Long awaited COVID-19 Regulations have come into force in Victoria clarifying commercial leasing rental relief that tenants can negotiate with landlords and providing practical guidance about how parties can reach agreement on rent and land tax savings.
The COVID-19 Omnibus (Emergency Measures) (Commercial Leases and Licences) Regulations 2020 (Regulations) were made on 1 May 2020 and have a retrospective effect from 29 March 2020.
The Regulations oblige landlords and tenants to cooperate and act reasonably and in good faith in all discussions and actions associated with matters to which the Regulations apply.
Whilst the Regulations provide that tenants are not to breach their existing lease conditions, they will not be in breach of an eligible lease if they do not pay the full amount of rent between 20 March and 29 September 2020 (Relevant Period), provided they first comply with the Regulations in relation to applying for rent relief.
How do you start Rent Relief negotiations?
A tenant has a right to request rent relief from the landlord under their eligible lease.
This request must be in writing and accompanied by the following 3 things:
- a statement by the tenant that the tenant’s lease is an eligible lease and the lease is not excluded from the operation of these Regulations; and
- information that evidences that the tenant is an SME entity (meaning it has a turnover of up to $50 million); and
- information that evidences that the tenant qualifies for, and is a participant in, the jobkeeper scheme.
Once the tenant provides their landlord with the required evidence of eligibility for rent relief, the landlord must offer rent relief within fourteen (14) days or within a different time frame as agreed between the parties.
The landlord’s offer of rent relief must be based on all the circumstances of the eligible lease and:
- relate to up to 100% of the rent payable under the eligible lease during the Relevant Period; and
- 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; and
- apply to the Relevant Period; and
- take into account:
- the reduction in the tenant’s turnover;
- any waiver of outgoings where the tenant is not able to operate their business from the leased premises; and
- whether a failure to offer rent relief would compromise the tenant’s ability to fulfil its ongoing obligations under the lease;
- the landlord’s financial ability to offer rent relief, including any rent relied provided to a landlord by any of its lenders as a response to the COVID-19 pandemic; and
- any reduction to any outgoings charged, imposed or levied in relation to the leased premises.
How the rent relief comes into effect
After the tenant has received the landlord’s offer for rent relief, the tenant and the landlord must negotiate in good faith with a view to agreeing on the rent relief to apply moving forward.
The rent relief may be given effect by the landlord and tenant by varying the lease or entering into any other agreement that gives effect to the rent relief. It is imperative that any agreement reached is properly documented!
The Regulations also allow for a tenant to make a further request for rent relief if their financial circumstances materially change after a variation to the eligible lease or an agreement has been reached between the landlord and tenant. If a tenant makes this request, both parties are required to apply the above process from the start to agree to additional relief.
No fees or interest allowed: Landlords are prohibited from increasing the rent payable under the lease at any time during the Relevant Period unless the landlord and tenant agree in writing that this prohibition will not apply.
Extension to the term of the Lease: Where payment of rent is deferred by virtue of the rent relief arrangement reached between the landlord and tenant, the landlord must offer the tenant a proportionate extension of the term of their eligible lease on the same terms and conditions as applied under the lease before 29 March 2020.
Proportionate waiver of outgoings: Landlords are obliged to consider waiving the recovery of any outgoings or other expense payable by the tenant under the lease for any part of the Relevant Period that the tenant cannot operate their business from the leased premises.
Landlords can also cease providing services at the premises during the period which the tenant’s business is closed or unable to operate.
Outgoings benefits must be passed on: Where any outgoings charged in relation to the premises are reduced (i.e. by a third party provider), that reduction must be proportionately passed on to the tenant by the landlord. Additionally, where a tenant has already paid to the landlord any amount towards outgoings that is greater than that tenant’s proportional share, the excess must be reimbursed to the tenant.
Recovering deferred rent: a landlord cannot request payment of any part of the deferred rent until the earlier of 29 September 2020 and the expiry of the term of the lease (before any extension period is applied).
Additionally, the landlord and the tenant must agree on the tenant paying the deferred rent on an amortised basis over the greater of:
- the balance of the term of the eligible lease, including any extension that is applied; and
- a period of no less than twenty-four (24) months.
A landlord is prohibited from charging interest or any other fees in relation to the payment of deferred rent.
Tenants can change trading hours
A tenant is not in breach of the terms of their eligible lease if, during the Relevant Period, they reduce the opening hours of the business they carry out from the premises or cease to carry out any business at the premises.
If the tenant elects to reduce its hours or close its business the landlord cannot evict, recover or attempt to re-enter premises and neither can a landlord dip into a tenant’s security relating to the non-payment of rent.
Where landlords and tenants cannot agree on rent relief, deferral, extension of lease or any other details prescribed by the Regulations, then a lease dispute can be referred to the Small Business Commission for mediation in writing.
The assistance provided by the Small Business Commission extends to preliminary assistance, including ensuring both tenants and landlords are aware of their rights and obligations and facilitating open communication, as well as formal dispute resolution in the form of mediation.
The Regulations prohibit parties from using mediation to prolong or frustrate reaching an agreement.
The Regulations also allow either party to be represented by a lawyer in mediating their dispute, however the Small Business Commission reserves the right of the mediator to meet with the parties without their legal practitioners, if they consider it appropriate to do so.
Landlord land tax relief
The Regulations confirm that where landlords cooperate with tenants in reaching agreement on rent relief, they will be eligible to apply for land tax relief.
The Regulations specifically state that landlords can disclose the information provided to them by the tenant as part of their request for rent relief to the Commissioner of State Revenue for the purpose of applying to be eligible for land tax relief. Of course, any land tax relief landlords obtain must be proportionately passed on to their tenant if the tenant is paying or contributing to land tax pursuant to their lease.
If you’re a tenant and you have an eligible lease, you have a right to negotiate rent relief with your landlord. You need to gather your paperwork evidencing the reduction in your business revenue, have applied for the jobkeeper scheme and prove you turn over less than $50 Million per annum. Request a rent reduction from your landlord in writing. Be prepared to negotiate openly and honestly with your landlord about what reasonable rent relief you need. You cannot simply stop paying rent.
If you’re a landlord and your eligible tenant makes a request for rent relief, you are obliged to provide it. You must offer your tenant rent relief within fourteen (14) days of receiving their request. Keep in mind that any offer you make, while it has to be compliant with the Regulations, can also take into consideration your own financial circumstances.
You do not have to navigate the pandemic or these new Regulations alone.
Whether you’re a tenant or a landlord, if you need help through the this process, we can assist you to nail down new terms and finalise the variations to your current commercial leasing arrangements to get you through COVID-19. If you can’t work it out, we can help you negotiate or mediate, if necessary. Remember, your relationship will endure beyond COVID-19. Focus on the long-game.