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.
Changes to the Corporations Act 2001 (Cth) in response to COVID-19: section 127 execution
The Federal Government has introduced welcome changes to the Corporations Act 2001 (Cth) by way of the Corporations (Coronavirus Economic Response) Determination (No. 1) 2020 to amongst other things permit companies to execute documents pursuant to section 127 electronically (for example, by Docusign).
At this stage, the changes apply from 6 May 2020 and will be in force for 6 months.
Companies will still need to ensure the electronic execution method complies with the Determination and the relevant electronic transaction legislation in each State (for example, using an appropriate electronic execution method and obtaining consent from parties to the transaction). We suggest it may be appropriate to include additional drafting in contracts to ensure the electronic execution arrangements are compliant.
May 6, 2020
ACCC Interim authorisation for collective negotiations by retail tenants
On 22 April 2020, the ACCC granted interim authorisation for tenants who are members of the Australian Retailers Association to collectively negotiate with landlords regarding the support to be provided to retail tenants who are adversely impacted by COVID-19 – including information sharing for the purposes of those negotiations.
This interim authorisation protects retail tenants from legal action for certain conduct which might otherwise breach the Competition and Consumer Act 2010 (Cth) and remains in place until it is revoked or the date that the ACCC has made its final determination. The public consultation process is currently open and the final determination is anticipated in September 2020.
This interim authorisation will be especially helpful for tenants in retail shopping centres and will impact how retail landlords approach rent relief negotiations with their tenants.
April 24, 2020
New South Wales - COVID-19 New regulation - Witnessing documents via audio visual link
New regulation introduced in NSW (applicable to documents governed by state laws) allows for documents to be witnessed by audio visual link for an anticipated period of 6 months commencing from 22 April 2020. Find full copy of regulation here:
Electronic Transactions Amendment (COVID-19 Witnessing of Documents) Regulation 2020
April 24, 2020
Victoria - COVID-19 Omnibus legislation - What it means for commercial/retail tenancies now
The COVID-19 Omnibus (Emergency Measures) Bill 2020 was passed by the Victorian Government yesterday and came into effect today. The Act gives the Governor powers to enact Regulations to prohibit termination rights and limit/modify rights under an ‘eligible lease’.
What we do know now
- The Regulations (which we have not yet seen) may be retrospective, but they wont apply before 29 March 2020 (so consider whether any April arrangement should remain subject to future rights that you may have under the regulations).
- For now, the Regulations will only have effect for a maximum 6 months (ie. until 24 October 2020).
- The Victorian Small Business Commission can make recommendations on the Regulations (so keep an eye out on the VSBC website).
- The criteria for the Regulations to apply to your lease (ie to be an ‘eligible lease’) includes:
- the tenant must have less than $50 million annual turnover (current or previous year)
- the tenant must qualify for and participate in the JobKeeper scheme (eg. at least 30% fall in turnover)
- the lease must be in effect on the date the first regulation operates (ie. a future date – so consider the impact on leases being/about to be entered into now)
What we don’t know yet
- We still have to wait for Regulations from the Governor to know the details on how this may impact your rights under a lease.
- No update on Victoria’s version of the commercial/retail tenancy rent relief framework (the Commonwealth’s Mandatory Code of Conduct is still not law yet in Victoria…).
- The Regulations may apply to other occupancy arrangements like licences, but we won’t know exactly what that will mean in practice until we see the Regulations.
April 24, 2020
Western Australia - COVID-19 Legislation - Commercial tenancies
Covid-19 legislation for commercial tenancies appears one step closer in WA, with proposed legislation successfully passing both houses of Parliament this week. Enactment of legislation should be imminent. Interesting to see that WA has also taken the further step of introducing proposed additional legislation (which hasn’t passed Parliament yet) giving certain tenants in ‘severe financial distress’ a regime for early termination of their lease. This is in contrast to some other States’ views against providing tenants with early termination measures. Stay tuned for further updates.
Eviction moratorium and code of conduct to protect WA businesses
April 23, 2020
NSW - Strata management during COVID-19 crisis
Many strata schemes in NSW are presently stuck between a rock (face to face meeting obligations) and a hard place (Covid-19 meeting restrictions). NSW Fair Trading acknowledges that whilst meetings for smaller schemes may be able to comply with social distancing orders, meeting requirements are likely to be problematic for larger schemes and so it is “reviewing the situation”. There has been some talk of relying on the “no quorum” default provisions in the legislation to push through approval for alternative/electronic meeting arrangements at a 2-person meeting. Whilst this might seem a little cheeky, query whether this might just meet the dual objectives of staying safe whilst complying with face to face meeting requirements. Guidance notes from NSW Fair Trading Trading can be found here:
Fair Trading – Guidance notes
April 17, 2020