Commercial Tenancy Relief Scheme Regulations 2021 now released – Take 2!

By Evelyn Marcou, Senior Associate

On 24 August 2021, the Commercial Tenancy Relief Scheme Regulations 2021 (“the Regulations”) came into effect.

The Regulations are more complex than the 2020 Regulations and the process for applying for rent relief has changed and is more cumbersome, so it is important that tenants take time to understand the new process and seek legal advice.

I have set out below some of the key issues to assist tenants in understanding the Regulations.

Summary of Key things to note

• Time is of the essence. If a tenant makes an application for rent relief on or before 30 September 2021, the rent relief period will be 28 July 2021 – 15 January 2022. This means if a tenant makes a request and provides evidence after 30 September 2021, it will lose more than 9 weeks of rent relief. The rent relief period will commence from the date of request and evidence being provided in accordance with the Regulations.
• The Regulations differ to last year so it is important tenants seek advice in relation to the process for applying for rent relief.
• If a tenant does not provide a compliant request and evidence within 14 days of requesting rent relief, the request lapses.
• There is a prohibition on rent increases during the Protection Period irrespective of whether a tenant has applied for rent relief.
• A landlord only has to offer rent relief proportionate to the tenant’s downturn in turnover applying the relevant test period and comparison period.
• A landlord must consider waiving outgoings.

What is an eligible lease?

An eligible lease is a retail lease or a non-retail commercial lease or licence that:

• was in effect on 28 July 2021; and
• under which the tenant is an eligible tenant; and
• is not excluded under regulation 7 or 8 (notably agricultural leases or leases where the tenant is a listed corporation).

What about a renewal of lease or extension or variation of lease?

If a lease is extended, renewed or varied after 28 July 2021, it is deemed to be a continuation of the eligible lease in effect on 28 July 2021.

Who is an eligible tenant?

To qualify as an eligible tenant, the tenant must:

• have as at 28 July 2021 carried on business (or been a non-profit body or deductible gift recipient); and
• be an SME entity (with turnover in 2020/2021 of less than $50,000,000.00); and
• satisfy the decline in turnover test (as set out in Regulation 12, see below); and
• not excluded due to the operation of Regulation 8 (relevantly a company in liquidation or a bankrupt individual.

What is the meaning of decline in Turnover Test?

• a tenant satisfies the decline in turnover test if the tenant’s turnover for the turnover test period falls short of the tenant’s comparison turnover; and
• the shortfall, equals or exceeds 30%.

What is Turnover and how is it Assessed?

• Turnover is defined in the same manner as GST turnover within the meaning of the GST Act, however, varied to include State Government COVID grants but to exclude Federal Government grants.
• Turnover includes revenue derived from all sources including onlines sales and other sites and is not just restricted to revenue derived from the business premises which differs from the position last year.
• The Turnover Test Period and Comparison Turnover depends on the day the tenant commenced trade.

Date of Commencement of Trade	Turnover Test Period (Regulation 13)	Comparison Turnover (Regulation 14)
Prior to 1 April 2021	At the tenant’s election, a consecutive three month period between 1 April 2021 and 30 September 2021 commencing on the first day of the month	The three corresponding months in 2019
1 April 2019 – 31 March 2020 (inclusive) (Regulation 16)	The tenant’s choice of any three consecutive whole calendar months between 1 April 2021 and 30 September 2021	The sum of the tenant’s turnover for each whole month of trade after the tenant commenced trading and before 1 April 2020 divided by the number of whole months, multiplied by 3. Example – If a tenant commenced trading on 1 September 2019:   Total turnover between 1 September 2019 to 31 March 2020  x 3                 Divided by 8
1 April 2020 – 31 March 2021 (inclusive)	The tenant’s choice of any three consecutive whole calendar months between 1 April 2021 and 30 September 2021	The sum of the tenant’s turnover for each whole month of trade after the tenant commenced trading and before 31 July 2021 divided by the number of whole months, multiplied by 3 Example – If a tenant commenced trading on 15 September 2020:   Total turnover between 1 October 2020 to 30 June 2020   x 3                 Divided by 8
From 1 April 2021	A period agreed by landlord and tenant following good faith negotiations	The tenant’s total turnover to 31 July 2021, divided by the number of days trade, multiplied by 92

How does a tenant apply for relief?

• A tenant must make a compliant request and a landlord does not have to consider such request unless it is compliant and the tenant has provided sufficient evidence to a landlord.
• The request must be in writing accompanied by a statement from the tenant:
  • that the tenant is an eligible tenant; and
  • that the tenant satisfies the Decline in Turnover Test (including setting out details of the turnover test period, comparison period and decline).
• Within 14 days of the request being made, the tenant must then provide to the landlord evidence in support of the request which must include at least one of the following:
  •  extracts from the tenant’s accounting records;
  • the tenant’s business activity statements (BAS);
  • the tenant’s bank statements; and
  • A statement prepared by a practising Accountant.
• In addition to such evidence the tenant must now also provide a statutory declaration stating that the information is true to the best of the tenant’s knowledge and belief.
• Most importantly, if a tenant fails to provide evidence within 14 days of the request (being evidence that also must be compliant with the Regulations), then the tenant’s request for rent relief will lapse. The tenant will then be entitled to make a further request, but if a tenant makes three requests that lapse then it will not be able to make any further requests and will lose its right to any rent relief.

