Following on from our previous publications, the Victorian Government finally released the COVID-19 Omnibus (Emergency Measures) (Commercial Leases and Licences) Regulations 2020 (“the Regulations”) for the purpose of implementing temporary measures for landlords and tenants with respect to ‘eligible leases’ as a result of the COVID-19 pandemic.
These Regulations roughly implement the provisions set out in the National Cabinet’s Mandatory Code of Conduct (“Code”), though there are some significant deviations.
In summary, the key provisions are:
- Relevant Period – these Regulations are in force for the 6 month period from 29 March 2020 to 29 September 2020 (“the Relevant Period”).
- Tenants can request rent relief – the process for formally requesting rent relief has now been clarified.
- Landlords must offer rent relief – Landlords must offer rent relief within 14 days of receipt of a request (or other agreed period) BUT unlike the Code, the Regulations do not mandate the amount of such rent relief.
- Offer must include waiver – at least 50% of the rent relief offered must be a waiver (as opposed to deferral) of rent (unless otherwise agreed) and it must apply to the Relevant Period of 6 months. Once waived, Landlords cannot later claim any part of the waived rent.
- What must the Landlord take into account? – the Landlord’s offer “must be based on all the circumstances of the eligible lease” and must take into account the following: –
- The reduction in the Tenant’s turnover associated with the premises during the relevant period (not turnover associated with the Tenant’s entire business as suggested by the Code);
- Any waiver of outgoings given by the Landlord to a Tenant who can’t trade from the Premises;
- Whether a failure to offer sufficient rent relief would compromise the Tenant’s capacity to continue to comply with the Lease, including the payment of rent [Note that this suggests that profitability is relevant, rather than just turnover];
- The Landlord’s financial ability to offer rent relief, including any relief provided to the 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.
[Importantly, this means the Landlord does not have to offer a rent reduction equal to the reduction in the Tenant’s trade – unlike the provisions of the Code]
- What is “turnover”? – Turnover is defined to include the following:
- the proceeds of sales of goods and/or services;
- commission income;
- repair and service income;
- rent, leasing and hiring income;
- government bounties and subsidies [importantly, this would include amounts the Tenant receives through the jobkeeper scheme & small business grants and arguably also include the PAYG withholding tax refunds & credits – in many cases, this may mean that the reduction in turnover is minimal or nil];
- interest, royalties and dividends;
- other operating income.
- Negotiate in good faith – the Landlord and Tenant must then negotiate the rent in good faith after the Tenant receives the Landlord’s offer.
- What if Tenant’s circumstances later change? – the Tenant may ask the Landlord for further rent relief (even after an agreed variation), however any such further rent relief need not be at least a 50% waiver. It is interesting to note that the Landlord does not have the same right to seek a variation of the rent relief if the Tenant’s business improves.
- Evictions and Non-Payment of Rent – the Tenant will not be in breach of an eligible lease if they do not pay the usual rent during the Relevant Period provided they comply with the rent relief procedure set out in the Regulations OR pay an agreed varied rent. Landlords are prohibited from evicting tenants or otherwise re-entering the premises in such circumstances.
- Rent Increases – Landlords may not increase rent during the Relevant Period (except in relation to turnover rent).
- Rent Deferment – If rent is deferred by way of a lease variation, the Landlord must offer the Tenant an extension to the term of the Lease on the same terms and conditions for the period for which the rent is deferred. The deferred rent is to be amortised over the balance of the term of the lease (including extensions that may have been granted under regulation 13), or 24 months (whichever is the greater). The method by which the deferred rent is amortised is to be agreed.
- Outgoings – a Landlord must consider waiving the recovery of outgoings or other expenses that are payable by the Tenant for the period of time that the Tenant is not able to operate their business at the premises. [Note the obligation is merely to “consider” it]
- Changes to Trading Times and Closures – the Tenant may reduce the opening hours of the business, close the business or cease to carry out the business and the Landlord cannot evict the tenant for doing so. Further, the Landlord is not able to ‘attempt’ to evict the tenant nor can the Landlord call on security under the lease for non-payment of rent.
- Dispute Resolution – The Landlord or Tenant can refer a dispute to the Small Business Commissioner (SBC) for mediation. If the mediation fails, the SBC can determine that the matter be heard in either VCAT or a court (other than Supreme Court).
These Regulations leave numerous questions to be answered/negotiated. (For example, it remains unclear as to what financial information the tenant must provide to its landlord. We understand that the Small Business Commission may be publishing a guideline to assist in this respect, however we suspect that the Tenant will be required to provide some trading figures to allow the Landlord to consider the Tenant’s ability to pay).
For both landlords and tenants, these new Regulations offer a legislative baseline to how each party must act, noting that for a number of weeks now, parties have been basing their discussions on the Code principles. We suspect that the Regulations will come under further scrutiny and may even require further clarification over the coming days, however in the meantime, Landlords and Tenants should adhere to the above provisions.
This summary is merely a general outline of the Regulations. It is essential that the specific circumstances of each Lease and the parties thereto be considered, especially in light of the above. Please feel free to contact us if you require any assistance in this regard.