COVID-19: Victorian Rent Relief Rulebook

By Scott McKenzie (Director), Andrew Henshaw (Director), Emma Milne (Senior Associate) and Patrick Simon (Associate), Velocity Legal 

The Upshot

Regulations announced by the Victorian government provide the rulebook for landlords and tenants when negotiating rent relief in light of the impact of COVID-19. The devil is in the detail; however, the article below summarises some of the key concepts. We urge landlords and tenants to obtain legal advice to ensure that they approach negotiations in a methodical way without compromising their rights.

 

Background

Just under a month after the National Cabinet published the Commercial Tenancies Code of Conduct (Commercial Code) (which we have written about here), the Victorian Government has now enacted the ‘nuts and bolts’ of the legislation that will govern the rights and obligations of landlords and tenants who have been affected by the COVID-19 pandemic.

The Commercial Code made it clear that landlords and tenants who have been affected by COVID-19 will be required to negotiate in good faith to enact appropriate arrangements. The COVID-19 Omnibus (Emergency Measures)(Commercial Leases and Licences) Regulations 2020 (Regulations) establishes the general parameters that will define those negotiations in Victoria.

This article outlines the core provisions that will govern the rights and obligations of landlords and tenants during the COVID-19 pandemic.

 

‘Who is Covered? For How Long?’

Most retail leases require a tenant to keep premises open for trade, and not to close its business. However, many business owners have voluntarily decided to temporarily close their businesses (e.g. retail), despite being legally permitted to trade. Voluntarily closure of a business (even for a short period of time) should be managed carefully from a legal perspective to avoid unexpected consequences.

Who is covered by the Regulations?

The rules enacted under the Regulations generally apply to retail and non-retail commercial leases and licences that were in place on or before 29 March 2020, provided that the tenant/licensee is participating in JobKeeper and either:

  • the tenant/licensee’s annual turnover for the current financial year is likely to be less than $50 million; or
  • the tenant/licensee’s annual turnover for the previous financial year was less than $50 million.
Who is not covered by the Regulations?

The Regulations specifically carve out leases and licences under which the premises may be used wholly or predominantly for any of the following activities:

  • agricultural, pastoral horticultural or apicultural activities;
  • 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;
  • grazing, including agistment; and
  • prescribed farming operations.

Entities that are connected or affiliated with an entity that is likely to have an annual turnover of more than $50 million for the current financial year are also excluded from the operation of the Regulations.

How long will the Regulations remain in operation?

The Regulations operate retrospectively from 29 March 2020, and will remain in effect until 29 September 2020 (COVID-19 Period).

 

Negotiations between Landlord and Tenant

Important Note

We have seen situations where both landlords and tenants have placed themselves in a precarious position from a legal perspective as a result of attempting to ‘self manage’ these negotiations. It is critical that you are fully informed of your rights and obligations as a part of any direct landlord to tenant negotiations. It is also important to ensure that you are approaching the negotiations in a methodical way to ensure that you do not waive your rights. Please contact us if you would like to discuss.

What does ‘rent relief’ actually mean?

The term ‘rent relief’ is broadly defined under the Regulations to mean any form of relief provided to a tenant in relation to their obligations to pay rent under the lease, and includes:

  • waivers;
  • reductions;
  • remissions; and
  • deferrals.
When is a landlord required to offer rent relief?

The Regulations provide that a tenant under an eligible lease may formally request rent relief from the landlord in writing, and must support the request with a:

  • a statement that the tenant’s lease is an eligible lease, and that the tenant is not a type of entity that is excluded from the operation of the Regulations; and
  • evidence that the tenant is participating in JobKeeper, and qualifies under the turnover rules.

When the landlord receives a formal written request from the tenant, and provided that the request satisfies the formality requirements, the landlord must offer the tenant rent relief within 14 days of receiving the request. Alternatively, the parties can agree to a different time frame in writing.

If the tenant is not satisfied with the landlord’s offer, the parties must then negotiate in good faith to come to an agreement on the rent relief to apply during the COVID-19 Period.

