The Commercial Tenancy Relief Scheme Regulations 2021 (Regulations) were brought into effect on 24 August 2021 pursuant to s7 of the Commercial Tenancy Relief Scheme Act 2021 (Vic) (CTRS Act). They are taken to operate from 28 July 2021.
The Regulations will be revoked on 16 January 2022.
The Regulations are considered to be of a complex nature, and will have significant ramifications for landlords and tenants under eligible leases. Accordingly, they will require careful consideration.
This articles outlines some of the key provisions of the Regulations.
The objectives of the Regulations are:
- to implement temporary measures to apply to tenants and landlords under ‘eligible leases’ under the CTRS Act to mitigate the effect of measures taken in response to the COVID-19 pandemic; and
- to implement mechanisms to resolve disputes concerning eligible leases.
The Regulations apply to an eligible lease. Regulation 5(1) defines an eligible lease as being a retail lease or non-retail commercial lease or licence that is:
- in effect on 28 July 2021 (this includes leases renewed or extended on substantially the same terms after this date);
- not excluded by Regulations 7 or 8 (ie not leases or licences for agricultural uses or where the tenant is a listed corporation or a subsidiary of one); and
- under which the tenant is an eligible tenant.
Regulation 9(1) defines an eligible tenant as being an entity that as at 28 July 2021:
- carried on a business in Australia (including a non-profit body or deductible gift recipient);
- is an SME entity (ie a profit or non-profit body or entity with turnover for the financial year ending 2021 of less than $50,000,000);
- satisfies the decline in turnover test as set out in Regulation 12;
- is not an entity connected or affiliated with other entities whose combined turnover exceeds $50,000,000;
- is not a company in liquidation or a bankrupt individual;
- is not a Australian government agency, local governing body or sovereign entity (or a an entity wholly owned by such an entity);
- is not a listed corporation (or a subsidiary of one) in Australia or overseas; and
- is not an entity who was levied an amount under the Major Bank Levy Act 2017 (Cth) for any quarter ending before 1 July 2021 or a member of a group where an entity was levied such an amount.
Decline in Turnover Test
The decline in turnover test will be satisfied if the tenant’s turnover for the turnover test period is at least 30% (15% for some charities and schools) lower than the tenant’s comparison turnover.
Turnover is, for all intents and purposes, defined in the same way as GST turnover, specifically including State Government COVID-19 grants, but excluding Federal Government grants. Turnover also includes turnover from online sales or sales from other premises operated by tenants.
The table below outlines the turnover test period and comparison turnover.
|Date the tenant first commenced business (from any premises)||Turnover Test Period||Comparison Turnover|
|Prior to 1 April 2019||Tenant's choice of any three consecutive calendar months between 1 April 2021 and 30 September 2021||The three corresponding months in 2019|
|1 April 2019 - 31 March 2020||Tenant's choice of any three consecutive whole calendar months between 1 April 2021 and 30 September 2021||The sum of the tenant’s turnover for each month of trade to 31 March 2020, divided by the number of months, multiplied by 3 (3-month average)|
|1 April 2020 - 31 March 2021||Tenant's choice of any three consecutive whole calendar months between 1 April 2021 and 30 September 2021||The sum of the tenant’s turnover for each whole month of trade to 31 July 2021, divided by the number of whole months, multiplied by 3 (3-month average)|
|After 31 March 2021||A period agreed by landlord and tenant following good faith negotiations||The tenant’s total turnover to 31 July 2021, divided by the number of days trade, multiplied by 92|
If a tenant has had an increase in turnover of:
- 50% or more in the 12 month period;
- 25% or more in the 6 month period; or
- 12.5% or more in the 3 month period,
immediately before the turnover test period, then the comparison turnover for the tenant will be the tenant’s turnover in the 3 months immediately before the turnover test period.
Special rules apply where:
- a business has been sold or a restructure of the tenant’s business has occurred after the start of the comparison period and before the turnover test period;
- where the tenant qualified for the ATO’s bushfire 2019-20 lodgement and payment deferrals;
- where the tenant received drought help concessions;
- where the tenant conducted business in a declared drought zone during the comparison period;
- the tenant’s business has irregular turnover (i.e. tenant’s turnover is not cyclical and within a period of 12 months before the turnover test period, turnover for 3 consecutive months is at least 50% less than the turnover for 3 consecutive months within the same 12 month period);
- where the tenant is a sole trader or small partnership and one of the partners (or the sole trader) did not work during the comparison period due to injury or illness (thereby affecting turnover); and
- where a tenant had to temporarily cease trading during the comparison period for at least a week due to events outside of the tenant’s control, but resumed trading before 28 July 2021.
