Victoria – COVID-19 – Commercial Leases and Licence Regulation
Written by Alex Ho on May 5, 2020
The COVID-19 Omnibus (Emergency Measures) (Commercial Leases and Licences) Regulations 2020 (“VIC Regulations”) became law on Friday 1 May 2020. The VIC Regulations brings the National Cabinet’s “Mandatory Code of Conduct” (Code) into law in Victoria.
- The VIC Regulations operate retrospectively from 29 March 2020 to 29 September 2020 (the “relevant period”)
- The VIC Regulations target an “eligible lease”, that is:
- a lease/licence that is:
- in effect on 29 March 2020 (including options to renew in such leases); and
- being either a ‘retail lease’ (ie lease under the Victorian retail legislation) or a ‘non-retail commercial lease or licence’, but excludes most farming and similar activities. The ambit of the definition of ‘Non-retail commercial lease or licence’ is very broad – applying to most leases/licences including written/unwritten and express/implied agreements and sub-leases and sub-licences, provided the right to occupy the premises is for the sole or predominant purpose of carrying on business at the premises; and
- where the tenant/licensee, on or after 29 March 2020:
- has an annual turnover of less than $50M for the current or previous year (including the aggregate turnover of an entity connected with/affiliated with the tenant – within the meaning of sections 328-125 and 328-130 in the Income Tax Assessment Act 1997 (Cth)); and
- is an employer who qualifies for and also participates in the JobKeeper scheme (eg. a business where turnover drops by 30%).
For simplicity, in this summary we have use the terms “tenant”, “rent” and “lease”, despite the fact that the VIC Regulations apply to both leases/licences and tenants/licensees.
- The VIC Regulations state that a failure to pay rent during the relevant period is not a breach of the lease, if the tenant either:
- requests rent relief in accordance with process set out the VIC Regulations, including providing the required statements/information and participating properly in the negotiation process (Rent Negotiation) regardless of whether or not parties reach agreement; or
- pays the rent agreed or determined as a result of a Rent Negotiation.
(“Tenant Requirements”) and a landlord must not evict a tenant, re-enter the premises, claim on any lease security or charge interest if the tenant satisfies the Tenant Requirements.
- The Rent Negotiation process can be largely summarised as follows:
- it can only be initiated by the tenant (by written request to the landlord, including a required statement about the application of the VIC Regulations and attaching information evidencing the tenant’s turnover and eligibility for, and participation, in the JobKeeper scheme);
- the landlord must make an offer for rent relief within 14 days after receiving the tenant’s request (a longer period can be agreed). The criteria for the offer are summarised below; and
- the agreed rent relief must be properly documented, including by way of a variation of lease.
- The landlord’s rent relief offer must be based on the circumstances of the lease and:
- will apply to the whole of the ‘relevant period’ (ie 29 March 2020 to 29 September 2020)
- may be up to 100% of the rent payable during the relevant period
- must provide no less than 50% of the rent relief offered in the form of a waiver (unless agreed otherwise by the parties)
- take into account:
- tenant’s reduction in turnover;
- a waiver of outgoings/other recurring expenses for the part of the relevant period that the tenant is not able to operate the business;
- whether failure to offer sufficient rent relief would compromise the tenant’s ability to continue to perform the lease (ie rent obligations beyond the relevant period);
- the landlord’s financial ability to offer rent relief (including if the landlord’s financiers have offered relief); and
- a reduction in the outgoings charged, imposed or levied to the landlord (and concessions given by statutory authorities to a landlord must generally be “passed on”).
- Unless otherwise agreed by the parties, the tenant does not have to start paying back any deferred component of the rent until the earlier of 30 September 2020 and the lease expiry and the tenant is allowed a total repayment period of at least 24 months (or the balance of the lease term if that it longer than 24 months). The landlord must also offer to extend the lease for such deferral period (which may mean that landlords will need to carefully consider whether a deferral is an appropriate offer in their circumstances).
- A tenant may make subsequent requests to the landlord for further rent relief (even after a rent relief agreement/variation is entered into), if the tenant’s financial circumstances materially change (but on a second or subsequent request, the requirement to allow at least a 50% waiver of rent, does not apply). It is therefore in tenant’s best interests to try to enter into an arrangement that takes into account any possible further deterioration at the beginning of the process, rather than relying on the right to have “a second go”.
- The rent for an eligible lease can’t be increased during the relevant period, unless otherwise agreed in writing (eg. agreed during the Rent Negotiation process). That is, any rent increase which would have normally occurred in that period is delayed until 30 September 2020 and the landlord cannot “claw back” that unpaid increase amount for that protected period. This doesn’t apply for turnover rent in a retail lease.
- If the landlord contravenes the VIC Regulations, the landlord may be subject to fines (~$3,300 per contravention) in addition to the tenant’s rights at law (eg. injunction, damages).
- There are general obligations for all landlords/tenants of an eligible lease to:
- cooperate and act reasonably and in good faith in all discussions/actions under the VIC Regulations
- keep confidential all financial/personal information obtained under or in connection with the VIC Regulations
If the parties can’t agree, a party may refer the dispute to a mediation facilitated by the Victorian Small Business Commission (“VSBC”) and failing that being successful, the usual court process.
- The VIC Regulations don’t apply to any leases entered into after 29 March 2020 except if the lease came about due to the exercise of an option, or a renewal on the same terms. This means that if you want a new deal to have regard to COVID-19 and its possible impact, you will need to deal with it specifically in the lease.