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:
What is an ‘eligible lease’ and what leases are excluded?
The Regulations were made pursuant to the COVID-19 Omnibus (Emergency Measures) Act 2020 (Act). Section 13(3) of the Act and regulations 6 and 7 of the Regulations define what leases will be eligible or excluded from protection. Refer to our earlier article to understand what leases are not eligible for protection.
Sub-Lease and licence arrangements are also eligible, the same assessment must be made to determine if the sub-lease or licence is an ‘eligible lease’ and the sub-tenant or licensee does not fall within an excluded class.
What is the process to access rent relief and the protections under Regulations?
Regulation 10(1) describes the steps each tenant must take, summarised below:
- Send a written request for rent relief to the landlord with the following:
- A statement confirming the lease is an ‘eligible lease’ and is not excluded under section 13(3) of the Act; and
- Information demonstrating that the tenant is an ‘SME entity’ and it qualifies and is a participant in the JobKeeper Scheme.
- Unless another time frame is agreed, within 14 days of receiving the tenant’s written request the landlord must offer rent relief to the tenant.
- Upon receiving the landlord’s offer the parties must negotiate in good faith with a view to agreeing on the rent relief to apply during the ‘relevant period’.
The ‘relevant period’ is defined as the period from 29 March 2020 to 29 September 2020. This means the landlord does not have to offer rent relief beyond 29 September 2020.
The Regulations prohibit a landlord from taking certain actions where a tenant has defaulted under the lease during the ‘relevant period’ such as terminating a lease (refer to paragraph 5 below).
A tenant of an ‘eligible lease’ is not automatically protected or entitled to the benefits arising under the Regulations. Until the tenant requests rent relief it will not be protected.
What financial information must a tenant provide to the landlord to evidence its turnover?
This would have to be the most common question we have been asked. The requirement is to demonstrate the tenant’s turnover for the previous financial year was less than $50M and that the tenant has experienced a reduction in turnover of at least 30%.
This means a tenant need only provide information to confirm its turnover, it is not necessary to provide P+L statements, tax returns or other financial documents. A sensible approach would be for the tenant to provide confirmation of the test that it satisfies for the purpose of the JobKeeper Scheme – the active test or an alternative test.
Extending the term of the lease
If the landlord offers to defer any part of the rent:
- the rent must be amortised over the greater of:
- the remainder of the term of the lease; and
- at least 24 months.
- the landlord must offer to extend the term of the lease on the same terms and conditions for a period equivalent to the period for which the rent is deferred.
A tenant does not have to agree to extend the term and the parties can agree to amortise the deferred rent over a lesser period.
What protections are available to the tenant?
Provided a tenant has requested rent relief pursuant to process under regulation 10(1)-(5) (summarised above at paragraph 2) or during the ‘relevant period’ the tenant has complied with its obligations under any rent relief arrangement it had agreed with the landlord, a landlord is prohibited from evicting a tenant if the tenant fails to pay rent.
A landlord is also prevented from taking action if during the ‘relevant period’ a tenant decides to reduce the trading hours of the business or close the business and cease trading from the premises.
 Rule 5 of Guarantee of Lending to Small and Medium Enterprises (Coronavirus Economic Response Package) Rules 2020 defines SME entity as an entity or non-profit entity with an annual turnover of less than $50M
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.