Contributions to this article were made by Simone Menz, Emily Masters, Chris Wheeler, Francesca Giorlando and Julia Nikolic.
Regulations to implement the National Cabinet's Mandatory Code of Conduct (National Code) for COVID-19 impacted landlords and tenants have now been made by the Victorian Governor in Council under the COVID-19 Omnibus (Emergency Measures) Act 2020 (Vic) (Act).
The Regulations provide welcome clarification and improvements to the practical application of some aspects of the National Code, which was released on 7 April 2020. It is important for landlords and tenants under eligible leases to be cognisant of the effect of the Regulations in structuring their rent relief arrangements, including because some provisions are automatically included in eligible leases for the COVID-19 Period.
This alert summarises the Regulations and sets out the key differences from the National Code and the implications for landlords and tenants.
On 1 May 2020, the Governor in Council made the COVID-19 Omnibus (Emergency Measures) (Commercial Leases and Licences) Regulations 2020 (Regulations) under the Act.
The Act and the Regulations stand alone, in that they do not incorporate or refer to the National Code. Accordingly, the relevance of the National Code to eligible leases in Victoria is limited.
We recently released an alert on New South Wales' implementation of the National Code.
At a glance:
- applicable to leases on foot on 29 March 2020, and will have effect until 29 September 2020
- applicable where the tenant carries on a business, is a SME entity and is eligible for and participating in JobKeeper, and not part of a broader group with aggregate turnover >$50m
- tenant may apply to the landlord for rent relief and must substantiate its eligibility and financial position
- landlord must make an offer to the tenant, taking into account certain prescribed factors
- landlord and the tenant under an eligible lease must negotiate the rent relief in good faith
- if the parties cannot reach agreement, either of them can refer the matter to the Small Business Commission for mediation and then to VCAT
- there is a freeze on rent reviews occurring during 29 March 2020 to 29 September 2020
- landlord must consider waiving outgoings
- tenant must otherwise comply with their lease obligations
Period of application
The Regulations were made on 1 May 2020 but have effect retrospectively from 29 March 2020 and will remain in effect for six months until 29 September 2020 (COVID-19 Period), which is 2 business days after the JobKeeper period expires.
Helpfully, the retrospective effect means the Regulations do not apply to leases entered into after 29 March 2020, even if as a result of the exercise of an option to renew.
The retrospective effect could give rise to a question as to the lawfulness of any enforcement action taken by a landlord on or after 29 March 2020 and before 1 May 2020 that is now not permitted under the Regulations. The retrospective effect would be arguably unfair to a landlord who had taken those steps before the Regulations were made, particularly as the National Code was only released on 7 April 2020. However, this is unlikely to arise in practice, given the conditions the tenant must first satisfy in order to be entitled to the key protections.
Eligible leases
The Regulations apply to eligible leases which are in effect on 29 March 2020.
An "eligible lease" means:
- a retail lease under the Retail Leases Act 2003 (Vic) or a lease or licence under which the premises are let or licensed for the sole or predominant purpose of carrying on a business at the premises
There is no express reference to charities, as there is in JobKeeper. However, if the charity is "carrying on a business" at the premises, even if not for profit, it is likely the lease will satisfy the requirement above. This is consistent with Premier Andrews' Second Reading Speech for the Act, which refers to eligible sole traders, not for profit businesses and franchisees being covered.
- under which the tenant is, on or after 29 March 2020, an SME entity
An "SME entity" is defined in section 5 of the Guarantee of Lending to Small and Medium Enterprises (Coronavirus Economic Response Package) Rules 2020 (Cth) to mean a tenant entity (not its group) carries on business or is a non-profit body, with an anticipated turnover for the current financial year of less than $50m, or an actual turnover for the previous financial year of less than $50m.
However, even if the tenant is an SME entity, if that tenant is "connected"[1] with or an "affiliate"[2] of entities where the tenant and those entities have aggregate annual turnover exceeding $50m, the lease will be excluded from the application of the Regulations. This is consistent with the National Code principle that turnover will be assessed at a corporate group level. The National Code principle that turnover is to be assessed at a franchise level is not specifically addressed (although this may still be the outcome, depending on the particular franchise structure).
- under which the tenant is an employer who qualifies for and is a participant in Jobkeeper.
For the purpose of the Regulations, this means the tenant has experienced a 30% decline in turnover since 1 March 2020 or, for ACNC-registered charities, a 15% decline in turnover since 1 March 2020
JobKeeper payments are due to start in May 2020, and so tenants will be able to show evidence of receipts from the Commonwealth of payments under the JobKeeper scheme. In practice, many landlords may be content to rely on that instead of trying to carry out what could be a complicated assessment of whether a tenant is entitled to JobKeeper.
The Regulations expressly exclude leases where the premises are used wholly or predominantly for a range of agricultural and farming purposes.
Protections for non-payment of rent
Tenants under eligible leases:
- are not in breach of their lease if they do not pay rent that is payable during the COVID-19 Period
- cannot have their lease terminated or be evicted if they do not pay rent payable during the COVID-19 Period
- cannot have their security called if they do not pay rent payable during the COVID-19 Period
"Rent payable" for these purposes will be the rent payable under the lease, as reduced by any rent relief provided under the Regulations.
Given the retrospective effect of the Regulations, a rent instalment that fell due on 1 April 2020 and has been unpaid is subject to these protections (but a rent instalment that fell due on 1 March 2020 and is unpaid is not).
These particular protections are also subject to the tenant meeting the conditions below and apply only to non-payment of rent, and not to payment of outgoings, GST or other amounts.
