It is finally here! New Victorian Regulations for commercial and retail property leases
The COVID-19 Omnibus (Emergency Measures) (Commercial Leases and Licences) Regulations 2020 (Regulations) were introduced on 1 May 2020 and retrospectively apply from 29 March 2020 and will sunset on 29 September 2020.
The Regulations direct how landlords and tenants of eligible leases must deal with each other in negotiating temporary arrangements to support the tenant and how disputes are to be resolved.
Tenants who qualify for rent relief must send a written request to the landlord now – until they do, the landlord is not prohibited from terminating your lease if you are currently in breach of your obligations.
Landlords who have received written requests from tenants seeking rent relief must respond with an offer within 14 days otherwise they are at risk of receiving a fine.
In the short time the Regulations have been in force we have received many questions from both landlord and tenant clients. Below are the most common questions we’ve received:
The Code provided that any rent relief must be in proportion to the downturn in turnover suffered by the tenant as a result of COVID-19. Is this a requirement in the Regulations?
No. A landlord only needs to take into account the reduction in a tenant’s turnover. There is no positive obligation on the landlord to offer a rent waiver or deferred rent arrangement in line with the downturn suffered by the tenant in the business operated from the premises.
The Regulations also do not direct a landlord as to how much rent relief to provide. This means a landlord has flexibility in terms of the quantum of rent relief to offer to its tenant.
In our view, the threshold for compliance by the landlord is lower than contemplated by the Code.
What are the things a landlord must consider when deciding on what rent relief to offer?
Regulation 10(4) requires that any offer of rent relief must be based on all the circumstances of the eligible lease and sets out specific matters that a landlord must consider being:
- The reduction in a tenant’s turnover during the ‘relevant period’
- Any waiver of outgoings the landlord agrees to give to the tenant
- Whether not offering any rent relief will compromise the tenant’s obligations under the eligible lease
- The landlord’s financial ability to offer rent relief
Must a landlord provide support for outgoings?
No but where a tenant is not able to operate its business from the premises for any part of the relevant period a landlord must consider waiving recovery of any outgoing or other expense payable by the tenant. This implies that a landlord would not need to consider waiving or reducing outgoings at all if a tenant is still using part of the premises.
It is not clear what the landlord’s obligation is if a tenant has chosen not to operate the business and was not forced to close pursuant to government restrictions.
If the parties agree on a rent relief arrangement and the tenant defaults and does not pay the rent on the date and terms agreed can a landlord terminate the lease and evict the tenant?
Yes. A landlord is not prohibited from taking action against the tenant if the tenant defaults under the arrangement that was agreed. This means a landlord can evict a tenant, draw on a security deposit or bank guarantee, charge default interest and pursue the tenant’s guarantors. In other words, a tenant will lose the protection afforded by the Regulations if it does not comply with its obligations under an agreement reached with the landlord.
Do the Regulations require a landlord to provide rent relief beyond the end of the ‘relevant period’?
No, but a tenant is entitled to make another request for rent relief if its financial circumstances materially change after an initial variation arrangement was agreed. Both parties need to follow the same process described in regulation 10 for any subsequent request for rent relief.
It will be interesting to see what will constitute a material change to the tenant’s circumstances as this term is not defined in the Regulations.
What if the parties do not agree on an arrangement?
Either party can refer the dispute for mediation at the Office of the Small Business Commissioner (OSBC). The mediator will facilitate discussions to assist the parties to agree on a rent relief arrangement but it will not hand down a binding determination. In practical terms this means the parties could end up starting the process again if they do not reach an agreement at the mediation.
We suspect there are many applications for mediation the OSBC is waiting to mediate and that many more will join the queue. So we suggest that you submit an application sooner rather than later if the negotiations stall.
Contact Sotheary Bryant for advice about how to swiftly navigate the process.