TENANTS BREATHE A SIGH OF RELIEF - CHANGES TO COMMERCIAL LEASING DURING COVID-19
12 May 2020New Regulations Provide Rent Relief for Eligible Leases
Victoria’s response to the National Leasing Code of Conduct (Code) – the COVID-19 Omnibus (Emergency Measures) (Commercial Leases and Licences) Regulations 2020 (Vic) (“the Regulations”) –spawned a flurry of activity in the commercial tenancies landscape. Significantly, there have been considerable changes to the structure and balance of the landlord/tenant relationship in light of the economic impact of the COVID-19 crisis, forcing parties to established and often longstanding leasing agreements to reconsider their rights and obligations. We explore the key tenets of the Regulations below.
The Regulations override the terms of existing leases, meaning that, save for the exceptions detailed herein, landlords and tenants are unable to make any contradictory agreements or contract out of the Regulations. As in the Code, there is an overriding obligation on parties to deal reasonably and in good faith. Failure to do so will amount to a breach of the lease.
The Regulations are implemented retrospectively, and are deemed to have been in operation from 29 March 2020 to at least 29 September 2020 (“the Relevant Period”).
Eligibility
The Regulations only apply to “Eligible Leases”. Eligibility criteria include the following:
1. The lease must be either:
a. A retail lease under the Retail Leases Act 2003; or
b. A commercial lease or licence for the sole of predominant purpose of carrying on a business at the relevant premises;
2. The lease must have been in effect as at 29 March 2020;
3. The tenant must be a SME entity with turnover not exceeding $50 million; and
4. The tenant must be an employer who both qualifies for and is a participant in Jobkeeper.
Jobkeeper Participation
The Regulations do not expressly refer to the Code, nor are they entirely consistent with the Code’s principles. Of particular note is that the Regulations exceed the Code by requiring tenants to actively participate in the Jobkeeper scheme, whereas the Code mandates mere qualification for the scheme. This is a significantly higher standard than that referred to by the Code and excludes a significant portion of businesses who are not receiving Jobkeeper funding.
SME Entity
The SME turnover cap of $50 million is not limited to just the tenant, but also takes into account the turnover generated by any affiliates or entities connected to the tenant. Turnover can be calculated by the actual turnover for the financial year ending 30 June 2019 or the projected turnover for the financial year ending 30 June 2020 and includes, inter alia:
The proceeds of sales of goods and/or services;
Commission income;
Rent, leasing and hiring income;
Government extras and subsidies;
Repair and service income;
Interest, royalties and dividends; and
Other operating income.
The Regulations expressly preclude leases and licences which wholly or predominantly use the relevant premises for agricultural and farming purposes.
Procedure
A tenant under an Eligible Lease may request relief by providing the landlord with the following:
1. A statement that the lease is an eligible lease; and
2. Evidence that the tenant:
a. Is a SME entity; and
b. Qualifies for and is a participant in Jobkeeper.
The Regulations do not specify exactly what constitutes sufficient “evidence”. We suggest the parties should be cognisant of their good faith obligations in the provision and assessment of such evidence.
Landlord’s offer
Landlords must make an offer for rent relief within 14 days from the tenant’s request. However, the Regulations do not set out strict requirements for any amount of relief, and the tenant is not necessarily entitled to a reduction in rent which mirrors its reduction in revenue. The landlord’s offer must be based on all circumstances of the lease and take into account:
The reduction in the tenant’s turnover associated with the premises during the Relevant Period;
Any waiver of outgoings by the landlord;
Any reduction to outgoings charged, imposed or levied in relation to the premises;
The tenant’s ability to fulfil the ongoing lease obligations without rent relief;
The landlord’s financial ability to provide relief.
It appears that landlords have broad discretion in making an offer for rent relief. However, offers must apply for the Relevant Period and at least 50% of the rent relief must be in the form of a waiver, whilst the remaining portion can be by way of deferral. Landlords are prohibited from claiming back any waived rent.
