Since the COVID-19 Pandemic was declared, Landlords and Tenants of commercial and retail leases have been encouraged to negotiate in good faith in relation to rent relief to address the impact of the COVID-19 Pandemic. Whilst the federal government released a mandatory code of conduct for commercial and retail leases (Code) on 7 April 2020, it was only on Friday 1 May 2020 that the regulations implementing the Code in Victoria were passed.
The Victorian government has now passed the following legislation to effect the Code:
- COVID 19 Omnibus (Emergency Measures) Act 2020 (Vic) (Act); and
- COVID-19 Omnibus (Emergency Measures) (Commercial leases and Licences) Regulations 2020 (Vic) (Regulations).
This means Landlords and Tenants can now commence negotiations to reach agreement on rent relief in accordance with the Regulations.
What Tenants are entitled to rent relief?
The Act applies to retail and commercial leases and includes subleases and commercial licences, however it does not apply to agricultural leases.
To be an eligible Tenant within the meaning of the Act and the Regulations, the Tenant must:
(a) be an SME Entity – being a small to medium sized business with a turnover of less than $50 million, including sole traders;
(b) qualify for and be a participant in the JobKeeper Scheme; and
(d) not be one of the Tenants excluded under the Act (which includes Tenants who are part of a group entity or have a specified relationship with a group entity which exceeds a turnover of $50 million).
If a Tenant is not an eligible Tenant, a Landlord is not required to negotiate rent relief in accordance with the Regulations, however the federal government has encouraged all Landlords to negotiate with Tenants in light of the current impact of COVID-19.
How is rent relief determined?
There is no prescribed formula or method for determining rent relief in the Regulations. Landlords and Tenants should negotiate in good faith taking into account the particular circumstances of the lease and the parties.
Under the Regulations, any offer for rent relief must take into account:
- the individual circumstances of the lease;
- the reduction in the Tenant’s turnover associated with the Premises during 29 March 2020 to 29 September 2020;
- whether a failure to offer sufficient rent relief would compromise a Tenant’s capacity to fulfil the Tenant’s ongoing obligations under the lease (including paying rent);
- the Landlord’s financial ability to offer rent relief – this includes any relief provided by lenders in response to COVID-19;
- any reduction in outgoings charged in relation to the Premises, such as council rates etc; and
- any waiver by the Landlord of outgoings for any period that the Tenant is not able to operate
The rent relief offered must relate to the period of 29 March 2020 to 29 September 2020 and at least 50% of the rent relief must be by way of waiver of rent (unless otherwise agreed by the Tenant in writing).
For any rent which is to be deferred:
(a) the Landlord must not require repayment until after 29 September 2020 (or the expiry date of the lease if earlier than 29 September 2020);
(b) the deferred rent must be repaid over no less than 24 months (or the balance of the lease, if that is more than 24 months); and
(c) the Landlord must offer to extend the lease to include the period of deferral of rent (unless otherwise agreed in writing with the Tenant).
What is the process to be followed?
An eligible Tenant must start the process by making an application in writing to the Landlord for rent relief. The Tenant will need to provide to the Landlord a statement that the Tenant is an eligible lease within the Act, as well as evidence that the Tenant is an SME Entity that qualifies for and is a participant in the JobKeeper Scheme.
Whilst a Tenant is not required to produce financial statements or details of turnover under the Regulations, if a Tenant seeks a rent reduction of more than 30% from the Landlord, it appears appropriate for the Tenant to produce trading figures or statements of revenue showing the Tenant’s reduction in turnover in comparison to the same period last year.
Within 14 days of receiving the Tenant’s application, the Landlord must make an offer to the Tenant for rent relief.
The Landlord and Tenant must then negotiate in good faith.
If the parties reach an agreement for rent relief, the agreement should be documented and signed by both parties. To ensure the agreement is binding and there is clarity on all variations (including repayment of deferred rent), we recommend Landlords ensure the agreement is formalised by way of Deed, signed by Landlord, Tenant and any Guarantors.
If an agreement cannot be reached, either party may refer the matter to the Small Business Commissioner for mediation to determine the appropriate rent relief.
Additional protections for Tenants
The Regulations also provide additional protections for Tenants that will apply from 29 March 2020 and 29 September 2020 including:
1. a Landlord will be unable to terminate the lease (or evict a tenant) for non-payment of rent where a Tenant has followed the process of seeking rent relief as set out in the Regulations;
2. any increases to rent cannot be applied; and
3. if a Tenant has a further material change in their financial circumstances, they can make a further request to the Landlord for rent relief.
If you require further advice in relation to rent relief or assistance negotiating variations to your lease, do not hesitate to contact our commercial team.
We are also able to assist to document agreed variations in a form which is binding and can give certainty to all parties regarding their obligations moving forward.