Importantly, the agreement should take the form of a written document signed by both parties. This document should be prepared by the landlord’s solicitor and reviewed by the tenant’s solicitor.

What does a landlord have to consider when they make the offer?

Although the Regulations do not specify that the landlord is required to provide any particular value of rent relief, they do specify that at unless the parties otherwise agree in writing, at least 50% of the rent relief offered must be in the form of a waiver of rent.

The landlord’s initial offer must be based on all the circumstances of the eligible lease, and must take into account the following factors:

  • the scope of the reduction in the tenant’s turnover that is associated with the premises during the COVID-19 Period;
  • any waiver the landlord is required to give under the Regulations;
  • whether a failure to offer sufficient rent relief would impact the tenant’s ability to fulfil their lease obligations (including paying rent);
  • whether the landlord is financially capable of offering rent relief, including whether any the landlord’s lenders have agreed to provide any form of relief to the landlord; and
  • whether the landlord has agreed to reduce any amounts recovered from the tenant as outgoings.
What happens if a landlord breaches the negotiated agreement?

Once the parties have come to a formal agreement, and so long as the tenant continues to pay the agreed amount, the landlord cannot take any action to:

  • evict the tenant;
  • re-enter the premises;
  • retake possession of the premises;
  • appropriate any amount of the tenant’s bond or security deposit; or
  • make a claim against any guarantee or indemnity provided by the tenant,

on the basis that the tenant has breached the lease by failing to pay the rent agreed under the lease.

Under the Regulations, a landlord that takes any of the aforementioned action against a tenant that has satisfied their obligations under a negotiated rent-relief agreement will be guilty of an offence, punishable by civil penalties of up to 20 penalty units (roughly $3,300).

What happens if a tenant’s circumstances change after the parties have come to an agreement?

If a tenant’s circumstances materially change after the parties have come to an agreement regarding rent relief, the tenant may make a further request to the landlord for further rent relief.

If the tenant makes a further request the parties repeat the negotiation process. Provided that the tenant can substantiate that their circumstances have materially changed, the landlord is required to make a further offer of rent relief within 14 days, but is not required to offer 50% of that relief in the form of a waiver of rent.

When does the tenant have to repay any deferred rent, and is the tenant entitled to an extension of the lease?

If the parties agree to defer payment of any rent under the lease:

  • the landlord must offer to extend the lease (on the same terms and conditions) until the end of the deferral period;
  • the deferred rent must be amortised (i.e. gradually paid off) over the greater of:
    • the remaining lease term; and
    • 24 months; and
  • the Regulations will prevent the landlord from requesting repayment until the earlier of:
    • 29 September 2020; and
    • expiry of the lease term (excluding any extensions that the landlord is required to give under the Regulations).

The upshot is that:

  • if the parties agree to a rent deferral, and less than 24 months remains on the lease term, the landlord will be required to offer to extend the term of the lease so that it expires at least 24 months from 29 September 2020; and
  • regardless of whether the tenant accepts the lease extension, the landlord cannot seek to recover any of the deferred rent until 30 September 2020.
Can a landlord charge interest on any deferred amount?

Under the Regulations, a landlord must not require a tenant to pay interest or any other fee or charge in relation to any deferred rent.

Are landlords required to waive or reduce any amounts they recover from the tenant as outgoings?

The Regulations provide that a landlord must consider waiving recovery of outgoings or other expenses payable by the tenant for any part of the COVID-19 period that the tenant is not able to operate their business at the premises. Landlords should consider whether it is reasonable to continue to recover outgoings from their tenants, on a case-by-case basis.

Additionally, if a tenant under an eligible lease is not able to operate their business at the premises for any part of the COVID-19 Period, the landlord may cease or reduce provision of services at the premises as is reasonable in the circumstances.

Unfortunately, the regulations do not specify whether these provisions are limited to situations in which government restrictions prevent the tenant from conducting any part of their business from the premises, or if they would also apply to situations in which the tenant independently determined that they could not continue to trade for some other reason (e.g. financial viability).

