This article was written by Simone Menz, Victoria Thackwray, Tristan Howes, Gabriel Ling and Ivor Wong.
On 29 September 2020, the Governor in Council made the COVID-19 Omnibus (Emergency Measures) (Commercial Leases and Licences) Miscellaneous Amendments Regulations 2020 (Vic) (Amending Regulations), extending and amending the rent and enforcement relief scheme provided since 29 March 2020 to eligible tenants under the COVID-19 Omnibus (Emergency Measures) (Commercial Leases and Licences) Regulations 2020 (Vic) (Principal Regulations).
The Amending Regulations extend the period to which relief may apply and add a certain degree of complexity and oversight. We discuss the key changes below, and note that this update should be read in light of our earlier Insight.
It is important to note that, consistent with the Principal Regulations, the Amending Regulations do not incorporate or refer to the National Cabinet's Mandatory Code of Conduct. Accordingly, the National Code remains inapplicable to leases in Victoria.
At a glance:
- extends relief scheme for eligible leases until 31 December 2020
- definition of "eligible lease" substantially unchanged
- protections for non-payment of rent extended to outgoings, provided tenants have requested rent relief and paid the balance of rent and outgoings in accordance with that rent relief
- added level of prescription to a tenant's request for rent relief tenants, including requiring a statement of turnover
- landlord's offer for rent relief must apply from the period starting on the date of the tenant's request (or request for further relief, as applicable) and ending on 31 December 2020
- rent relief offered during that period must be, at a minimum, proportional to the decline in the tenant's turnover, as evidenced by the tenant's statement of turnover and supporting materials
- repayment of rent deferrals extended to 31 December 2020
- on application by the tenant, the Small Business Commission may make binding rent relief orders in certain circumstances, although subject to VCAT review
Period of application
The relief scheme, which initially ran from 29 March to 29 September 2020, has been extended by 3 months to 31 December 2020 (COVID-19 Period).
The protection of the relief scheme is only afforded to eligible leases that were in effect on 29 March 2020. This remains the threshold requirement and accordingly leases entered into after that date, including by way of exercise of an option, are not entitled to protection.
The definition of eligible lease is essentially the same as before. In particular, the tenant is still required to be an SME entity and on JobKeeper, with the turnover tests for individual entities and groups remaining the same.
The only noteworthy changes to the test for determining an eligible lease are:
- clarification that JobKeeper and other coronavirus economic response payments do not count towards turnover when determining whether the tenant is an SME entity; and
- inclusion of new savings provisions meaning that a tenant who qualified under an eligible lease when rent relief was requested or agreed but who subsequently ceases to be entitled to JobKeeper will still be afforded the same protection as if the lease remained an eligible lease.
Protections for non-payment of rent extended to outgoings
Existing protections against breach, enforcement proceedings and calling on security under an eligible lease for non-payment of rent are extended to non-payment of outgoings during the COVID-19 Period. However, these protections are still subject to the tenant meeting the conditions below.
Conditions on tenants being entitled to protection for non-payment of rent and outgoings
Tenants under eligible leases are entitled to the protections described above if and only if those tenants follow the prescribed process for seeking rent relief and pay the balance of the rent and outgoings (after being reduced by the rent relief) during the COVID-19 Period. The Amending Regulations have added a considerable level of prescription to the content of a tenant's request for rent relief.
A tenant must now provide a statement of its decline in turnover (associated with the premises only) and evidence supporting those figures, in addition to the statement of eligibility and evidence the tenant is an SME entity and entitled to JobKeeper.
The decline in turnover must be:
- expressed as a whole percentage;
- calculated in accordance with the 'actual decline in turnover test' from the JobKeeper rules and relate to the most recent turnover test period applying to the tenant, likely to be the quarter ending 30 September 2020, against the same period in 2019; and
- evidenced by at least one of the following: extracts of the tenant's accounting records, the tenant's BAS relating to the turnover test period, statements issued by an ADI in respect of the tenant's account, and a statement prepared by a practising accountant.
Landlord's response to the tenant's rent relief request
The landlord's offer continues to be based on all the circumstances of the eligible lease, but there are a few notable changes.
First, the rent relief offered must apply to the period starting on the date of the tenant's request and ending on 31 December 2020, not to the whole of the COVID-19 Period. This is important as it means that the request and any resulting rent relief will not apply retrospectively but only from the date on which the tenant makes a request that complies with the Amending Regulations.
