COVID-19 | Victorian regulations provide much needed guidance on rent relief obligations for Victorian landlords and tenants during the COVID-19 pandemic

The long awaited COVID-19 Omnibus (Emergency Measures) (Commercial Leases and Licences) Regulations 2020 (Regulations) have now been released, giving effect to the National Cabinet Mandatory Code of Conduct and some much needed guidance for Victorian landlords and tenants.

The Regulations apply to “eligible leases” for the “relevant period”, from 29 March 2020 until 29 September 2020. For further discussion on what is an “eligible lease” refer to our earlier article, found here.

Note also that the Regulations provide some further clarity on “eligible leases” by excluding:

• leases under which premises are used wholly or predominantly for the following activities:
  • agricultural, pastoral, horticultural or apicultural activities;
  • poultry farming, dairy farming, aquaculture, tree-farming or any business that consists of the cultivation of soils, the gathering of crops or rearing of livestock;
  • grazing, including agistment; and
  • “farming operations” as defined under section 3 of the Farm Debt Mediation Act 2011;
• a tenant connected with another entity or entities, within the meaning of sections 328-125 of the Income Tax Assessment Act 1997 (Cth) if the aggregate turnover of the group of entities exceeds $50 million; or
• a tenant with a prescribed relationship or connection between it and another entity or other entities if the entity or the entities are affiliates of the tenant within the meaning of sections 328-130 of the Income Tax Assessment Act 1997 (Cth), if the aggregate turnover of the tenant and its affiliates exceeds $50 million.

A prescribed procedure for rent relief

A tenant under an eligible lease may request rent relief from a landlord. That request must be in writing and must be accompanied by:

• a statement by the tenant that its lease is an “eligible lease”; and
• information that evidences the tenant:
  • is an SME Entity; and
  • qualifies for, and is a participant in, the JobKeeper scheme.

A landlord must offer a tenant who requests relief in this manner rent relief within 14 days or another period agreed by the parties. A landlord’s offer must be based on all the circumstances of the eligible lease and:

• relate to up to 100% of the rent payable under the eligible lease during the relevant period;
• provide no less than 50% of rent relief in the form of a rent waiver (unless otherwise agreed in writing);
• apply to the relevant period; and
• take into account the following factors:
  • the reduction in a tenant’s turnover associated with the premises during the relevant period;
  • any waiver of outgoings or other expenses granted by the landlord;
  • whether a failure to offer sufficient rent relief would compromise a tenant’s capacity to fulfil its ongoing lease obligations;
  • 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
  • any reduction to any outgoings charged, imposed or levied in relation to the premises.

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 addressed by the Regulations.

Agreeing terms for rent relief

When following the prescribed procedure for rent relief, landlords and tenants must take note of the following:

• No rent increases: Rent, except rent determined by reference to the volume of trade of a tenant’s business, under an eligible lease may not be increased at any time during the relevant period (unless otherwise agreed in writing).
• Outgoings: A landlord must consider waiving recovery of any outgoing or other expense payable by a tenant under an eligible lease for any part of the relevant period that the tenant is not able to operate their business at the premises. Landlords should pass on the benefit of any reductions in outgoings to tenants.
• Subsequent rent relief: If the financial circumstances of a tenant under an eligible lease materially change after an agreement has been reached:
  • the tenant may make a further request to the landlord for rent relief; and
  • the landlord and the tenant must follow the same prescribed procedure in relation to that request, except that the landlord is not compelled to provide no less than 50% of subsequent rent relief in the form of a waiver of rent, like it is required to do for an initial request for relief.
• Deferred rent: If any part of rent is deferred, the landlord must offer to extend the eligible lease. The extended period must be equivalent to the period for which rent is deferred (unless otherwise agreed in writing).
• Payment of deferred rent: Payment of deferred rent cannot commence until after the relevant period ends or after such earlier lease expiry date. Payments must occur over the greater of:
  • the balance of the term of the eligible lease; and
  • a period of no less than 24 months.
• Extending the term: The term need only be extended if payment of any part of the rent is deferred. The period of any extension must be equivalent to the period for which rent is deferred (unless otherwise agreed in writing).

Tenant’s obligation to pay rent and trade

A tenant will not be in breach of an eligible lease if it does not pay rent during the relevant period provided that it:

• complies with the procedure for requesting relief outlined in the Regulations; and
• pays rent, as it has agreed to do so under a variation or other agreement,
  (Eligibility Conditions).

Additionally and unsurprisingly, a tenant will also not be in breach of an eligible lease if it reduces the opening hours of the business it carries out at the premises or closes the premises and ceases to carry out any business at the premises.

In turn, a landlord must not (and must not attempt to) evict a tenant, re-enter or otherwise recover possession of a premises or have recourse to any security for that action or inaction by their tenant. No fees, interest or charges can be levied for late payment of rent or deferred rent.

Interestingly, the tenant of an eligible lease is only considered not to be in breach of its obligation to pay rent if it complies with the Eligibility Conditions. If a tenant fails to satisfy the Eligibility Conditions then, arguably, a landlord can demand full payment of rent and issue a breach notice for its failure to comply.

Disputes

As for retail leasing matters, disputes may be referred to the Small Business Commissioner for mediation. Failing resolution at mediation, parties may then proceed to VCAT to have their disputes determined.

What now?

It is encouraging to see that the terms of rent relief provide parties room to agree terms that suit their individual circumstances. Whilst no less than 50% of rent relief is to be provided in the form of a rent waiver, deferrals of rent are not mandatory which in turn means that lease extensions can be avoided if it is not desired by the parties and that a landlord’s financial capacity to provide relief may also be considered.

Landlords and tenants now have all the tools required to finalise agreements on rent relief during the COVID-19 pandemic. It’s time to get started!

For details of all our COVID-19 tips and updates, visit the Gadens COVID-19 Hub.

Authored by:

Alexandra Walker, Special Counsel