Victorian Leasing Update – a must read for all Landlords and Tenants

On Friday 1 May 2020 the Covid-19 Omnibus (Emergency Measures)(Commercial Leases and Licences) Regulations 2020 were released.  As expected, the Regulations apply for the period from 29 March 2020 to 29 September 2020.

The Regulations somewhat mirror the National Cabinet Mandatory Code of Conduct (the “Code”), but there are some notable differences.

Rent Relief not linked solely to Tenants reduction in turnover

Regulation 10 sets out the process for rent relief, which is summarised as follows:

  • A tenant under an eligible lease may request rent relief from the landlord, such request to be in writing to the landlord and accompanied by:
    •  a statement by the tenant that it is an eligible lease that is not excluded by the corporate group provisions of the Act;
    • evidence that the tenant is an SME entity; and
    • evidence that the tenant qualifies for and participates in the JobKeeper scheme.
  • Once that request is made, the landlord has 14 days (or a different timeframe agreed to by the parties) to make an offer for rent relief.
  •  The Code had previously provided in Leasing Principle 3, that any rent relief offered to tenants must be proportionate to the reduction in the tenant’s trade.

The Regulations go further than this Leasing Principle with Regulation 10(4) providing that a landlord’s offer of rent relief must be based on all the circumstances of the eligible lease and:

(a)        relate to up to 100% of the rent payable under the eligible lease during the relevant period; and

(b)        provide that no less than 50% of the rent relief offered by the landlord must be in the form of a waiver of rent, unless a landlord and a tenant otherwise agree in writing; and

(c)        apply to the relevant period; and

(d)        take into account the following:

  1. the reduction in a tenant’s turnover associated with the premises during the relevant period. Unlike what was stated in the Code, the rent relief does not necessarily need to be directly proportional to the reduction in the tenant’s turnover. Given that the Code is to be read alongside the Regulations, it is unclear how this regulation will be interpreted and how it will apply. This  difference between the Code and the Regulations may lead to arguments between landlords and tenants, noting that the Regulations not the principles in the Code are the law.
  2. any waiver given pursuant to regulation 14(2);
  3. whether a failure to offer sufficient rent relief would compromise a tenant’s capacity to fulfil the tenant’s ongoing obligations under the eligible lease, including the payment of rent. It appears that the tenant’s solvency currently and in the future is a relevant consideration.
  4. a landlord’s financial ability to offer rent relief, including any relief provided to a landlord by any of its lenders as a response to the COVID-19 pandemic. This could mean that a self funded retiree who solely depends on rent as an income stream can factor this into its offer to a tenant. This Regulation could also have the affect that a landlord does not offer the waiver and relief for the whole eligible period if the landlord can only get limited relief from its financier.
  5.  any reduction to any outgoings charged, imposed or levied in relation to the premises.

Meaning of “landlord’s offer of rent…must be based on all the circumstances of the eligible lease” 

The broad drafting of Regulation 10(4) may well mean that if a tenant elected to close its business as opposed to being required to close by the government, that the tenant’s choice in closing could be a relevant circumstance that a landlord can take into account in considering its offer to the tenant.

What form does the relief have to take?

Leasing Principles 3 and 4 of the Code provided that rental waivers must constitute no less than 50% of the total reduction in rent, the remainder 50% to be a rent deferral.

Regulation 10(5) provides that following receipt of the landlord’s offer, the landlord and tenant are required to negotiate rent relief in good faith.

Regulation 4 defines “rent relief” as:

any form of relief provided to a tenant in respect of the obligation under an eligible lease to pay rent, including a waiver, reduction, remission or deferral of rent”.

Regulation 10 does not specifically refer to deferrals. However, once 50% of the rent relief is offered as a waiver, it is difficult to see how the other 50% would be treated by landlords other than a deferral.

What are the requirements with respect to any agreed rent deferrals?

Regulation 16 provides that to the extent that a deferral is agreed, the tenant has the greater of 24 months or the balance of the lease term to pay the deferred rent.

Regulation 13 further provides that a landlord must offer the tenant an extension to the term of their lease equivalent to the period for which the rent is deferred, unless otherwise agreed in writing.

What financial information will a tenant need to provide to a landlord?

