Thinking | 5 May 2020
Victorian COVID-19 Regulations for commercial leases and rent relief
The COVID-19 Omnibus (Emergency Measures) Act 2020 (Act) was passed on 23 April 2020 in Victoria, allowing the Minister for Small Business to make regulations in order to give effect to the National Cabinet’s Mandatory Code of Conduct (Code) released on 7 April 2020.
On Friday 1 May 2020, the Minister released the COVID-19 Omnibus (Emergency Measures) (Commercial Leases and Licences) Regulations 2020 (Regulations).
The Regulations have retrospective effect from 29 March 2020 and operate until 29 September 2020.
Tenancies to which the Regulation applies
The Regulations only apply to an eligible lease, which includes certain retail leases or non-retail commercial leases or licences (being premises used for the sole or dominant purpose of carrying on a business):
- which are in effect on the day that the Regulations are made; and
- under which the tenant is, on or after commencement of the Regulations, an SME entity who qualifies for and is a participant in the JobKeeper scheme.
A lease or licence is not an eligible lease if:
- the tenant is a member of a prescribed group of entities and the aggregate turnover of the group exceeds $50 million;
- the tenant is an affiliate of another entity and the aggregate turnover of the tenant and the other entity exceeds $50 million; or
- it is an agricultural lease.
What do the Regulations do?
|An eligible tenant must make a written request to the landlord for rent relief||This must include a statement that the lease is an eligible lease and that the tenant qualifies for and is participating in the JobKeeper scheme.
The tenant is required to provide information that evidences their eligibility.
It is unclear what financial information a tenant is required to provide to satisfy this, but the Small Business Commission has indicated that it will publish a guideline to provide some assistance.
A tenant is only entitled to protection from termination for non-payment of rent if it makes a request in accordance with regulation 10 (discussed below), and complies with any subsequent agreement to vary the lease.
|The landlord then has 14 days (or longer by agreement) to make a rent relief offer.||The landlord must consider all the circumstances of the relevant lease and make an offer which complies with Regulation 10.
The offer must:
In relation to outgoings, regulation 14 states that the landlord is required to consider waiving recovery of outgoings. It is not clear how this should be determined by landlords but the obligation to act in good faith and in accordance with the Code will apply. The landlord must also pass on any reductions in outgoings to the tenant and must reimburse the tenant for any proportional share of a reduced outgoing that has already been paid.
When making an offer, the landlord’s financial ability to offer rent relief is also a relevant factor. The inclusion of this requirement is interesting and will provide some comfort to landlords who are also suffering the effects of COVID-19 or otherwise not well positioned to make concessions.
|The landlord and the tenant are then required to negotiate in good faith to agree the terms of the rent relief.||The Regulations provide that eligible leases are amended to impose an obligation to cooperate and act reasonably and in good faith.
This is to be implied into every lease for the duration of the application of the Regulations.
|Subsequent actions||Where a tenant has made a request for rent relief in accordance with the Regulations and is complying with the terms of any agreed rent relief, it will not be in breach of its lease for non-payment of rent or a reduction in trading hours, and a landlord cannot:
Regulation 12 includes a prohibition on rent increases during the period of the Regulations unless the landlord and the tenant otherwise agree in writing.
Deferred rent may be repaid over the greater of 24 months or the balance of the term. Regulation 13 also provides that if the parties agree a deferral of rent, the landlord must offer the tenant an extension to the term for the equivalent period of the rent deferral, unless otherwise agreed.
As expected, Regulation 17 prevents a landlord from requiring the tenant to pay interest ‘or any other fee or charge in relation to the payment of rent deferred by variation’ or any agreement relating to the variation.
Regulation 19 provides that the terms of any agreement reached by the parties must be kept confidential.
In contrast to the Commercial Tenancies (COVID-19 Response (Early Termination)) Bill 2020 in Western Australia, there are no express provisions in the Victorian Bill which allow financially distressed tenants to terminate a lease early.
|A regime for determination of disputes by mediation is created||If the landlord and tenant can’t reach agreement about the relief to be provided, the landlord or tenant can refer a dispute to the Small Business Commission for mediation. If the dispute cannot be resolved it may be referred to VCAT or the Supreme Court.
This dispute resolution regime mirrors the Retail Leases Act 2003 (Vic) mediation regime.
|Penalties apply||Civil penalties of up to 20 penalty units (which is approximately $3600) apply where a landlord terminates a lease, takes possession or has recourse to security in relation to non-payment of rent or reductions in trading hours, or attempts to do any of the above.
These penalties apply retrospectively.
These penalties are not high but apply in addition to the tenant’s rights under the Regulations.
There is also the risk of reputational risk for institutional landlords if they become subject to penalties.
What is mandatory and what can be varied by agreement?
|Requirement||Mandatory/can be avoided?|
|Rent relief to include 50% waiver||Not mandatory. The landlord and the tenant can agree otherwise; however, the landlord must offer this to the tenant.|
|Rent relief to apply to the relevant period, being 29 March 2020 to 29 September 2020||Mandatory. The landlord’s offer must relate to the relevant period.|
|Waiving recovery of outgoings||Not mandatory. The landlord has a good faith obligation to consider this where tenants are unable to operate from the premises but it is not mandatory.|
|Prohibition on rental increases||Not mandatory. Regulation 12 requires that all eligible leases are taken to be amended to including this requirement, unless the parties agree in writing that this does not apply.|
|Offer to extend the term for the period of any deferral||Not mandatory. Regulation 13 states that all eligible leases are taken to be amended to include this requirement, unless the parties agree in writing that this does not apply.|
|Passing on reductions of outgoings||Mandatory. Regulation 15 requires that all eligible leases are taken to be amended to state that any reduction of an outgoing must be passed through the tenant.|
|Restriction on eviction of a tenant for non-payment of rent or failure to trade||Mandatory where the tenant has complied with the regulations and with any final agreement entered into between the parties.
We note that this does not apply to other breaches of the lease not related to COVID-19.
|Restriction on recovery of interest, fees or charges||Mandatory. Regulation 17 state that all eligible leases are taken to be amended to include this prohibition and does not allow the parties to agree otherwise.|
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