There is a civil penalty for a landlord terminating the lease, evicting the tenant or calling on the tenant's security for non-payment of rent of 20 penalty units (approximately $3,300). This means there is a statutory ability for the relevant Minister to impose a fine on landlords (in addition to the remedies available to tenants), although given the Regulations deem the tenant not to be in breach, this penalty is unlikely to be of practical relevance.
Conditions on tenants being entitled to protection for non-payment of rent
Tenants under eligible leases are entitled to the protections described above if and only if those tenants:
- follow a prescribed process (see below) each time those tenants seek rent relief during the COVID-19 Period.
This is a significant advance on the National Code, and addresses concerns expressed by many landlords about tenants who withhold rent but do not reasonably substantiate the financial impact that measures taken in response to COVID-19 have had on the tenant's business.
- pay the balance of the rent (after it is reduced by the rent relief) during the COVID-19 Period.
This gives partial effect to the National Code principle that tenants must otherwise comply with their obligations under leases to be eligible for rent relief.
The process that tenants must follow is:
- request rent relief, and that request must be accompanied by:
- a statement that the lease is an eligible lease, and the lease is not excluded from the application of the Regulations
- evidence that the tenant is an SME entity
- evidence that the tenant qualifies for and is a participant in JobKeeper
The landlord must keep that information confidential, with usual exceptions for disclosure.
- the tenant negotiates with the landlord in good faith with a view to agreeing the rent relief.
Landlord's response to the tenant's rent relief request
A landlord has 14 days, or a longer period as agreed, to offer rent relief which has regard to all circumstances of the eligible lease. As contemplated by the National Code, it is open to the parties to agree on a rent relief package that is appropriate for the particular circumstances of the lease and the parties to it.
The Regulations require that the landlord's offer:
- relates to up to 100% of the rent payable during the COVID-19 Period, and may include a waiver, reduction, remission or deferral of rent
The Regulations are for the fixed period of 6 months, which differs to the more open-ended National Code.
- takes into account the reduction in the tenant's turnover, any waiver or other reduction of outgoings, whether failure to provide relief would compromise the tenant's ability to fulfil its obligations under the lease and the financial ability of the landlord to provide rent relief (including whether the landlord has been provided any relief by lenders)
The Regulations differ to the National Code in that they do not suggest that any rent reduction should be proportionate to the tenant's decline in turnover.
Taking into account the landlord's financial ability to provide the rent relief is a point of difference to the National Code and is a welcome recognition of some landlords who are or will also be in financial distress as a result of the COVID-19 pandemic.
It is also open to the landlord to have regard to other relevant matters, such as the unexpired term of the lease, impact on profit (not just turnover), any other relief available to the tenant, any outstanding incentives available to the tenant and future rent review timing and mechanics.
- comprises a rent waiver of at least 50% of any rent reduction unless otherwise agreed.
The tenant may initiate a repeat of the process if its financial position subsequently materially changes, but any further rent relief need not include 50% of that rent relief as a rent waiver.
Both parties must work cooperatively together, and act reasonably and in good faith in all discussions and actions associated with the Regulations.
Rent deferrals
If the rent relief comprises a rent deferral:
- the deferred rent does not start to become payable until the earlier of the end of the COVID-19 Period or the expiry of the term of the eligible lease
- the deferred rent is amortised over the greater of the balance of the lease term and 24 months
- unless otherwise agreed, the landlord must offer the tenant any extension of its lease required to achieve the deferral period of at least 24 months, on the same terms and conditions as the existing lease.
Rent reviews
Landlords must not impose rent increases during the COVID-19 Period (unless agreed that this regulation does not apply to the eligible lease, or where this results from increases in turnover rent).
Outgoings and other charges
There is no entitlement to a reduction in outgoings payable by a tenant. However:
- landlords must consider waiving recovery of any outgoing or expense payable by a tenant for any period the tenant is unable to operate its business
- landlords must pass any reduction in outgoings on to the tenant
- if a tenant is unable to operate their business at the premises for any part of the COVID-19 Period, the landlord may cease providing services at the premises as is reasonable and in accordance with any reasonable request from the tenant
- landlords who provide rent relief are eligible for land tax relief, if it is passed through to the tenant. Details of the land tax relief are not yet available.
Other protections
The tenant is not in breach of the lease if it ceases or reduces trading from its premises during the COVID-19 Period, and the landlord cannot terminate the lease, evict the tenant or call on the tenant's security if the tenant does so. The penalty is 20 penalty units (approximately $3,300), although given the Regulations deem the tenant not to be in breach, this penalty is unlikely to be of practical relevance.
Mediation
Either a landlord or a tenant may refer a dispute under the Regulations to the Small Business Commission for mediation, including formal mediation or preliminary assistance in dispute resolution. This differs to the National Code, in that it is not binding mediation. The process follows the well-established process under the Retail Leases Act 2003 (Vic). Landlords and tenants may be legally represented in a mediation but must not use the mediation process to prolong or frustrate reaching an agreement.
Proceedings in connection with a dispute about an eligible lease may not be commenced in the Victorian Civil and Administrative Tribunal or any court unless the Small Business Commission has certified that mediation has failed or is unlikely to resolve the dispute, except with leave of the Supreme Court.
We are on hand to assist landlords and tenants to work through these complex requirements and negotiate outcomes to protect their businesses and position them for recovery.
[1] generally, where an entity is entitled to distributions of 40% or more from the other entity, or is entitled to exercise 40% or more of the voting power of the other entity. For discretionary trusts, additional tests apply
[2] if the individual or company acts, or could reasonably be expected to act, in accordance with the directions or wishes, or in concert, with the tenant (or vice versa) in relation to the affairs of the business of the individual or company
