This article was written by Emily Masters, Simone Menz, Victoria Thackwray, Michael Evans and Jonathan Le.
Victoria has just enacted the Commercial Tenancy Relief Scheme Regulations 2021 (Regulations) putting a 2021 spin on rent relief.
The Regulations are largely similar to the COVID-19 Omnibus (Emergency Measures) (Commercial Leases and Licences) Regulations 2020 (2020 Regulations) but with some important differences including:
- a ‘decline in turnover test’ replacing participation in the JobKeeper scheme as the key test for tenant eligibility;
- more rigour in the process for tenants to request and negotiate rent relief with landlords;
- mandatory reassessment of rent relief agreements mid-way through the scheme period; and
- any rent increases or reviews due during the period cannot occur, even after the scheme period ends.
This alert picks up key differences from the 2020 Regulations that landlords and tenants should be aware of.
The Regulations (released on 24 August 2021) re-implement the Commercial Tenancy Relief Scheme for 2021. The Regulations apply for the period from 28 July 2021 to 15 January 2022.
The Regulations apply to eligible leases on foot on 28 July 2021, but also extend to any subsequent renewal, variation or extension of lease on substantially the same terms.
To be eligible for protection, a tenant must:
- carry on a business in Australia;
- be an SME entity (which, under the Regulations, broadly means that the tenant’s annual turnover was less than $50m for the financial year ending 30 June 2021);
- satisfy the ‘decline in turnover’ test; and
- not, among other things, be part of a broader corporate group with an aggregate turnover of more than $50m for the financial year ending 30 June 2021.
The Regulations do not apply to tenants that are listed or subsidiaries of listed companies, which is a new 2021 carve out.
Decline in Turnover Test
The ‘decline in turnover’ test replaces eligibility and participation in JobKeeper as one of the qualifying criteria for a tenant to seek protections under the Regulations. In essence, the requirements are similar to the JobKeeper eligibility test, in the sense that a tenant will satisfy the ‘decline in turnover’ test if the tenant’s turnover for any consecutive 3 month period between 1 April 2021 and 30 September 2021 falls short of the tenant’s turnover for the equivalent 3 month period in 2019 (by 30% or more or 15% or more for ACNC-registered charities). The Regulations also apply similar “alternative” decline in turnover tests to those under the JobKeeper scheme, such as for a business restructure that changed an entity’s comparison turnover.
However, in addition to the turnover comparison periods noted above, there are some differences to the requirements from the JobKeeper tests. Broadly, these include:
- an entity’s “turnover” for the purposes of the test includes all Victorian government COVID-19 business support grants received during the relevant period, but not any grant or financial assistance payment provided by the Commonwealth to mitigate the effects of the pandemic; and
- if a tenant began trading on or after 1 April 2021, the tenant and the landlord must negotiate in good faith to agree on the turnover test period to apply.
This change will put more pressure on landlords to closely assess tenant financials, given that they will be unable to rely on a simple confirmation that the tenant is receiving JobKeeper. However, as for the 2020 Regulations, tenants will need to provide supporting information for any rent relief request.
The process for the tenant to apply for rent relief is broadly similar to that in the 2020 Regulations. However, the following key differences are noteworthy:
- Request lapses: A tenant’s request for rent relief will lapse if they fail to provide the required supporting information within 14 days of making the request. If a tenant’s request for rent relief lapses, then the tenant may make another request for rent relief. However, if the tenant allows 3 requests for rent relief to lapse, the tenant cannot make a further request for rent relief.
- “Other circumstances”: In addition to the landlord’s rent relief offer being at least proportional to the decline in turnover with at least 50% being in the form of a waiver, the landlord must take into account any other circumstances that the tenant would like the landlord to consider. The Regulations do not identify any specific types of circumstance or mandate any particular weighting and so this could potentially have quite broad application.
- Deemed acceptance: The Regulations deem a tenant to have accepted a landlord’s offer if, 15 days after the tenant first receives the landlord’s offer of rent relief, the landlord and tenant have not agreed on a rent relief agreement, the landlord’s offer of rent relief satisfies the minimum requirements in the Regulations, and, importantly, the tenant has not referred the matter to the Small Business Commission for mediation. This deeming provision is a welcome change from the 2020 Regulations and should assist in the parties reaching conclusions of rent relief without unnecessary delay.
- Mandatory reassessment of relief: The Regulations require rent relief agreements to be re-assessed on 31 October 2021 if the tenant’s request for rent relief was made on or before 30 September 2021 and the tenant began trading before 1 April 2021. Contrary to the 2020 Regulations, this will potentially enable landlords to trigger renegotiations if lockdowns end and trading conditions improve. There is a strong disincentive to a tenant failing to provide the required information for reassessment, as they will automatically lose any agreed rent waiver that would otherwise have applied from 31 October 2021, unless a limited exception applies.
Restrictions on landlords taking action for breaches
The restrictions on landlords taking action for failures to pay rent or outgoings are similar to the 2020 Regulations – where a tenant has satisfied the relevant conditions, a landlord must not during the scheme period:
- evict a tenant, re-enter or otherwise recover the premises, or make any attempt to do so; or
- have recourse to any tenant security (which would include a bank guarantee, bond, security deposit, indemnity or guarantee).
Critically, before a rent relief agreement has been made, the tenant must continue to pay rent at the reduced rate proportionate to the tenant’s stated decline in turnover in order to be entitled to these protections. This is a new condition that did not apply in the 2020 Regulations.
However, a tenant can also be entitled to the protections if the tenant is unable to trade as a result of sickness or natural disaster, without needing to make a request for rent relief.
Prohibition on rent increases
Similar to the 2020 Regulations, the Regulations prohibit increases to the rent payable under a lease during the scheme period. However, the Regulations go one step further in providing that, where a lease provides for a rent review that would increase the rent during the protection period, then that review is voided and cannot be claimed in future by the landlord. This is a departure from the 2020 Regulations that could have a significant ongoing commercial impact beyond the scheme period, particularly for market reviews.
We are on hand to assist landlords and tenants to work through these requirements and negotiate mutually beneficial outcomes to protect their businesses during this challenging time.