Secondly, the rent relief must be, at a minimum, proportional to the decline in the tenant's turnover (consistent with the statement of the tenant's decline in turnover). This is a departure from the previous relief scheme, which provided only that a landlord take into account the reduction in turnover as one of a number of factors when offering rent relief.
Thirdly, the mandatory requirement to take into account the landlord's financial ability to provide rent relief in determining the amount of relief has been removed. However, given the offer will be based on all the circumstances of the eligible lease, it is still open to the landlord to have regard to all relevant matters, not limited to those items that must be taken into account, which we consider may include the landlord's financial ability.
The requirement for at least 50% of any rent relief to be in the form of a waiver unless otherwise agreed remains unchanged.
Tenant's entitlement to subsequent rent relief
The circumstances in which a tenant that has already agreed rent relief with its landlord may request further relief are expanded. A further request may now be made:
- if the financial circumstances of the tenant materially change (as previously);
- if the existing rent relief was documented prior to the Amending Regulations and is not, at a minimum, proportional to the decline in the tenant's turnover; or
- if the existing rent relief does not cover the entire period from the date of the tenant's request to 31 December 2020.
In practical terms, we consider the effect of these changes to be somewhat limited. A landlord's offer of additional rent relief need only relate to the period from the date the further request is made, meaning a landlord is not required to reopen a concluded deal and offer additional relief in respect of any earlier period. The lack of retrospective effect in this aspect provides some welcome certainty for landlords.
Rent deferrals extended
If any rent is deferred, whether under a rent relief arrangement made prior to the Amending Regulations or in response to a new or further request from the tenant, a landlord cannot require payment of the deferred rent until 31 December 2020. This applies regardless of the terms of any agreement.
Binding orders for rent relief made by Small Business Commission (SBC)
A landlord or a tenant can continue to refer eligible lease disputes to the SBC for mediation, though the process, forms and requirements for information and documentation are prescribed in much greater detail. In particular, the Amending Regulations set out a new process for the SBC to issue a 'regulation 20A certificate' if mediation has failed or is unlikely to resolve the dispute.
A tenant can now apply to the SBC for a binding order for rent relief where the landlord has either not responded or has not engaged in mediation in good faith, as certified by the regulation 20A certificate.
The SBC can make a binding order in relation to a tenant's request for rent relief only if:
- the landlord has not responded or has not engaged in mediation in good faith;
- it is fair and reasonable in all the circumstances; and
- neither party has commenced proceedings in VCAT or court.
Importantly, any binding order by the SBC must comply with the same requirements that apply to a landlord's offer of rent relief, including that the rent relief apply from the date of the tenant's request for rent relief in respect of which the application for a binding order was made. Both parties will be given opportunities to make written submissions prior to the issue of a binding order, but there will be no hearing for the matter.
Although the right to apply for a binding order goes some way further than the previous scheme, helpfully the Amending Regulations allow a landlord or a tenant to apply to VCAT for review of a decision made by the SBC, including a decision to make a binding order or to dismiss an application for a binding order. Any application is to be made within 14 days of the SBC's decision. VCAT may also review a landlord's compliance with a binding order.
Consequences for landlords and tenants
While Victoria's moves to extend the rent and enforcement relief scheme to 31 December 2020 is broadly keeping with the positions of other States and Territories, the Amending Regulations have gone some way further in overhauling the procedure for requesting, negotiating and ultimately determining the appropriate rent relief. In particular:
- the introduction of a minimum proportionality standard based on reduction in tenant's reported turnover and a requirement that rent relief be extended to 31 December 2020;
- the added level of prescription to the content of any compliant tenant's request for rent relief; and
- the incorporation of a right for the SBC to make binding rent relief orders, subject to VCAT review,
may impact on the overall value of rent relief afforded to tenants under eligible leases but will not allow a reopening of concluded deals in respect of the period before the tenant requests additional relief.
Key unresolved questions for the Amending Regulations include whether the minimum proportionality standard for rent relief can take into account any forecast or documented improvement in a tenant's turnover subsequent to the data provided with the request for relief (or further relief), particularly as all industry participants look towards the gradual lifting of restrictions and improvement of trading conditions.