COVID-19 Rent Relief Legislation: Preventing forfeiture?

By Alicia Hill, Principal and Harrison Breer, Law Clerk

VCAT has had its first hearing in which relief from forfeiture was sought under the COVID-19 Commercial Tenancies regulations. In the matter of PS Market Pty Ltd v Brijcam Nominees Pty Ltd (Building and Property) [2020] VCAT 1468, the Tribunal had to consider the COVID-19 legislation relating to commercial tenancies. PS Market Pty Ltd argued that it was entitled to relief through the COVID-19 legislation from the Notice of Default by Brijcam Nominees Pty Ltd, which demanded the payment of the outstanding rent. In the alternative, PS Market also argued that in filing this Notice of Default, Brijcam Nominees had engaged in unconscionable conduct, and that they were also entitled to relief against forfeiture.

Background

PS Market Pty Ltd (“PS Market”) was a tenant of a premises owned by Brijcam Nominees Pty Ltd (“Brijcam Nominees”) pursuant to the lease agreement dated 24 January 2018 and commencing on 1 February 2018, with the first 12 months being rent-free. Under this lease, the permitted use of the premises was “community market and place of assembly for the sale of food and beverages”.

PS Market was responsible for obtaining a town planning permit and/or any other permit that is required to perform the intended use of the premises. If after 6 months from the commencement date, the permit has been refused, granted but not on reasonable terms, or granted but appealed to VCAT, then PS Market could determine the lease upon seven days’ notice of such an outcome.

PS Market was not successful in obtaining a town planning permit and had even been refused a permit to use the premises for a market and food/drink premises on 10 August 2019 by the Manningham City Council. PS Market appealed the refusal to VCAT, although no decision had been made at the time of this case.

PS Market received a Notice of Default dated 23 November 2020, whereby Brijcam Nominees demanded the outstanding rental payment and GST of $358,877.68 from PS Market. This outstanding rent was from the period 1 April 2020 – 1 November 2020 inclusive. Further rent fell due on 1 December 2020, bringing the total rental payments due to $409,659.95.

PS Market argued that:

  • Brijcam Nominees was unable to act on the Notice of Default given that PS Market is entitled to relief from its obligation to pay rent pursuant to the provisions of the COVID-19 commercial tenancy legislation /regulations;
  • it is entitled to an injunction on the basis that, in demanding payment of the full rental amount for the period owed during which the COVID-19 pandemic was occurring, Brijcam Nominees has engaged in unconscionable conduct pursuant to section 77 of the Retail Leases Act 2003 (Vic);
  • it was entitled to relief against forfeiture of the premises.

Injunction

In order for an interlocutory injunction to be ordered, PS Market must firstly demonstrate that there is a serious question to be tried and that there is a sufficient likelihood of success at trial, and as such is not entitled to serve notice demanding payment.

On 29 March 2020, the National Cabinet introduced a set of principles, later becoming legislation in Victoria comprising of:

  • COVID-19 Omnibus (Emergency Measures) Act 2020 No II of 2020 (“the Act”)
  • COVID-19 Commercial and Residential Tenancies Legislation Amendment (Extension) Act 2020 SR No 25 of 2020 (“Amending Act”)
  • COVID-19 Omnibus (Emergency Measures) (Commercial Leases and Licenses Regulations 2020 SR No 31 of 2020 (“Regulations”)
  • COVID-19 Omnibus (Emergency Measures) (Commercial Leases and Licences Regulations 2020 SR No 31 of 2020 (“Amended Regulations”)
  • Coronavirus Economic Response Package (Payments and Benefits) Rules 2020 (“Jobkeeper Rules”)

This legislation allows for a delay on evictions of commercial and residential tenants initially over the six months from March to September 2020 and then extended to December 20202 due to the COVID-19 pandemic.  

In summary, a tenant who has an ‘eligible lease’ as defined in section 13 of the Act (as amended in section 4 of the Amending Act), is entitled to be protected by a rent relief regime.

Under section 9(1) of the Amended Regulations, ‘eligible leases’ will be protected from breaching any provision of their respective leases that relates to the payment of rent or outgoings should they have requested rent relief or paid an agreed amount in accordance with the COVID-19 legislation.

