On 23 April 2020, the COVID-19 Omnibus (Emergency Measures) Act 2020 (Vic) (Act) was passed. The Act contemplated that regulations would be made by the Governor in Council in respect of Eligible Leases.
The COVID-19 Omnibus (Emergency Measures) (Commercial Leases and Licences) Regulations 2020 (Vic) (Regulations) were subsequently passed on 1 May 2020.
The Act and the Regulations implement the National Cabinet Mandatory Code of Conduct SME Commercial Leasing Principles During COVID-19 (Code).
1. Application of the Regulations
The Regulations apply:
- To Eligible Leases; and
- From 29 March 2020 to 29 September 2020 (Relevant Period).
1.1 Eligible Leases
Under the Act, to qualify as an Eligible Lease the lease must satisfy the following criteria:1
- Lease: The lease must be a retail lease (i.e. subject to the Retail Leases Act 2003 (Vic)), a non-retail commercial lease, a licence, a sublease or an agreement for lease. It may be wholly or partly in writing and may be expressed or implied.A non-retail commercial lease or licence means a lease for a premises used solely or predominantly for carrying on a business on the premises or a commercial licence.2 This means that a franchisee’s outlet licence should fall within the jurisdiction of the Act and the Regulations;
- In effect: The lease must have been in effect as at 29 March 2020;
- SME Entity: The tenant must be an SME Entity.For the purposes of the Act and the Regulations, an SME Entity is an entity that had an annual turnover of less than $50 million in the previous financial year or anticipates annual turnover of less than $50 million in the current financial year3; and
- Jobkeeper scheme: The tenant must be an employer that qualifies for and is a participant in the Jobkeeper scheme (as defined in s789GC of the Fair Work Act 2009 (Cth)). The main requirement is for the tenant to evidence that they estimate that their GST Turnover has fallen compared to a similar period in the previous financial year, or will likely fall, by 30% or more.
1.2 Exclusions to Eligible Leases
A lease or licence is specifically excluded as an Eligible Lease if:
Affiliated entities: the tenant is affiliated with another entity, or the entities are affiliates, within the meaning of section 328–130 of the Income Tax Assessment Act 1997 (Cth),10 and the entities have an aggregate turnover of more than $50 million;11
A tenant is an affiliate of another entity under section 328-130 of the Income Tax Assessment Act 1997 (Cth) if the tenant acts or it could reasonably be expected that the tenant would act, in accordance with directions or wishes, or in concert with, the other entity in relation to the affairs of the tenant’s business.12
However, it should be noted that the individuals or entities are not affiliates merely because of the nature of their business relationship (for example, a partnership).13
- Agricultural use: the premises under that lease or licence 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; or
- any activity prescribed for the purposes of paragraph (c) of the definition of farming operation in section 3 of the Farm Debt Mediation Act 2011 (Vic);4 or
Connected entities: the tenant is connected with another entity or other entities within the meaning of section 328–125 of the Income Tax Assessment Act 1997 (Cth),5 and the entities have an aggregate turnover of more than $50 million;6At a high-level, a tenant is connected with another entity under section 328-125 of the Income Tax Assessment Act 1997 (Cth) if the tenant controls or is controlled by another entity, or the tenant and another entity are controlled by the same third entity.7
An entity (in conjunction with its affiliates) will control another entity if it owns or has the right to acquire ownership of, equity interests in the entity that amounts to at least 40% of the voting power of the entity.8
However, control over a discretionary trust is assessed by considering how the discretionary trust funds were applied, including which entity benefited from the application of the funds.9
Additionally, the Commissioner of Taxation may determine that entities are not related if one entity’s control over another entity is between 40% and 50%.
- Control or influence over body corporates: an entity maintains control or influence, through the holding of an interest, right or power, in relation to acts or decisions relating to the ownership, management or affairs of a tenant under an Eligible Lease that is a body corporate.14
For the purposes of the Act and the Regulations, turnover is defined as the annual turnover of an entity for a financial year and is the total of the following that is earned during the financial year in the course of business:
- the proceeds of sales of goods and/or services (this would include on-line sales);
- commission income;
- repair and service income;
- rent, leasing and hiring income;
- government bounties and subsidies;
- interest, royalties and dividends; and
- other operating income.