Tenants are not obliged to accept the landlord’s offer, but as previously noted, the parties are required to deal in good faith. Either party is able to refer the matter to the Victorian Small Business Commissioner where no agreement is possible.
Significantly, tenants are able to make further requests for rent relief if their financial circumstances materially change, which would see the recommencement of the rent relief process. Landlords are not required to provide a 50% waiver in new agreements but are also not afforded the same opportunity to make a new agreement should their financial circumstances worsen.
Breaches of Leases
Landlords are prohibited from evicting, re-entering, or calling security where a tenant has requested rent relief in compliance with the above procedure, or complied with an agreement for rent relief. Tenants will not be in breach of an eligible lease under those circumstances. Any failure by the landlord to comply may result in a penalty of $3,304.40 per offence.
However, the Regulations do not prohibit a landlord from taking action for the following:
1. Non-payment of:
a. Rent outside the Relevant Period; or
b. Outgoings; or
2. Other breaches of a lease; and
3. Breaches of rent-relief agreements under the Regulations.
Extensions to Leases & Deferred Rent
Where any deferrals of rent are agreed to, landlords must offer an extension of the term of the lease. An extension must be equivalent to the period for which rent is deferred and be on the same terms as the existing lease.
The landlord is not able to recover the deferred rent until the earlier of:
- The conclusion of the Relevant Period; or
- The expiry of the term of the lease, notwithstanding any applicable extension.
Repayment of the deferred rent must be amortised over the balance of the term, including any applicable extension, or a period of 24 months, whichever is greater.
The Regulations allow for agreements which effectively front or back load the repayment of deferrals and may require repayment after the lease is concluded. We suggest landlords ensure that they have prepared sound legal agreements which secure their rights in these circumstances.
Rent increases
Landlords must not increase the rent payable during the Relevant Period, unless otherwise agreed in writing by the parties. However, this prohibition does not apply to retail leases to the extent that it provides for rent to be determined by reference to the tenant’s turnover.
Outgoings
If a tenant is not able to operate from the relevant premises for a period of time, landlords should consider waiving payment of outgoings or other expenses during that period. Tenants must be completely unable to operate from the premises, hence this requirement will not apply to tenants who are able to operate in some reduced capacity. Again, good faith obligations apply. Landlords also have the option of reducing or suspending services to the premises entirely if reasonable and so requested by the tenant.
Furthermore, any reduction in outgoings must be passed on to the tenant. In practice, this would mean that any reduction in outgoings for, say, land tax payable monthly (but based on annual estimates) must be immediately passed on to the tenant rather than waiting until the conclusion of the outgoings year.
Trading & operating decisions
Tenants under an eligible lease may choose to reduce trading hours or not trade at all during the Relevant Period. Under these circumstances, landlords must not evict, re-enter or attempt to re-enter the premises or risk a penalty of $3,304.40 per offence, as is the same under default (above).
Confidentiality
Landlords and tenants must keep any confidential information, such as financial statements, personal and business information confidential. However, the specifics of any agreement between the parties are not expressly required to be kept confidential by the Regulations.
Accordingly, we suggest any agreement should be drafted to ensure confidentiality is maintained.
Disputes
Disputes must be referred to the Small Business Commissioner. This process will usually involve mediation before any VCAT or court proceedings. We anticipate significant activity in this area, which only increases the importance of the parties looking to address any concerns and applications in a timely and effective manner.
KKP Comment
The Regulations provide substantial protections for tenants, in particular relating to default, rental waivers and prohibition on evictions. However, the consideration of what is an “eligible lease” is less broad than in other jurisdictions, whilst requirements forcing landlords to “consider” certain elements are unclear. In any case, it should remain in the interests of both parties to address the rent relief procedure promptly and in good faith to ensure eligible leases are not breached and resolutions are achieved.
Our Property & Leasing team are experts in all areas of leasing, acting for both landlords and tenants in advocating our clients’ best interests. If you have any questions in respect of this update, require any advice or representation in relation to your lease, please do not hesitate to get in touch with us at enquiries@kerrpartners.com.au.