We are still waiting for the Small Business Commission to produce a guideline on what financial information a tenant will be required to provide to a landlord.

However, we expect that the bare minimum a tenant will need to provide to a landlord is trading figures as to the downturn in trade, which show a downturn from the equivalent trading period in the previous year.

Some landlords have been asking for information such as statements of assets and liabilities, business plans, cash flow projections, income and profit and loss projections and details of capital raising from financiers and investors.  Our concern with this approach is that most of these documents are not readily available and will need to be prepared by accountants which will slow the negotiation process and add to the costs and administrative burden of SME tenants who are already under financial stress.

What about security deposits already drawn down on by landlords?

As foreshadowed previously, the Regulations will apply from 29 March 2020. If a landlord drew down on a bank guarantee/security deposit after this date, such action will be deemed a breach under the Regulations and liable to a penalty of 20 penalty units (approximately $3,300.00).  

What if a landlord and tenant have already reached an agreement and it does not comply with the Regulations?

The Regulations do not deal with whether agreements between landlords and tenants reached prior to the Regulations remain in force.

We can only assume that given the government encourage landlords and tenants to negotiate in good faith and reach agreement, that any existing deals reached will not be set aside as a result of the Regulations. However, it is worth noting that Regulation 11 allows a tenant to make a further request for rent relief of a landlord if, after a variation to an eligible lease has been agreed to, the tenant’s financial circumstances materially change. The tenant must follow the process set out in Regulation 10, however, in this circumstance a landlord’s offer of rent relief does not need provide that no less than 50% of the rent relief offered by the landlord must be in the form of a waiver of rent.

The regulations do not address what occurs if a tenant’s financial situation improves significantly after a variation to an eligible lease has been agreed to. Landlords are not afforded the same right.  Accordingly, it appears landlords will have to wear the consequences of rent waivers and deferrals for the whole of the relevant period (defined as 29 March 2020 to 29 September 2020) irrespective of whether the tenant’s financial circumstances improve.

Can the landlord increase the rent under the rent review provisions in the lease?

Regulation 12 provides a landlord under an eligible lease must not increase the rent payable under the lease at any time during the relevant period, unless the landlord and the tenant under the eligible lease agree in writing.

Are outgoings payable?

Regulation 14 provides:

(2)        A landlord under an eligible lease must consider waiving recovery of any outgoing or other expense payable by a tenant under the eligible lease for any part of the relevant period that the tenant is not able to operate their business at the premises.

(3)        If a tenant under an eligible lease is not able to operate their business at the premises for any part of the relevant period, the landlord may cease to provide, or reduce provision of, any service at the premises—

(a)        as is reasonable in the circumstances; and

(b)        in accordance with any reasonable request of the tenant.

The reference to “not able to operate their business” could mean that if a business voluntarily chose to close (as opposed to a mandatory government closure), a landlord may not have to waive outgoings.

Further, the use of the words “must consider” indicate that the waiver of outgoings is just another consideration rather than a mandatory obligation.

Although Regulation 18 provides a tenant under an eligible lease is not in breach of the eligible lease if, during the relevant period, they reduce their opening hours or close the premises and cease to carry out any business at the

It is critical that any variation agreement between landlord and tenant’s address all issues between them– rent relief, a closure period or reduced hours and outgoings relief. 

What happens if the parties cannot agree?

As with the Retail Leases Act 2003 (Vic), the Regulations provide a regime for mediation. Regulation 20 allows a landlord or tenant under an eligible lease to refer a dispute to the Small Business Commission for mediation.

Parties can choose to go to either VCAT or to court to have their dispute under the Regulations determined if the dispute is not resolved at mediation, provided the Small Business Commission has certified in writing that the mediation has failed or is unlikely to resolve the dispute. 

What should landlords and tenants do now?

If you have not already done so, as a tenant under an eligible lease you should commence the process provided for in the Regulations and make a written request of your landlord for rent relief.

Any agreements between landlords and tenants that have already been reached should be documented in accordance with the terms of the lease between the parties, usually in a variation agreement.

Any discussions between landlords and tenants that have not yet been finalised should be reviewed in light of the Regulations and once concluded should again be documented by variation agreement.

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