An ‘eligible lease’ must be in operation on the 29 March 2020, and satisfy Clause 4A of the Amended Regulations:

  1. Be a small to medium enterprise with an annual turnover of up to $50 million
  2. Be entitled to a Jobkeeper payment under section 6, 11 or 12A of the Jobkeeper Rules

PS Market was found:

  • not to satisfy Clause 4A(b), as it was not entitled to Jobkeeper payments.
  • not entitled under section 6 as it had no employees and did not meet the requirements set out under this section, nor sections 11 or 12A.

Therefore, this lease could not be classed as an ‘eligible lease’. Member Kincaid therefore found that there is no serious question to be tried, and as such the injunction claim ultimately failed and no requirement to consider the balance of convenience.

Unconscionable conduct

PS Market’s alternative claim was that by demanding the outstanding rental payments when they did, Brijcam Nominees had engaged in unconscionable conduct pursuant to section 77 of the Retail Leases Act 2003 (Vic).

PS Market’s argued that the Notice of Default breached the Code of Conduct and the COVID-19 legislation, as they believed all parties to commercial leases must work together in these unprecedented times.

The Tribunal considered Jams 2 Pty Ltd v Stubbings, in which the Court relied on Gageler J’s statement in Australian Securities and Investments Commission v Kobelt, whereby unconscionable conduct is conduct that is “so far outside societal norms of acceptable commercial behaviour as to warrant condemnation as conduct that is offensive to conscience”. Taking this statement into account, and the fact that no serious question was to be tried, it was found that serving the Notice of Default alone could not amount to unconscionable conduct. As such, this line of argument failed.

Relief against forfeiture

PS Market’s final argument was through relief against forfeiture of the premises, whereby the property right of PS Market will be protected despite its failure to perform its side of the contract, namely, to pay rent.

The Tribunal analysed various cases where late payments of rent were present. In the case of Jam Factory Pty Ltd v Sunny Paradise Pty Ltd, the majority of the rental payments were late by several days, however these actions did not “display a deliberate denial of the landlord’s rights”, nor were they within “exceptional circumstances”. In this case, relief was granted.

In the current situation, the Tribunal analysed PS Market’s rental payment history. Aware of the hardship that PS Market was facing due to the delayed planning permit application, Brijcam Nominees granted a suspension of the rental payments for July and August 2019. PS Market failed to pay rent for September, October and November 2019. PS Market had their solicitor’s write a letter to Brijcam Nominees requesting that the payment of rent be paused until April 2020, which was ultimately rejected. It was later agreed that half of the owing rent was to be paid by November 2019, with the balance being paid in monthly instalments over a 12-month period.

However, according to an affidavit filed on behalf of Brijcam Nominees, rental payments continued to be paid late consistently. On 20 April 2020, PS Market’s representatives informed Brijcam Nominees that they were not in a financial place to pay rent, given the issues arising due to the COVID-19 pandemic.

The Tribunal also looked at the assets of PS Market and its related parties and found that the parent company was controlled by Mr Fanous, whom was very wealthy, holding net assets of over $42 million and a substantial net annual income. The Tribunal found that there was not sufficient evidence to show that the rental payments would not be paid in the future, and that the required exceptional circumstances in which relief against forfeiture for the non-payment of rent is denied were not present.

As such, relief against forfeiture was granted. The Tribunal did however state that relief against forfeiture would only be granted in situations where the tenant can pay the outstanding rent and have the ability to put the landlord in the position they would have been had no default in the rental payment occurred.

Therefore, the Tribunal only granted a relief against forfeiture on the basis that PS Market pay their indebted rental payments and ordered for payments to be set up accordingly.

Take-aways

This case illustrates the complex issues that are just arising surrounding leases and rent relief in the wake of COVID-19 and the benefits of having reached an agreement with landlords for the pandemic affected period.

Negotiations are still underway between some landlords and tenants. There is also a built in ability to re-negotiate some of the agreements reached if there is a substantial change of circumstances.

Mutual agreement, after negotiations, is the most effective way of having certainty for the future and maintaining a working landlord / tenant relationship.

There has not been many parties who had to have recourse to the courts or tribunals to determine matters. This case shows however the importance of understanding your legal rights, the actions that can and cannot be lawfully taken and that there are various avenues for relief which may be available depending upon parties’ circumstances.

If you have any questions about the commercial tenancy rent relief legislation, or lease agreements more generally, please contact Alicia Hill on (03) 8540 0292 or alicia.hill@mst.com.au or Evelyn Marcou on (03) 8540 0243.