2. Rent Relief
2.1 Obligation to act reasonably and in good faith
As an overarching principle, a landlord and tenant in relation to an Eligible Lease must cooperate and act reasonably and in good faith in respect of all matters to which the Regulations apply.15
2.2 Request by tenant
A tenant under an Eligible Lease may request rent relief from a landlord in writing by providing the following information:
- a statement that the lease is an Eligible Lease and that the lease is not excluded from the operation of the Regulations; and
- evidence that the Tenant:
- is an SME entity; and
- qualifies for and is a participant in the JobKeeper scheme.16
The Regulations do not provide detailed guidance in relation to the content or extent of the evidence required to be submitted by tenants to landlords. Landlords and tenants should consult the Office of the Small Business Commissioner (SBC) of Victoria if they require further clarity.
What it appears can be asked for:
At present, it appears that it is appropriate for the landlord to request the following information from a tenant regarding its turnover and its decline in turnover:
- Information from an accounting system.
- Information extracted from BAS.
- Information provided to a financial institution.
- Information submitted with the Jobkeeper application.
What it appears cannot be asked for:
- Future cash flow projections.
- Balance sheets.
- Profit and Loss Statements.
- Year to date Financial Statements.
- Bank balances.
- For the information to be verified, examined, assured or audited, or provided by a third party, i.e. an accountant.
- For an accountant to provide a letter of comfort or similar assurance regarding the financial information provided by the tenant.
2.3 Landlord’s offer
a. Obligation to make an offer
Under the Regulations, the amount of rent relief offered by landlords to tenants does not need to be directly related to the reduction in the tenant’s turnover (although it is one of the factors which must be taken into account, as referred to below). Unlike the Code, there is also no requirement under the Regulations for a 50% ‘rent deferral’ (although deferral does fall within the definition of ‘rent relief’ and so it may still be the case that the 50% deferral applies).
A landlord must make an offer of rent relief (up to 100%) within 14 days of the tenant giving a rent relief request, as outlined at paragraph 2.2 (or within another period as agreed by the parties).17
b. Terms of landlord’s offer
A landlord’s offer of rent relief must be based on all the circumstances of the Eligible Lease,18 and must take into account:
- the reduction in the tenant’s turnover which is associated with the Premises during the Relevant Period;
- any waiver of outgoings for the Premises given by the landlord;
- 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;
- the landlord’s financial ability to offer rent relief to the tenant, including any relief provided to a landlord by any of its lenders as a response to the COVID-19 pandemic; and
- any reduction by any third party to any outgoings charged, imposed or levied in relation to the Premises.19
A landlord’s offer must apply to the Relevant Period, and provide that:
- at least 50% of the rent relief is in the form of a rent waiver (unless otherwise agreed by the parties in writing).20 Any rent waived does not need to be repaid by the tenant; and
- the balance of a landlord’s offer of rent relief may comprise of a reduction, remission or deferral of the rent. In the case of rent deferrals, the amount deferred is repayable over the greater of:
- the remaining lease term; or
- 24 months after the end of the Relevant Period,
unless otherwise agreed by the parties.
The parties must negotiate the landlord’s offer in good faith.21
If there is a dispute in relation to the rent relief to be provided, either party may apply in writing to the SBC for mediation.22
Landlords or tenants may refer these disputes to the SBC for resolution at any time after the landlord’s offer is rejected by the tenant.
The SBC can still offer mediation for those parties that fall outside the operation of the Act and the Regulations.
