Commercial Leasing Update

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The Covid-19 pandemic has impacted almost every aspect of Australian day-to-day life. It also has had dire consequences for the Country’s economy. In an attempt to reduce the economic impact of the pandemic, the Federal Government introduced a number of measures including the introduction of the JobKeeper programme and a code of conduct governing the actions of landlords and tenants of commercial premises: the National Cabinet Mandatory Code of Conduct (“Code”).
The goal of the Code “is to impose a set of good faith leasing principles for application to commercial tenancies (including retail, office and industrial) between owners/operators/other landlords and tenants …”

The Code sets out 14 principles dealing with such matters as the obligation on a landlord to offer to a tenant a reduction of rent and the imposition of a prohibition on the termination of leases for non-payment of rent or a reduction by the tenant of trading hours.
The Code is being implemented at a State and Territory level. On 23 April 2020 the COVID-19 Omnibus (Emergency Measures) Act 2020 (“Act”) was passed and on 1 May 2020 the COVID-19 Omnibus (Emergency Measures) (Commercial Leases and Licences) Regulations 2020 (“Regulations”), which govern how the rent relief will work in Victoria, was passed.

As a preliminary point, it should be noted that the Act and the Regulations do not specifically incorporate the Code. As a consequence, there are some differences between the Code on the one hand, and the Act and Regulations on the other. For example, the commencement and end dates of the rent relief periods, the relevance of the landlord’s financial position and the relief not automatically being proportionate to the tenant’s decline in turnover.
If you think that the Code may apply to you, it is important that you seek legal advice because:

A breach of restrictions on Landlords can result in fines being imposed; and
B the terms of any agreement reached between a Landlord and a Tenant needs to be properly documented.

The following is a brief summary of the major aspects of the operation of the Code in Victoria.

1 The Regulations will only apply from 29 March 2020 to 29 September 2020 (the “relevant period”).

2 To qualify the lease must be an “eligible lease”, that is, a retail lease or a non-retail commercial lease or licence:
1.1 that is in effect on 29 March 2020, being the day the Regulations came into operation; and
1.2 under which the tenant is, on or after 29 March 2020:
(a) an SME entity; and
(b) an employer (or sole trader) who qualifies for the JobKeeper scheme and is a participant in the JobKeeper scheme.
Certain leases are excluded, for example where agricultural activities are conducted or where the tenant is a member of or connected to or related to a group of entities whose aggregate turnover exceeds the prescribed amount.

3 During the relevant period, and provided the tenant complies with the requirements of the Regulations, the tenant will not be in breach of the eligible lease if the tenant:
3.1 does not pay the amount of rent required to be paid under the lease;
3.2 reduces the opening hours of the business the tenant carries out at the premises; or
3.3 closes the premises and ceases to carry out any business at the premises.
4 The landlord, during the relevant period, cannot:
4.1 terminate the lease or evict the tenant or re-enter the premises for non-payment of rent;
4.2 access security for non-payment of rent; or
4.3 seek to increase the rent,
and penalties apply for breaches of these prohibitions.

5 Rent relief is not automatic. The following procedure must be followed before the Regulations will apply:
5.1 The tenant has to make a written request for rent relief, i.e., the onus is on the tenant to activate the application of the Regulations.
5.2 the written request must be accompanied by:
(a) a statement that the lease is an eligible lease; and
(b) Information that the tenant is an SME entity and qualifies for and is a participant in the JobKeeper scheme.
The landlord has to keep this information confidential (subject to the usual disclosure exceptions).
5.3 The landlord has 14 days (or such other period as the parties agree) to offer rent relief to the tenant.
6 The offer of rent relief must be based on all the circumstances of the eligible lease, and:
6.1 relate to up to 100% of the rent payable under the eligible lease during the relevant period;
6.2 provide that no less than 50% of the rent relief offered by the landlord must be in the form of a waiver of rent, unless a landlord and a tenant otherwise agree in writing;
6.3 apply to the relevant period;
6.4 take into account:
(a) the reduction in a tenant’s turnover associated with the premises;
(b) any waiver by the landlord of recovery of any outgoing or other expense payable by a tenant during the period that the tenant is not able to operate their business at the premises;
(c) whether a failure to offer sufficient rent relief would compromise a tenant’s capacity to fulfil the tenant’s ongoing obligations under the eligible lease, including the payment of rent;
(d) reduction to any outgoings charged, imposed or levied in relation to the premises, for example, land tax concessions; and
(e) a landlord’s financial ability to offer rent relief, including any relief provided to a landlord by any of its lenders as a response to the COVID-19 pandemic.
7 The application for rent relief is not a “one-off”. The tenant may make a further request to the landlord for rent relief but any further rent relief need not include 50% of that rent relief as a rent waiver.

8 The parties are required to negotiate in good faith. If negotiations are unsuccessful, the matter is mediated by the Victorian Small Business Commissioner. The mediation is not binding but recourse to VCAT or a court is not possible until the Commissioner has certified in writing that mediation has failed or is unlikely to resolve the dispute.

9 Waiver
9.1 As noted above, the landlord’s offer must comprise not less than a waiver of 50% of the rent (unless the parties otherwise agree).
10 Deferral
10.1 If the offer includes a deferral of payment of rent the landlord:
(a) cannot seek payment of interest or any other fee or charge in relation to any payment of deferred rent;
(b) must not request payment of any part of the deferred rent until the earlier of 29 September 2020 or the expiry of the term of the lease (before any extension as provided in the Regulations or otherwise):
(c) must pass on any reductions in statutory charges (e.g. land tax, council rates) or insurance in the appropriate proportion applicable under the terms of the lease;
(d) must offer the tenant an extension to the term of the lease, for the period for which rent is deferred or as otherwise agreed, on the same terms and conditions that applied before the commencement of the Regulations.
10.2 The parties must vary the lease so that the deferred rent payable to the landlord is amortised over the greater of:
(a) the balance of the term of the lease, including any extension to that term, as provided under the Regulations; and
(b) a period of no less than 24 months.
10.3 The method by which the deferred rent is amortised is to be agreed to by the parties.

11 Rent relief may be given effect by the parties by either a variation to the lease or any other agreement between them that gives effect to the rent relief, either directly or indirectly.
As is apparent from the above overview, the rent relief system is complex and complicated. We can provide assistance to both landlords and tenants to ensure proper compliance with the Act, the Regulations and the Code.

Carmel Woodward
LIV Accredited Specialist – Commercial Tenancy Law

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