If an outgoing incurred by the landlord in relation to the premises is reduced by the relevant authority or provider:

  • the landlord cannot require the tenant to pay an amount that is greater that the tenant’s proportional share of the reduced outgoing; and
  • if the tenant has already prepaid an amount in relation to the outgoing, the landlord must reimburse the excess amount to the tenant as soon as possible.

 

Change in Trading Hours

Can a landlord take any action against a tenant that reduces their opening hours or closes the premises?

Regardless of whether doing so would constitute a breach of the terms of the lease, the Regulations provide that a tenant will not be in breach if they reduce the opening hours of the business or cease to carry on business at the premises during the COVID-19 Period.

If a tenant reduces their opening hours or closes the store during the COVID-19 Period, and the landlord takes action to:

  • evict the tenant;
  • re-enter the premises;
  • retake possession of the premises;
  • appropriate any amount of the tenant’s bond or security deposit; or
  • make a claim against any guarantee or indemnity provided by the tenant,

the landlord will be guilty of an offence, punishable by civil penalties of up to 20 penalty units (roughly $3,300).

 

Resolving Disputes

What happens if the parties are unable to negotiate an agreement?

If the parties to a lease/licence are unable to come to an agreement, the Regulations provide that either party can refer the dispute to the Victorian Small Business Commission (VSBC) for mediation – regardless of whether the lease/licence would ordinarily qualify as a ‘retail lease’ under the Retail Leases Act 2003 (Vic).

The parties to a mediation at the VSBC can be represented by lawyers, however the mediator can elect to meet with the parties (either alone or together) without the presence of each party’s lawyers.

What happens if the parties cannot resolve the dispute at mediation?

In the event that the parties are unable to resolve the dispute through mediation with the VSBC, the only avenue available to the parties will be to escalate the matter to either the Victorian Civil and Administrative Tribunal (VCAT) or the Courts.

As such, the parties to such dispute will have a significant incentive to make reasonable concessions and negotiate in good faith, as the costs of litigating a dispute will be prohibitive to both landlords and tenants who are already experiencing economic shock due to the COVID-19 pandemic.

 

This article is the opinion of the author and in no way constitutes legal advice.

Insight Authors…

SCOTT MCKENZIE

Director

Scott is as sharp as they come. He guides his clients with precision and has an unrivalled hunger to find practical solutions to complex legal issues. Scott has been recognised as a leading commercial lawyer in Australia, and prides himself on tenaciously protecting his clients. If you want clear advice and exceptional outcomes, Scott is your man.

0432 920 510  •  VIEW DETAILED PROFILE   •  READ ALL OF SCOTTS ARTICLES

ANDREW HENSHAW

Director

Andrew specialises in difficult tax disputes and complex tax advice. He is passionate about getting wins for his clients, solving difficult legal issues and giving clear practical advice.

Andrew acts for a diverse range of private businesses, high net-wealth individuals and family groups. Andrew has been a Director of Velocity Legal since the firm was founded in 2016, and established Velocity Legal’s Sydney practice in 2019.

0421 219 553  •  VIEW DETAILED PROFILE  •  READ ALL OF ANDREW'S ARTICLES

EMMA MILNE

Senior Associate

Emma is a gun at property law. She is relentless and meticulous in finding solutions for her clients. Whether developer, landlord, tenant or investor, she gets the job done. You’ll also be in good company if you’re a Melbourne Storm, Renegades or Pies fan.

0429 290 389  •  READ ALL OF EMMA'S ARTICLES

PATRICK SIMON

Associate

Patrick in his element figuring out legal issues. He passionately delves into the detail and relentlessly pursues solutions. Outside of office hours, Patrick has been known to moonlight as a musician with his instrumental math-rock trio. If you have a legal problem, Patrick’s creative and practical solutions will be music to your ears.

0459 022 640  •  READ ALL OF PATRICK’S ARTICLES

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Level 10, 580 George Street,
Sydney NSW 2000

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