the Rent Relief offered by the landlord must be in the form of a waiver of rent, unless a landlord and a tenant otherwise agree in writing.’ The Regulations do not prescribe how much Rent Relief a landlord must offer and do not explicitly require the offer to be proportionate to the reduction in turnover the tenant has experienced. A landlord’s own financial position has a bearing on the terms of the offer.

What should a landlord offer contain?

The Regulations are quite specific about what the landlord’s offer must provide and we recommend that any offer letter addresses the following matters as a minimum:

  • Rent Relief: the quantum and nature of the rent relief that the landlord is prepared to offer
  • Rent waiver: a statement that under the Regulations up to 50% of what the landlord has offered is to be in the form of a waiver of rent unless the landlord and tenant otherwise agree in writing. If the landlord’s offer does not satisfy this requirement then the offer should state that the landlord is asking the tenant to agree to vary that position which consent would ultimately be documented in writing. It makes sense to include the consent in any final agreement documenting the arrangement.
  • Relevant period: A statement that the period relevant to the offer is the ‘relevant period’ as defined under the Regulations being between 29 March 2020 and 29 September 2020.
  • Rent reviews: If a rent review is scheduled to occur during the relevant period, this should be addressed. If the landlord intends that the rent review proceed, the offer should state that the landlord is asking the tenant to agree to vary that position and, if agreed, such consent will be contained in the final agreement documenting this arrangement.
  • Extension of term: if any part of the Rent Relief is provided by way of a deferral of rent, the landlord must offer to extend the term of the lease for a period equivalent to the period for which rent is deferred or seek the tenant’s consent to vary that requirement.
  • Outgoings: as landlords must consider waiving recovery of outgoings or other expenses for any period where a tenant cannot operate its business, we suggest the offer expressly address outgoings or expenses and set out the landlord’s position, or the landlord retain a file note summarising its considerations in relation to this aspect of the offer, noting why, in all of the circumstances, the landlord’s position was adopted.
  • Amortisation of rent: the period over which any deferred rent is to be repaid. The offer must provide for the amortisation of any deferred rent over the greater of the balance of the term or 24 months, unless otherwise agreed.

What if the tenant does not accept the landlord’s offer?

The landlord and the tenant are required to cooperate and act reasonably and in good faith to try to agree a variation to the lease based on the tenant’s position and the landlord’s offer. If agreement cannot be reached, either party may refer the matter to the Small Business Commissioner for mediation. The Small Business Commissioner does not have the power to make a binding determination about any rent relief but will assist the parties to reach a mutually agreed outcome. If that does not occur, either party can refer the dispute to the Victorian Civil and Administrative Tribunal or the Supreme Court. The dispute will be treated as a dispute under the Retail Leases Act 2003 (Vic) so each party will need to bear its own costs. It could be expensive and time consuming to resolve a dispute and we expect that this will incentivise parties to reach agreement in many circumstances.

Is an agreement final?

No. A tenant is entitled to make another request of a landlord if its financial circumstances change materially during the relevant period. This would start the process all over again.

However, importantly, when agreement is reached and documented, a tenant is obliged to comply with that agreement (unless and until further varied) and a landlord is not prohibited from ending the lease, calling on any security, or re-entering the premises if the tenant does not comply with the agreement, for instance by failing to pay the agreed revised rental amount.

We expect to see a flurry of activity in the market with eligible tenants and landlords now seeking to finalise and document rent relief. We recommend that any agreements be formally documented by way of a variation of lease to ensure that the arrangement is certain and binding on both parties.

For more detail on the Victorian regulations, see our article Victorian COVID-19 Regulations for commercial leases and rent relief. You can read our other real estate and property articles about COVID-19 issues here.

Each state is dealing with this issue slightly differently. For an update on what each state is doing, please see our article COVID-19 commercial leasing: status of rent relief laws around Australia.

[1] The name of the Regulations is a mouthful: the COVID-19 Omnibus (Emergency Measures) (Commercial Leases and Licences) Regulations 2020.

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