Coronavirus and Victorian Retail And Commercial Tenancies – The Mandatory Code and the COVID-19 Omnibus (Emergency Measures) Act 2020 (Vic)

Coronavirus and Victorian Retail And Commercial Tenancies – The Mandatory Code and the COVID-19 Omnibus (Emergency Measures) Act 2020 (Vic)

The COVID-19 Omnibus (Emergency Measures) Act 2020 (Vic) (the “Act”) was passed in Victoria on 24 April 2020.

The Act allows Regulations to be created that will give effect to the National Cabinet Mandatory Code of Conduct (the “Code”).

The Leasing Principles Under the Code

As noted in our earlier article, the Code established 14 leasing principles which can be summarised as follows:

1. Landlords must not terminate a lease for non-payment of rent during the pandemic period or the subsequent recovery period.
2. Tenants must comply with the terms of their lease subject to negotiated changes. A material failure to comply with substantive lease terms will result in a forfeit of the protections provided by the Code.
3. Landlords must offer proportionate rent reductions in the form of waivers and deferrals up to 100% of the amount ordinarily payable. The reductions are assessed on a case-by-case basis and are to be based on the reduction in the tenant’s turnover during the COVID‑19 pandemic period and the subsequent recovery period.
4. Any rental waivers must constitute no less than 50% of the total rent reduction during that period. Tenants may waive the 50% waiver requirement by agreement with the landlord;
5. Unless otherwise agreed by the parties, rental deferrals must be amortised over the greater of:
   • the balance of the lease term; and
   • 24 months.
6. Any reduction in land tax, council rates or insurance granted to the landlord will be proportionally passed on to the tenant;
7. Landlords should seek to share with the tenant in a proportionate manner any benefit the landlord receives due to a deferral of loan payments, provided by a financial institution as part of the Australian Bankers Association’s COVID 19 response;
8. Landlords should, where appropriate, seek to waive recovery of any other expense or outgoing payable by a tenant under lease terms, during the period the tenant is not able to trade. Landlords may reserve the right to reduce services as required in such circumstances;
9. If negotiated arrangements under the Code necessitate repayment, this should occur over an extended period so as to not place an undue financial burden on the tenant. No repayment should commence until the earlier of COVID-19 pandemic ending or the existing lease expiry, taking into account a reasonable subsequent recovery period.
10. No fees, interest or other charges should be applied with respect to the waived rent, and no fees, charges or punitive interest may be charged on deferrals;
11. Landlords must not draw on a tenant’s security (whether this be cash bond, bank guarantee or personal guarantee) for the non-payment of rent during the pandemic period or the subsequent recovery period;
12. The tenant should be provided with an opportunity to extend the lease for an equivalent period of the rent waiver and/ or deferral period;
13. Landlords agree to a freeze on rent increases (except for retail leases based on turnover rent) for the duration of the pandemic and a reasonable subsequent recovery period; and
14. Landlords are prohibited from applying any penalty if a tenant reduces its opening hours or ceases to trade due to the COVID 19 pandemic.

The above leasing principles are not legislation and are aimed to supplement the Regulations (once enacted).  The Code should be viewed as a policy statement to support the interpretation of the State legislation.

The COVID-19 Omnibus (Emergency Measures) Act 2020 (Vic)

The Act is enabling legislation and allows Regulations to be created that give effect to the Code.  The real details will be in the Regulations which we expect to see in the next week.

 The highlights of the Act are:

• it will allow the Regulations to apply to retail, non-retail, commercial and industrial leases and licences to occupy land for business purposes. The latter means that co-working spaces will be protected (provided they are used for business purposes). In the franchising context an occupancy licence between a franchisor or franchisee should also be protected by the Code;
• it defines an ‘eligible lease’ as one that was in effect when the proposed Regulations come into operation and where the tenant is an SME entity and an employer who qualifies for AND is a participant in the JobKeeper scheme.. It should be noted that an SME entity is one that had less than $50M in turnover in either or both of the previous or current financial year (r 5 of the Guarantee of Lending to Small and Medium Enterprises (Coronavirus Economic Response Package) Rules 2020 (Cth)). Therefore, the Regulations could apply to a tenant whose turnover has gone below $50M because of COVID-19; and
• it appears it will apply to a head lease, a sub-lease and a licence separately.

It should be noted that the Code applies on or after 3 April 2020, whereas the Act allows the Regulations to commence from 29 March 2020. Premier Daniel Andrews said in the Second Reading speech that this date was decided on so that tenants in arrears from 1 April 2020 will have the benefit of the Regulations.

Application to Franchisee occupying premises under an outlet/occupancy licence

The Act will apply to franchisees whose occupancy rights are granted under a licence provided the franchisee is eligible for and is a participant in the JobKeeper scheme. The franchisee will have the protection of the Code with respect to the licence fee payable to the franchisor. However, if a franchisor has turnover of over $50million and therefore, is not eligible for JobKeeper, the franchisor it is a prospect that the franchisor will not have the protection of the Act. Hopefully the Regulations will deal with this anomaly.

The Regulations

Once enacted, the Regulations will be retrospective from 29 March 2020. However, we do not yet know the extent of the retrospectivity. If it is a complete retrospectivity, then if any landlords have called on any bank guarantees or security deposits after 29 March 2020, then such actions are likely to be deemed invalid.

In Western Australia, where the Bill has currently stalled, a different model of retrospectivity has been seen.  The Bill in WA foreshadowed that anything part way through or incomplete is to be “stayed”. But if something has already happened, such as the landlord drawing down on a bank guarantee or terminating a lease, then these actions would not be deemed to be invalid.

What should you do now?

Whether you are a landlord or a tenant, if you have not already done so, you should commence negotiations now! Tenants should liaise with their accountants and start putting together evidence of the downturn in turnover. 

It is expected that the information required from tenants will vary on a case-by-case basis. Landlord are requesting turnover information and financial statements for past periods and current periods together with projected cashflow statements for the pandemic period  certified by the tenant’s accountant. The Victorian Small Business Commission is preparing a guideline on this.

What we do know is that the Code and the Regulations focus on revenue and not profit.

If you are a landlord or a tenant you should act now, but you need to be weary because the Regulations will have some form of retrospective application.  If you are a tenant you should apply for the JobKeeper Scheme immediately.

It may be that the Regulations will invalidate any deals struck between landlords and tenants although this seems unlikely given the Prime Minister has been encouraging parties to negotiate in good faith.

How should changes to a commercial (retail or non-retail) lease be formalised?

An exchange of emails or solicitors’ letters is rarely sufficient.  A signed memorandum in writing is the minimum in the short term.  However, the terms of the lease should be considered as it will no doubt dictate how variations are to be documented.  An agreement or deed varying the terms of the Lease is the ideal way to proceed.

For any queries regarding the application of the Code, the Act or the Regulations, please contact Evelyn Marcou on 0409 384 025 or Raynia Theodore on 0419 877 345.