Claiming Rent Relief
Regulation 27 deals with rent relief requests and the landlord’s obligation to make an offer of rent relief.
A tenant under an eligible lease may request rent relief directly from their landlord. The request must be in writing and accompanied by a statement from the tenant:
- that the tenant is an eligible tenant;
- that the tenant satisfies the decline in turnover test (including setting out details of the turnover test period, comparison period and decline and rent relief sought); and
- any other circumstances that the tenant would like the landlord to consider when making a relief offer(optional).
Within 14 days after making the request, the tenant must provide evidence to the landlord evidencing the turnover figures stated in such request by providing at least one of the following:
- extracts from the tenant’s accounting records;
- the tenant’s business activity statements lodged with the ATO;
- statements issued by an ADI in respect of the tenant’s bank account; or
- a statement prepared by a practising accountant.
The tenant must also provide a statutory declaration stating that the tenant is an eligible tenant and that the information provided is true to the best of the tenant’s knowledge and belief.
If the tenant fails to provide the required evidence and statutory declaration within the 14 day period, the request lapses (see Regulation 27(4)). The tenant may make another request. However, if the tenant allows three requests to lapse, they are unable to make a fourth request.
Landlord’s rent relief offer
If the tenant submits a compliant request, then, within 14 days after receiving the required evidence, the landlord must submit a rent relief offer in writing to the tenant, which (see Regulations 27 (7) and (8)):
- is for the rent relief period;
- at a minimum, must be proportional to the tenant’s decline in turnover;
- provides that no less than 50% of the rent relief offered is in the form of waiver (with the balance to be deferred); and
- takes into consideration any other circumstances that the tenant would like the landlord to consider in making an offer.
If the rent charged under an eligible lease is inclusive of outgoings chargeable to the tenant with respect to the premises, the landlord must offer rent relief with respect to the rent payable inclusive of outgoings (see Regulation 27(9)).
Rent relief period
If the tenant’s rent relief request is made (see Regulation 28):
- on or before 30 September 2021, the rent relief period is between 28 July 2021 and 15 January 2022 (inclusive); or
- after 30 September 2021, the rent relief period will be from the date of the tenant’s request until 15 January 2022 (inclusive).
Reaching an agreement
The parties must negotiate in good faith with a view to agreeing on the rent relief to apply during the rent relief period (see Regulation 27(10)).
The tenant will be deemed to have accepted the landlord’s offer and a rent relief agreement is deemed to have been made unless (see Regulation 27(11)):
- the parties have not reached agreement on the rent relief agreement within 14 days after the landlord’s offer is made;
- the landlord’s offer does not satisfy the minimum requirements under Regulation 27(8); and
- the tenant has not referred the matter to the Small Business Commissioner for assistance within 14 days after the landlord’s offer is made.
Mandatory reassessment of rent relief
Regulation 29 provides for a mandatory reassessment of any rent relief agreement that is entered into as a result of a request made by the tenant before 30 September 2021 and the tenant began trading before 1 April 2021.
The tenant must, by no later than 31 October 2021, provide to the landlord (supported by a statutory declaration):
- details of the tenant’s turnover for the turnover test period;
- the tenant’s comparison turnover; and
- the tenant’s change in turnover (difference between the tenant’s turnover for the relevant turnover test period and the tenant’s turnover for the comparison period).
If the tenant’s change in turnover differs from the tenant’s decline in turnover, then, with effect from 31 October 2021, any part of the rent relief agreement (which is based on the tenant’s decline in turnover) is deemed to be adjusted for the balance of the rent relief period to be based on the tenant’s change in turnover.
If the tenant fails to provide the information required for reassessment (unless trading prevented due to sickness or injury or due to a natural disaster), then, any part of the rent relief agreement that relates to waived rent, will cease to apply from 31 October 2021.
Regulations 31 to 34 (inclusive) deal with deferred rental arrangements between landlords and tenants of eligible leases.
If the rent is deferred as a result of a rent relief agreement, the landlord must offer the tenant an extension to the lease term (on the same terms as the terms which applied before 28 July 2021) (see Regulation 31). The extension period is the period for which the rent is deferred (i.e. if 3 months of rent is deferred, then the extension period offered to the tenant must be 3 months) unless other agreed in writing by the parties.
