The object of the Regulations is to give effect to the COVID-19 Omnibus (Emergency Measures) Act 2020 (Act) and to implement the National Cabinet Mandatory Code of Conduct - SME Commercial Leasing Principles (National Code of Conduct) to the extent applicable in Victoria.
The Regulations provide a mechanism for "eligible leases" to be renegotiated by commercial landlords and tenants who have been impacted by the COVID-19 pandemic during the Regulation Period.
- Landlords and tenants must cooperate and act reasonably and in good faith in all discussions and actions under the Regulations. Failure to do so is a breach of the lease.
- A landlord's offer of rent relief is not required to match a tenant's decline in turnover; rather this is just one factor that a landlord must consider in making an offer of rent relief.
- A tenant's request for rent relief must follow the procedure outlined by the Regulations.
- A landlord under an eligible lease cannot evict a tenant, re-enter the premises or have recourse to any security during the Regulation Period. A landlord can take action for arrears of rent outside this period, non-payment of outgoings or other breaches of lease.
- Any dispute will be, at first instance, referred to the Small Business Commission for mediation at which the parties may have legal representation.
- The Regulations override the terms of individual eligible leases so that landlords and tenants cannot contract out of them (except where specified).
How long will the provisions specified in the Regulations last?
The Regulations are deemed to have been in operation from 29 March 2020 and will continue to apply until 29 September 2020 (Regulation Period). They apply to leases "in effect" from 29 March 2020 – no guidance is included on the meaning of "in effect".
What is an "eligible lease" for the purposes of the Regulations?
The Regulations apply to retail leases, and non-retail commercial leases or licences for the sole or predominant purpose of carrying on a business at the premises, where the tenant is:
- an SME entity, meaning an entity that expects annual turnover for the current financial year to be less than $50 million, or an entity that had actual annual turnover of less than $50 million in the 2018-2019 financial year*; and
- an employer who qualifies for, and is a participant in, the JobKeeper scheme**.
* If the tenant is "connected" with or an "affiliate" of entities where the tenant and those entities have aggregate annual turnover exceeding $50 m, the lease will be excluded from the application of the Regulations. (Eligibility is assessed at a corporate group level.)
** The tenant will have to have experienced a 30% decline in turnover since 1 March 2020, or, for ACNC-registered charities, a 15% decline in turnover since 1 March 2020.
The Regulations do not apply to:
- agricultural, farming or grazing leases;
- leases entered into after 29 March 2020 (even if as a result of the exercise of an option to renew).
To what extent are landlords and tenants required to negotiate under the Regulations?
The primary obligation of landlords and tenants under the Regulations is to cooperate and act reasonably and in good faith in all discussions and actions to which the Regulations apply.
What is the process for obtaining rent relief under the Regulations?
A tenant is entitled to request rent relief from their landlord under the Regulations if:
- they are a tenant under an eligible lease; and
- they make a request for rent relief to their landlord in writing, confirming their eligibility under the Regulations*.
* The tenant must actually request relief. The request must be accompanied by a statement that the lease is an "eligible lease" with evidence of satisfaction of the eligibility criteria.
Landlords then have 14 days (or such other agreed period) to provide an offer for rent relief, at least 50% of which must be a waiver of rent. The amount of rent relief offered by landlords should take into account all the circumstances of the eligible lease, including the reduction in the tenant's turnover, any waiver or other reduction of outgoings and whether failure would affect a landlord's financial ability to offer rent relief. Unlike the National Code of Conduct, the landlord's offer is not required to be directly related to the reduction in the tenant's turnover.
Any rent relief should be formally documented as a variation to the lease or as an agreement between the parties.
A tenant may request further rent relief if their financial circumstances materially change after a variation or other revised rental arrangements have been agreed.
What are the obligations of landlords under the Regulations?
Where a tenant under an eligible lease fails to pay rent, reduces its opening hours or ceases to carry on business during the Regulation Period, the tenant will not be in breach of their lease and the landlord cannot:
- evict, or attempt to evict, the tenant;
- re-enter or recover, or attempt to re-enter or recover, the premises; or
- have recourse, or attempt to have recourse, to any security.
The Regulations do not prevent a landlord from taking action in respect of arrears of rent outside the Regulation Period, failure to pay outgoings or other breaches of lease.
Rent payable and rent deferrals
A landlord cannot increase the rent payable during the Regulation Period (except for rent based on turnover).
Where rent relief is provided by way of a deferral:
- the landlord must not require payment of any part of the deferred rent until the earlier of 29 September 2020 (the end of the Regulation Period) or the expiry of the term of the lease;
- the deferred rent is amortised over the greater of the balance of the lease term and 24 months;
- the landlord must offer the tenant an extension to the term of the lease required to achieve the deferrable period of at least 24 months (unless the parties agree otherwise), on the same terms and conditions that applied before the Regulation Period; and
- the landlord must not require the tenant to pay interest, or any other fee or charge, in relation to the deferred rent.
Proportionate decrease to outgoings
During the Regulation Period:
- where a tenant is not able to operate its business from the premises, the landlord:
- must consider waiving the recovery of outgoings; and
- may cease providing services at the premises as is reasonable and in accordance with any reasonable request from the tenant.
- where outgoings are reduced, a landlord must proportionately reduce the amount payable the tenant (e.g., any land tax relief must be proportionately passed on).
What entitlement do landlords have to land tax relief?
Commercial landlords may be eligible for a 25% reduction in land tax, and may be able to defer payment on any outstanding land tax liability until 31 March 2021, if:
- they are the landlord under an eligible lease and have provided rent relief of at least 25%; or
- they are unable to secure a tenant for an existing property due to COVID-19.
What happens if landlords and tenants cannot reach an agreement?
A landlord or tenant may submit a dispute relating to a matter under the Regulations to the Small Business Commission (SBC) for mediation. There is no set time frame before which the dispute may be referred for mediation and the service is free of charge. In addition to providing formal mediation, the SBC may provide preliminary assistance to either party, including giving advice to ensure that both parties are fully aware of their rights and obligations. A landlord or tenant may be represented by a lawyer at mediation unless the SBC directs otherwise. The SBC will not compel an outcome.
A dispute may only be heard by VCAT or a court if the SBC has certified in writing that mediation is unlikely to resolve the dispute.
To view the Regulations on the Victorian Government website, click here.
To view the National Cabinet Mandatory Code of Conduct - SME Commercial Leasing Principles During COVID-19, click here.