Landlord’s Offer within 14 days of Tenant’s request for rent relief

• Within 14 days of receiving evidence required to be provided by the tenant, the landlord must make an offer of rent relief in writing which must:
  • be proportional to the tenant’s decline in turnover;
  • provide that no less than 50% of the rent relief be in the form of a waiver with the balance deferred; and
  • take into account the “other circumstances”, “if any” that a tenant has asked the landlord to consider. There is no guidance as to what these other circumstances must be, but one must assume they must be COVID related.

Subsequent conduct

• Once the offer is made, the landlord and tenant must negotiate in good faith to agree on the rent relief.
• If an agreement is not reached within 14 days of the offer being made and the landlord’s offer meets the minimum requirements (based on proportionality) and the tenant has not referred the matter the Victorian Small Business Commissioner (“VSBC”) for assistance within 14 days of the offer being made then the landlord’s offer will be deemed to be accepted by the tenant.
• This is a significant change to the process under the 2020 Regulations and is designed to avoid any delay by tenants. Importantly, tenants should make an application to the VSBC days after they make a compliant request for rent relief as a tenant is deemed to have accepted their landlord’s first offer if the application to the VSBC is not made (unless agreement for rent relief has been reached). This will result in an increase in applications to the VSBC and potentially cause delays to matters being locked in for Mediation.

What is the rent relief period?

An offer by a landlord for rent relief must relate to the “rent relief period” determined as follows:

• If a tenant makes an application for rent relief on or before 30 September 2021, the rent relief period will be 28 July 2021 – 15 January 2022.
• If a tenant makes its application after 30 September 2021 the rent relief period will be from the date of such request and evidence being provided in accordance with the Regulations.

Deferral of rent and extension of lease term

• If rent is deferred, then it is payable by the tenant to the landlord commencing not earlier than 15 January 2022 and for a period of two years or the balance of the lease term, whichever is the greater. The deferred rent is to be amortised equally across this period and will be payable in addition to the usual rent.
• Again, this means that any agreement for rent relief should be documented by a Deed and the landlord should include a provision allowing it to retain any security deposit beyond the expiry of the lease term (in circumstances where the balance of the lease term is less than the lease term).
• A landlord must offer the tenant an extension to the term of the lease equivalent to the period for which the rent is deferred, but there is no obligation on a tenant to accept the offer. If three months’ rent is deferred, then three months must be offered to be added to the term of the eligible lease.

What about rent deferral arrangements that were already in place under the 2020 Regulations?

If rent has already been deferred under the 2020 Regulations and a tenant is applying for further rent relief under the new 2021 Regulations for the same lease (whether extended renewed or varied), then any part of that deferred rent is further deferred until after 15 January 2022. After 15 January 2022, the tenant must resume paying the deferred rent to the landlord in the same instalments and frequency as agreed under the 2020 Regulations.

Subsequent Re-Assessment of Rent Relief

Where a rent relief agreement has been reached, a tenant’s request was made prior to 30 September 2021 and the tenant commenced trade prior to 1 April 2021, a tenant must prior to 31 October 2021 provide a reassessment of information.

Protection Period

A tenant will not be in breach under an Eligible Lease for non-payment of rent and outgoings and will receive protection under the 2021 Regulations only if it has made a compliant rent relief request and continues to pay rent reduced by the tenant’s decline in turnover. This is a significant change to the 2020 Regulations.

Prohibition on Rent Increases

A landlord under an Eligible Lease must not increase the rent during the Protection Period being 28 July 2021 and 15 January 2022. This applies regardless of whether a tenant has made an application to a landlord for rent relief or not.

Importantly, any rent review otherwise due during the Protection Period is permanently lost and may never be claimed. If under a lease, rent is supposed to be reviewed on 1 September 2021, then this rent review is prohibited so the rent due under the lease will be the same for the period from 1 September 2020 to 1 September 2022 when the next rent review is due. This will impact the amortisation of rent reviews during the balance of the lease term. It is unclear what will happen if a market review is due during the Protection Period.

Frequently Asked Questions – Victorian Small Business Commission

The VSBC has today updated its website and FAQ’s section to reflect the new 2021 Regulations.

As can be seen from the above, the process for rent relief under the 2021 Regulations is more complicated than under the 2020 Regulations.

If you require any assistance in seeking rent relief under the new Commercial Tenancy Relief  Scheme or to further understand your eligibility, please contact Evelyn Marcou  at evelyn.marcou@mst.com.au.