Unless otherwise agreed between the landlord and tenant, any deferred rent it is taken to be payable by equal instalments commencing not earlier than 15 January 2022 and until the later of the lease expiry date and 15 January 2024 (see Regulation 32).
If the rent has been deferred under the 2020 Regulations and the tenant remains an eligible tenant who has requested rent relief under the Regulations, then the 2020 rent deferral repayments will be paused during the relevant rent relief period (at which point instalments will recommence in accordance with the 2020 Regulations) (see Regulation 33).
The tenant cannot be required to pay interest or any other fees on the deferred rent (see Regulation 34).
Supplementary request for relief
A tenant may submit a further request for relief after an initial rent relief agreement is made if the tenant’s financial circumstances materially change (see Regulation 30).
Additional protection for tenants
Regulation 28 provides statutory protection for tenants under an eligible lease.
A tenant under an eligible lease will not be in breach of any provision of an eligible lease that relates to payment of rent or outgoings if the tenant does not pay the amount of rent or outgoings required to be paid under the eligible lease during the protection period (ie between 28 July 2021 and 15 January 2022 (inclusive)), but only if:
- before a rent relief agreement is made, the tenant:
- has made a compliant rent relief request and it has not lapsed; and
- continues to pay a proportion of the rent payable under the eligible lease equal to the reduced rent payable after taking into account the tenant’s decline in turnover (as set out in the tenant’s request for rent relief);
- if a rent relief agreement is made, the tenant continues to pay the rent required to be paid under the rent relief agreement; or
- one of the following circumstances apply:
- the tenant is unable to trade as a result of sickness or injury affecting the tenant, its officers or employees;
- the tenant is unable to trade as a result of natural disaster affecting the tenant or the premises.
A landlord under an eligible lease must not evict the tenant in these circumstances. Relevantly, there is no prohibition on landlords seeking to terminate an eligible lease for any other breaches of an eligible lease or for any accrued arrears as at 28 July 2021 (see Regulation 26(5)).
A landlord under an eligible lease must not have recourse, or attempt to have recourse, to any security provided by a tenant under an eligible lease because of non-payment of rent or outgoings if the tenant under the eligible lease takes any of the actions specified in Regulation 26(1).
Restriction on rent increases
Unless agreed between the landlord and tenant, a landlord under an eligible lease must not increase the rent (excluding turnover rent) payable at any time between 28 July 2021 and 15 January 2022. This will apply regardless of whether the or not the tenant has requested rent relief (see Regulation 35). The applicable rent review is deemed to have been lost, and may not be instigated at a later date. However, it should be noted that the Regulations does not make it clear whether this would apply to a market rent review (if following the market review, the rent is likely to decrease).
Regulation 36 requires landlords under an eligible lease to consider waiving outgoings for any part of period between 28 July 2021 and 15 January 2022 (inclusive) if the tenant is unable to trade from the premises. This will need to be done as part of any rent relief request received from the tenant.
Landlords under an eligible lease may, acting reasonably, cease providing a service to the premises between 28 July 2021 and 15 January 2022 if the tenant is unable to trade from the premises.
Regulation 36 requires Landlords under an eligible lease to also pass on to tenants any outgoings savings obtained by the landlord.
Change in trading hours
Regulation 38 allows tenants of eligible leases to reduce their trading hours or cease trading from the premises between 28 July 2021 and 15 January 2022 without being in breach of their lease.
The Regulations contain provisions allowing either the landlord or tenant under an eligible lease to refer any dispute relating an eligible lease arising in relation to any matter covered by the Regulations to the Small Business Commissioner for mediation.
A tenant under an eligible lease may also ask the Small Business Commissioner to make a binding rent relief order if:
- the landlord and tenant failed to reach a rent relief agreement;
- the tenant has attempted mediation with the Small Business Commissioner and the Small Business Commissioner has issued a certificate certifying that mediation failed because a party was not acting in good faith; and
- the tenant has not commenced proceedings in VCAT.
If an order is made, either the landlord or tenant may apply to the Small Business Commissioner to vary it, or may appeal the order in VCAT. If the Small Business Commissioner refuses to make an order, that decision can also be appealed at VCAT.
The Regulations are materially different to the 2020 Regulations. Landlords and tenants need to be mindful of their respective rights and obligations under the Regulations.
If you would like any further advice regarding any of these matters or the Regulations, please feel free to contact us.
This article is written by Matthew Powell, Partner, Michael Westaway, Partner and Victoria Pesnikas, Law Graduate.