The Victorian Small Business Commission (“the VSBC”) has now released a series of FAQs to act as guidelines to assist with understanding and interpreting the operation of the COVID-19 Leasing Regulations in Victoria.
The FAQ’s address numerous issues which our clients are frequently facing, such as:
- How is turnover defined?
- How is turnover calculated?
- What turnover information is appropriate for a landlord to request from the tenant to help inform their offer of rent relief?
- What turnover information is not appropriate for a landlord to request from a tenant to help inform their offer of rent relief?
- Can a tenant who is not under an eligible lease apply for rent relief and assistance from the VSBC?
- How does a tenant request rent relief?
- What document does a tenant need to show to prove they participate in the JobKeeper scheme?
- What does the landlord need to do to respond?
- Is the tenant in breach if they do not pay rent?
- How is agreed rent relief documented?
- Can a tenant ask for more rent relief after an agreement has been made?
- Can rent be increased if the tenant’s situation improves after an agreement has been made?
- If rent is deferred is the lease extended?
- If rent is deferred, when is that rent payable?
- Does eligibility for rent relief change if eligibility for JobKeeper changes?
The following is a summary of some of the key FAQ guidelines (please note that below does not set out every FAQ and answer):
How is turnover defined?
Turnover is defined as the annual turnover of an SME for a financial year. It is the total of:
- The proceeds of sales of goods and/or services
- Commission income
- Repair and service income
- Rent, leasing and hiring income
- Government bounties and subsidies
- Interest, royalties and dividends
- Other operating income.
A landlord can request turnover information from a tenant to help inform their offer of rent relief.
How is turnover calculated?
Examples of ways a tenant can calculate turnover include:
- comparing their actual turnover for March 2020 with March 2019; or
- comparing their actual turnover for April 2020 with April 2019; or
- comparing likely turnover for the April to June quarter with actual turnover in that quarter in 2019; or
- comparing actual or likely turnover for a later month or quarter to the same period in 2019 until the end of the relevant period (being 29 September 2020).
To work out likely turnover, tenants need to use a cash or accruals basis to calculate a decline in turnover. However, they must use the same method for both periods and:
- make a reasonable estimate; and
- document the reasons for the estimate.
The ATO website offers further guidance in calculating turnover.
What turnover information is appropriate for a landlord to request from the tenant to help inform their offer of rent relief?
A landlord can ask the tenant for information:
- Extracted from an accounting system
- Extracted from BAS
- Provided to a financial institution.
What turnover information is not appropriate for a landlord to request from a tenant to help inform their offer of rent relief?
A landlord should not:
- Request future cash flow projections
- Request balance sheets, profit and loss or year to date financials
- Request the tenant’s bank balance
- Require the financial information to be verified, examined, assured, audited or provided by a third party such as an accountant
- Require an accountant to provide a letter of comfort or similar on the financial information
Can a tenant who is not under an eligible lease apply for rent relief and assistance from the VSBC?
Yes. If the Lease is not an eligible lease, the National Code of Conduct should still be used as a guide and the requirement to negotiate ‘in good faith’ means that landlords and tenants should cooperate with each other to reach an agreement. (Note however that the Regulations will not apply to mandate a variation to the Lease). Parties can also apply to the VSBC for dispute resolution even if the Lease is not an ‘eligible’ lease (e.g. if the tenant is not receiving JobKeeper or is part of a group of entities with turnover exceeding $50m or some farming or agricultural leases).
How does a tenant request rent relief?
The request must:
- Be in writing; and
- Be accompanied by a statement that the tenant’s lease is an eligible lease and is covered by the Commercial Tenancies Relief Scheme; and
- Include information that verifies the tenant is an SME entity and qualifies for, and participates in, the JobKeeper Scheme.
What document does a tenant need to show to prove they participate in the JobKeeper scheme?
A tenant can provide a copy of their Business Enrolment for JobKeeper Wage Subsidy ATO receipt that they received after the ATO accepted their application for JobKeeper.
What does the landlord need to do to respond?
A landlord must offer rent relief to an eligible tenant within 14 days after receiving the tenant’s request unless a different time frame has been agreed in writing.
At least 50 per cent of the rent relief offered must be in the form of a rent waiver (the balance can be deferred) unless the landlord and tenant reach a different agreement in writing.
Is the tenant in breach if they do not pay rent?
No, the tenant is not in breach if they do not pay rent during the relevant period provided:
- The process for requesting rent relief has been correctly followed; or
- They pay a reduced rent as set out in the agreement between the landlord and the tenant.
How is agreed rent relief documented?
A landlord and tenant can agree to rent relief by a Variation of Lease or any other agreement between them that gives effect to the rent relief.
On this point, we recommend that any agreement to vary the terms of a lease be in the form of a Deed of Variation of Lease so as to avoid any uncertainty and ensure enforceability.
Can a tenant ask for more rent relief after an agreement has been made?
If the financial circumstances of a tenant materially change after a variation has been made to the lease or an agreement has been reached, the tenant can make a further request for rent relief. To negotiate further rent relief, the landlord and tenant must follow the same process for agreeing to the initial rent relief, though the landlord is not required to offer at least 50 per cent of the further rent relief in the form of a rent waiver.
Can rent be increased if the tenant’s situation improves after an agreement has been made?
A landlord must not increase the rent payable at any time during the relevant period, unless the landlord and tenant agree otherwise in writing. (This restriction does not apply to turnover rent under a retail lease).
If rent is deferred is the lease extended?
The landlord must offer an extension equal to the period of rent deferral. (The parties are then free to agree otherwise).
If rent is deferred, when is that rent payable?
Payment of the deferred rent is to be spread over the remaining term of the lease (including any extension) or 24 months, whichever is greater. How the deferred rent is paid is to be agreed by the landlord and tenant.
Does eligibility for rent relief change if eligibility for JobKeeper changes?
No. The ATO states that if a business qualifies for JobKeeper payments for the first fortnight because turnover has declined by the required amount, the business remains eligible and does not need to keep testing turnover in the following months. (However, the business will have ongoing reporting requirements).
Importantly, it should be noted that these are only guidelines and matters between landlords and tenants should be assessed on a case by case basis. These FAQs can be accessed through the VSBC website.
Whether you are a landlord or a tenant, please do not hesitate to contact us if you have any questions regarding the guidelines or other leasing queries regarding the new COVID-19 legislation and regulations or if you require assistance formalising the agreed rent reduction.