Victoria winds back the Commonwealth Tenancy Code of Conduct restricting it to ‘eligible leases’ and specifically using the Tax legislation test for connected entity cf NSW. All other States and Territories are silent at the moment on the Code -it is only NSW and Victoria that have enacted legislation giving teeth to the Code.
The COVID-19 Omnibus (Emergency Measure) (Commercial Leases and Licences) Regulations 2020 (Vic) (Regulations) were introduced on 1 May 2020 and have retrospective effect from 29 March 2020.
The Regulations were introduced pursuant to the enabling powers under the COVID-19 Omnibus Emergency Measures Act 2020 (Vic) (Enabling Act) which gave effect to the principles set out in the Code of Conduct announced by the Prime Minister on 7 April 2020.
Related entities seemingly excluded and do not qualify for rent relief measures
The Code was intended to support small and medium sized businesses (including not for profits entities) with annual turnovers of no more than $50M and unless a business was a member of a ‘retail corporate group’ the turnover test was to be completed at the individual entity level.
The Code did not define ‘retail corporate group’. It is apparent that Victoria has followed the lead of NSW by seemingly providing for a broad exclusion for groups and related entities with common control.
The Enabling Act introduces the concept of an ‘eligible lease’ and excludes a lease or licence that is not an ‘eligible lease’ within the meaning of the Enabling Act. Specifically, the Enabling Act provides that the following leases and licences are not an ‘eligible lease’:
- Section 13(2): a retail lease or non-retail commercial lease or licence of a specified class, that is prescribed.
- Section 13(3) If:
- the tenant under the retail or non retail commercial lease or licence is a member of prescribed group of entities and the aggregate turnover of the prescribed group of entities exceeds the prescribed amount; or
- there is a relationship or connection between the tenant under the retail or non retail commercial lease or licence and another entity that is prescribed and the aggregate turnover of the tenant and the other entity exceeds the prescribed amount; or
- an entity has a prescribed method of control or influence through the holding of a prescribed interest, right or power, in relation to acts or decision relating to the ownership, management or affairs of a tenant under the retail or non retail commercial lease or licence that is a body corporate
Section 6 confirms the clauses of leases and licences that will be excluded as premises that may be used wholly or predominantly for:
Section 6 Prescribed excluded classes of lease
- agricultural, pastoral, horticultural or agricultural activities; or
- poultry farming, dairy farming, aquaculture, tree-farming or any business that consists of the cultivation of soils, the gathering of crops or rearing of livestock; or
- grazing, including agistment; or
- activity prescribed for the purposes of paragraph (c) of the definition of farming operation in section 3 of the Farm Debt Mediation Act 2011.
Section 7 of the Regulations define the concepts of ‘prescribed group of entities’, ‘the prescribed amount, ‘a relationship or connection between the tenant under the retail or non retail commercial lease or licence and another entity that is prescribed’.
Section 7 Prescribed group, relationship or connection
(1) For the purposes of section 13(3)(a) of the Act—
(a) a prescribed group is a tenant that is connected, within the meaning of section 328–125 of the Income Tax Assessment Act 1997 of the Commonwealth, with another entity or other entities; and
- $50 million is the prescribed amount.
(2) For the purposes of section 13(3)(b) of the Act—
(a) there is a prescribed relationship or connection between a tenant and another entity or other entities if the entity is an affiliate, or the entities are affiliates, within the meaning of section 328–130 of the Income Tax Assessment Act 1997 of the Commonwealth of the tenant; and
(b) $50 million is the prescribed amount.
From our reading of sections 328-125 and 328-130 of the Income Tax Assessment Act 1997 (Cth) it appears the test is to demonstrate there is common control amongst entities or that one entity can influence the decision making of another entity.
The Regulations do not define the concepts of ‘prescribed method of control or influence’ or ‘prescribed interest, right or power’ (used in section 13(3)(c) of the Enabling Act).
In any event, it is our view that the tests described in section 7(1) and (2) of the Regulations expand the class of tenants that will not qualify for protection under the Code beyond what was contemplated by the Code itself which specified that if a tenant was a franchisee the turnover test was to be applied at the franchisee level and that if a tenant was part of a retail corporate group the turnover of the group was relevant. =
The practical implication is that it seems many corporate groups will not be able to rely on the Code, the Enabling Act or the Regulations to require landlords to provide rent relief, freeze rent increases and cease actions like termination of the lease for non payment of rent.
We will be providing another article shortly setting out the uncertainties within the Regulations and tips for both landlords and tenants to approach negotiations including the scope of financial information to disclose to the other party.
In the meantime, please contact Sotheary Bryant for assistance with negotiating rent relief arrangements for your property lease.