Over recent months we have published a number of articles and updates for Landlords and Tenants about the leasing Regulations to apply in light of COVID-19. The Victorian Small Business Commissioner (VSBC) and the Victorian Government have now provided further guidance on the interpretation of the Regulations, being the COVID-19 Omnibus (Emergency Measures) (Commercial Leases and Licences) Regulations 2020 (Regulations).
The following information may be of assistance to both Landlords and Tenants who are negotiating rent relief.
What documents should be produced by the Tenant in support of rent relief?
The VSBC has stated that it is appropriate for a Landlord to request the following information from a Tenant when considering an offer for Rent Relief:
- Information extracted from an accounting system;
- Information extracted from a Business Activity Statement;
- Information provided to a financial institution.
In addition to this, the Victorian Government guidelines (Guidelines) suggest that the Landlord should only seek one of the documents set out in the list above. Whilst a Tenant may choose to provide further documentation in support of their rent relief application, they will not be obliged to do so.
The VSBC has also stated that it is not appropriate for a Landlord to request:
- Future cashflow projections;
- Balance sheets, profit and loss or year to date financials;
- The Tenant’s bank balance; or
- A letter or comfort from the Tenant’s accountant verifying the financial information or the financial position of the Tenant.
Further, the information produced by both the VSBC and of the Victorian Government makes it clear that a Landlord should not require the financial information produced by a Tenant to be verified, examined or audited or to be provided by a third party such as an accountant. Whilst it may appear reasonable for a Landlord to request that financial information be verified or provided by an accountant to assure the Landlord about the accuracy of the information, the Guidelines make it clear that requests for information should be kept to a minimum and it is not intended that a Tenant must engage (and incur the costs of) a third party providing this information.
Notwithstanding these Guidelines, where a Tenant is seeking rent relief from a Landlord, Tenants should consider providing additional financial information if it would be persuasive and encourage the Landlord to consider a greater level of rent relief.
Whilst the Guidelines do not form part of the legislation, it is likely that the VSBC will apply the Guidelines when conducting mediations under the Regulations.
How much rent relief should be offered?
Whilst the mandatory code of conduct released by the Federal Government suggested that Tenants should be given rent relief proportionate with the reduction in their turnover, the Victorian Regulations do not require this. The Regulations require Landlords and Tenants to negotiate in good faith and make it clear that the Tenant’s reduction in turnover is one of a number of factors to be taken into account in determining rent relief. In addition to reduction in turnover, the rent relief must also take into account other factors such the Landlord’s financial circumstances and capacity to offer rent relief.
Interestingly, the Victorian Government Guidelines now state that there is an expectation that rent relief should be provided “in proportion to the decline in the Tenants turnover”. Notwithstanding this, the Guidelines also state that all of the circumstances that the Lease should be considered, including the Landlord’s and Tenant’s individual financial circumstances.
Whilst there is no obligation in the Regulations for a Landlord to produce financial information to a Tenant, as the Landlord’s financial circumstances and capacity to offer rent relief are relevant, the Guidelines state where the rental relief offered is ‘”not in proportion to the Tenants decline in financial circumstances, the Landlord should provide documentation of their financial position to the Tenant to justify the amount of rent relief offered.”
As such, whilst all of the circumstances of the Lease and factors listed in the Regulations should be taken into account in determining rent relief, it appears that the most important factor is the decline in the Tenants turnover. If Landlords are not offering rent relief in proportion to the reduction in turnover, Landlords should ensure there are relevant reasons to justify their offer.
Is the reason for Business closure relevant?
The Guidelines give clarification to Landlords where Tenants have unilaterally decided to close the doors of their business in light of the COVID-19 pandemic, even when they have not been directed to do so by the Government. The Guidelines make it clear that the Regulations do not provide a distinction between those businesses who have taken precautionary steps and voluntarily closed their business, as opposed to those businesses who have closed because they are required to do so.
As such, Landlords should not base their offer for rent relief on whether or not the Tenant changed the operation of their business as a result of the COVID-19 pandemic. The Guidelines make it clear offers for rent relief should be based upon the financial information provided by the Tenant, rather than whether the Tenant closed their business or reduced their hours voluntarily, rather than by government requirement
What if circumstances change after we agree on rent relief?
It is important for both Landlords and Tenants to ensure that any agreement for rent relief is documented in a binding form and signed by all parties so as to ensure each party understands their rights and obligations, as well as making it clear that the parties have agreed to the terms of rent relief. It is intended that any agreement for rent relief should cover the entire rent relief period being 29 March 2020 to 29 September 2020.
If there is a material change in Tenant’s financial circumstances after an agreement has been entered into, the Regulations allow a Tenant to make a further request to a Landlord for additional rent relief. To be successful in seeking further rent relief, it is likely that a Tenant would need to show that there has been a further deterioration in their financial circumstances which was not in the contemplation of the parties when entering into an agreement for rent relief. Entering into a binding Variation of Lease documenting the agreement for rent relief can clarify the basis upon which the agreement was negotiated and may reduce the risk of such further claims for rent relief, except in circumstances where there is a further significant change which was unexpected by the parties.
Unfortunately for Landlords, it is only Tenants who can seek to change the agreement for rent relief. If there is a significant improvement in a Tenant’s business during the rent relief period, the Landlord cannot reduce the rent relief. The Guidelines make it clear that there is no obligation upon a Tenant to enter into further negotiations in these circumstances.
If you require information in relation to the Regulations and Guidelines or require assistance in negotiating or documenting rent relief or any other leasing matters, do not hesitate to contact one of the members of our Corporate and Commercial team, who can provide you with advice regarding all of your leasing matters.