Information for Landlords and Tenants
The COVID-19 Omnibus (Emergency Measures) Act 2020 (Act) was passed on 23 April 2020 in Victoria, and on Friday 1 May 2020, the Minister released the COVID-19 Omnibus (Emergency Measures) (Commercial Leases and Licences) Regulations 2020 (Regulations).
The Act and Regulations lay out the changes to leasing principles contained in the National Cabinet’s Mandatory Code of Conduct (Code) in Victoria. The Regulations broadly follow the scheme of the Code with a number of notable exceptions.
The Regulations are in operation for six months from 29 March 2020 until 29 September 2020 (Relevant Period).
What is an Eligible Lease?
The Regulations only apply to Eligible Leases.
To be an Eligible Lease as defined by the Act, the following conditions apply:
- The lease must be either:
a. a retail lease under the Retail Leases Act 2003; or
b. a commercial lease or licence for the sole or predominant purpose of
carrying on a business at the premises;
2. The lease must have been ‘in effect’ as at 29 March 2020
3. The tenant must be an ‘SME entity’ (An entity with an annual turnover of less than
$50 million); and
4. The tenant must be an employer who both qualifies for and participates in the
Leases in relation to premises which may be used predominantly for agricultural, pastoral, horticultural or apicultural activities; poultry, dairy and other types of farming; grazing, including agistment; and other farming operations are not Eligible Leases covered by the Act.
What is the Process to obtain Rent Relief?
To start the process, tenant must make a written request to the landlord for rent relief that contains a statement by the tenant that it is an Eligible Lease, that is not excluded by the corporate group provisions of the Act and evidence that the tenant is an SME that qualifies for and participates in the JobKeeper scheme. Once that request is made, the landlord has 14 days (or a different timeframe by agreement) to make an offer for rent relief.
What Rent Relief can a Tenant Get?
Unlike in the Code, the amount of rent relief offered by landlords to tenants does not need to be directly related to the reduction in the tenant’s turnover and there is no set formula to determine the amount of relief. As such, the amount of rent relief will need to be assessed on a case-by-case basis.
The Regulations contain the following definition:
“rent relief means 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”
The terms of the landlord’s offer are governed by Regulation 10, which includes the following:
(4) A landlord’s offer of rent relief must be ,based on all the circumstances, of the lease
(a) ,must relate to up to 100% of the rent, payable under the lease during the relevant
(b) ,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,—
(i) ,the reduction in a tenant’s turnover, associated with the premises during the
relevant period; and
(ii) any waiver given pursuant to regulation 14(2); and
(iii) ,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; and
(iv) ,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;
(v) ,any reduction to any outgoings charged,, imposed or levied in relation to the
Following receipt of the landlord’s offer, the landlord and tenant are required to negotiate rent relief in good faith. The main points to keep in mind when determining the amount (and form) of rent relief offered by the landlord are:
- Offers must apply to the Relevant Period, and, as per the Code, at least 50% of the rent relief be in the form of a complete waiver. It follows then that all or some of the other 50% must involve a deferral of rent.
- The rent relief offered does not necessarily need to be directly proportional to the reduction in the tenant’s turnover
- The tenant’s ability to fulfil its obligations under the lease (i.e. the tenant’s current and future solvency) is a consideration AND so too is the landlord’s financial capacity (including any relief provided by its lenders).
- The reference to ‘all of the circumstances of an eligible lease’ is quite broad, and allows significant flexibility regarding what is included in a landlord’s offer, and effectively requires each application to be treated on a case by case basis. However, landlords must take into account those matters in good faith and acting reasonably (or be in breach of the lease).
Can the Lease be extended?
If a rent relief agreement includes a deferral of rent, the landlord must offer the tenant an extension to the term of their Eligible Lease.
The extension must be equivalent to the period for which the rent is deferred and be on the same terms as the existing lease.
When and How does the Tenant repay the Deferred Rent?
Regulation 16 provides that any deferred rent may not be recovered by the landlord until the earlier of:
- The expiry of the Relevant Period; and
- The expiry of the term of the Eligible Lease (disregarding any extension to the lease term referred to above).
The deferred rent payable by the tenant must be repaid over a period of time being the greater of either:
- the balance of the term (including any extension to the lease term referred to above); and
- a period of at least 24 months
As such, 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.
What Happens if the Landlord and Tenant cannot agree?
If the parties do not agree on the rent relief to be provided, either party can refer the matter to the Small Business Commissioner for Mediation. If the dispute cannot be resolved it may be referred to VCAT or the Supreme Court. This dispute resolution regime mirrors the Retail Leases Act 2003 (Vic) mediation regime.
Contact Us for further advice on your commercial tenancy circumstances.
We can assist both landlords and tenants to negotiate rent relief arrangements that comply with the new legislation.