Any agreed rent relief may be given effect by variation to the Eligible Lease, or by any other agreement which directly or indirectly gives effect to the rent relief (Rent Relief Agreement). It is important to ensure that all parties to the Eligible Lease, including any guarantors, execute the Rent Relief Agreement, which should be in the form of a deed so that it is enforceable by and against all parties, all parties are clear on what has been agreed and it in binding on any subsequent purchaser of the land in which the premises is situated.
d. Effect of waived rent
Any amount of rent, which is waived under a Rent Relief Agreement cannot be claimed back or be required to be paid by the landlord.23
e. Further application for relief
If the financial circumstances of a tenant materially change after a Rent Relief Agreement has been reached under the Regulations, the tenant may commence the above process again.
If the tenant elects to do this, then the landlord need not provide a minimum 50% rent waiver in the new agreement.
Landlords are not given the same right if a tenant’s financial circumstances improve.24
3.1 Tenant not able to trade
Where the tenant is unable to operate its business, landlords must consider (noting that landlords must act reasonably and in good faith) waiving the recovery of outgoings or other expenses payable by the tenant, in accordance with any reasonable request by the tenant to do so.25
Landlords may cease to provide or reduce the provision of any service to the premises that is reasonable in the circumstances, so long as the tenant is not trading.26 Tenants may also make reasonable requests of landlords to cease the provision of services to the premises.27
It is important to note at this time that, especially in some retail centres, certain outgoings services, such as cleaning and security, have actually increased due to COVID-19.
3.2 Landlords must pass on savings
Where a landlord has received a reduction in the outgoings payable for the premises, landlords must not require tenants to pay an amount greater than the tenant’s proportional share of the reduced outgoing.28
Where a tenant has already paid an amount to the landlord which is greater than the tenant’s proportional share of the reduced outgoing, the landlord must reimburse the tenant for the overpayment.29
In Victoria, landlords are eligible for land tax relief (where they have reached an agreement on an Eligible Lease which includes a rental reduction of at least 25%). The land tax relief (for eligible landlords) is a 25% reduction in land tax with the right to defer payment up to 31 March 2021 on any amount owing on their 2020 land tax assessment. Where land tax has been reduced, the landlord must reduce the amount payable by the tenant (where the tenant is non-retail and is liable to pay land tax under the lease) and reimburse the tenant for any overpayment since 29 March 2020.
4. Impact on Eligible Lease Provisions
4.1 No breach for failure to pay rent
If the tenant has complied with:
- the rent relief process (as outlined in section 2 above); and
- the terms of any Rent Relief Agreement (including, for example, to pay a reduced amount of rent), then:
- the tenant is not in breach of the Eligible Lease;
- the landlord may not evict, re-enter or recover the premises if the tenant fails to pay rent;
- the landlord may not claim against any security deposit, bank guarantee or under any guarantee and indemnity it holds as a result of any failure to pay rent.30
4.2 Extensions to term of lease
If, as part of the rent relief agreed by the parties, the payment of rent is deferred, the landlord must offer the tenant an extension of the term of the Eligible Lease for a period equivalent to the period for which the rent is deferred, unless otherwise agreed by the parties in writing.31
A landlord may hold the security provided by the tenant under the Eligible Lease, whether under the Eligible Lease (as extended), or pursuant to a separate agreement which provides for the repayment until the deferred rent has been paid. If a separate agreement is signed, it should include a provision expressly allowing for the security to be held by the landlord until the deferred rent has been paid.
4.3 Payment of deferred rent
If rent is deferred as part of a Rent Relief Agreement, the landlord may not request payment of the deferred rent until the earlier of:
- 30 September 2020 (the Relevant Period having expired on 29 September 2020); or
- the expiry of the current term of the Eligible Lease (excluding any extension to the Eligible Lease, as mentioned in paragraph 4.2 above).
Further, the deferred rent must be amortised (on the terms and using the method agreed by the landlord and the tenant) over the greater of:
- The balance of the current term of the Eligible Lease (including any extension to the Eligible Lease, as mentioned in paragraph 4.2 above); and
- an agreed period of no less than 24 months.32
4.4 No increases to rent
During the Relevant Period, a landlord may not increase the rent payable under the Eligible Lease unless:
- The tenant agrees; or
- The Eligible Lease is subject to the Retail Leases Act 2003 (Vic) and the increase relates to turnover rent.33
It follows then that if the Eligible Lease is non-retail, turnover rent cannot be increased during the Relevant Period.
4.5 No interest, fees or charges
A landlord may not claim any fees, interest or charges on any late payment of rent which is deferred pursuant to a Rent Relief Agreement.34
4.6 Trading hours
A tenant under an Eligible Lease who reduces its opening hours or ceases to trade during the Relevant Period will not be in breach of an Eligible Lease.35
Additionally, landlords are prohibited from seeking to evict, re-enter the premises or to have any recourse against the tenant’s security for a tenant who fails meet their trading obligations under the Eligible Lease. Landlords face a maximum penalty of 20 penalty units for such actions (approximately $3,304).36
Protected Information exchanged between landlords and tenants as a result of the operation of the Regulations must be kept confidential, except:37
- with the consent of the person to whom the information relates;
- to a professional adviser or prospective financier who agrees to maintain confidentiality;
- as authorised by the Small Business Commissioner; and
- as required by law or for the purposes of proceedings in a court or tribunal.
For the purposes of the Regulations, Protected Information includes any contact details of a person other than the landlord or tenant and any information relating to business processes of financial information of a business.38 The parties should ensure that any Rent Relief Agreement contains a confidentiality provision.
As set out above, parties are obligated to cooperate and to act in good faith when dealing with all matters to which the Regulations apply. This extends to any disputes between the parties.39
All Eligible Leases will be subject to the dispute resolution processes set out in the Retail Leases Act 2003 (Vic), providing VCAT with jurisdiction over matters referred to the SBC.40
Accordingly, a landlord or tenant may apply to the SBC for mediation of a dispute concerning the terms of an Eligible Lease and the effect of the Regulations on these terms (Eligible Lease Dispute).41
Other than where leave is granted by the Supreme Court,42 legal proceedings may only be brought in VCAT or a court in relation to an Eligible Lease Dispute where the SBC has certified in writing that they are satisfied that the mediation has failed or is likely to fail.43
This article was written by Nicole Maxwell, Partner, Rupert Lugo, Senior Associate, Natalie Gnoato, Solicitor, Nic Sloan, Solicitor and Jared Hosking, Law Graduate.
1 Act section 13; Regulation 3.
2 Act section 14.
3 Act section 12; The Guarantee of Lending to Small and Medium Enterprises (Coronavirus Economic Response Package) Act 2020 section 4; The Guarantee of Lending to Small and Medium Enterprises (Coronavirus Economic Response Package) Rules 2020 rule 5.
4 Regulation 6.
5 Regulation 7(1).
6 Act section 13(3)(a); Regulation 5.
7Income Tax Assessment Act 1997 (Cth) section 328-125(1)(a)-(b).
8Income Tax Assessment Act 1997 (Cth) section 328-125(2)(b).
9Income Tax Assessment Act 1997 (Cth) section 328-125(4).
10 Regulation 7(2).
11 Act section 13(3)(b).
12 Income Tax Assessment Act 1997 (Cth) section 328-130(1).
13Income Tax Assessment Act 1997 (Cth) section 328-130(2).
14 Act section 13(3)(c).
15 Regulation 8(2)
16 Regulation 10(1)-(2).
17 Regulation 10(3).
18 Regulation 10(4)(a).
19 Regulation 10(4)(d).
20 Regulation 10(4)(b).
21 Regulation 8(2)
22 Regulation 20(1)-(2).
23 Regulation 10, Note 2.
24 Regulation 11.
25 Regulation 14(2).
26 Regulation 14(3)(a).
27 Regulation 14(3)(b).
28 Regulation 15(2)(a).
29 Regulation 15(2)(b).
30 Regulation 9.
31 Regulation 13.
32 Regulation 16.
33 Regulation 12.
34 Regulation 17.
35 Regulation 18(1).
36 Regulation 18(2)-(4).
37 Regulation 19(2).
38 Regulation 19(3).
39 Regulation 8(2).
40 Regulation 22.
41 Regulation 20.
42 Regulation 23(2)(b).
43 Regulation 23(1).