COVID–19:  Rent relief - rights and responsibilities of landlords and tenants

The COVID-19 pandemic is having an unprecedented impact on businesses throughout Australia, particularly those operated out of leased premises.

Many businesses deemed “non-essential” have been ordered by the government to close.  Others have had their trade severely interrupted and have had to make the difficult decision to stop trading for health and safety reasons, or because it is not viable for them to trade due to the downturn in business. 

On 29 March 2020, Prime Minister, Scott Morrison announced “hibernation” measures to ensure that such businesses could “start again” after the pandemic.  This was followed by the introduction of:

1. National Cabinet Mandatory Code of Conduct (“the Code”) on 7 April 2020;
2. COVID-19 Omnibus (Emergency Measures) Act 2020 (Vic) (“the Act”) assented to on 24 April 2020; and
3. COVID-19 Omnibus (Emergency Measures) (Commercial Leases and Licences) Regulations 2020 (“the Regulations”) published on 1 May 2020

The Code

The Code was the first response, to assist commercial tenants suffering financial hardship as a result of COVID-19. The purpose 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, where the tenant is an eligible business for the purpose of the Commonwealth Government’s JobKeeper programme.

The Code applies to tenants with an annual turnover of less than $50 million who are eligible for JobKeeper (which indicates a 30% drop in turnover).

• The Code prohibits a landlord, during the COVID-19 period (or reasonable subsequent recovery period) from:
  • terminating the lease for non payment of rent;
  • levying penalties on a tenant that reduces its opening hours or ceases to trade;
  • increasing the rent;
  • drawing on a tenant’s security for non-payment of rent.
• The Code provides that the landlord must offer tenants rent relief in proportion to the tenant’s downturn in trade.
• The rent relief must comprise 50% waivers and 50% deferrals, with deferrals to be paid over the longer of the balance of the lease term and 24 months.
  

The Act

The Act is what is known as “enabling legislation”, the purpose of which is to temporarily amend certain Acts, to temporarily empower the making of regulations, and to modify the application of the law of Victoria in certain respects for the purpose of responding to COVID-19.  A copy of the Act is available here.

The Regulations

The eagerly awaited Regulations were published on 1 May 2020 and operate retrospectively from 29 March 2020 until 29 September 2020 (“relevant period”).  The Regulations effectively dictate how the Code applies to commercial tenancies in Victoria.  They are, for the most part, in line with the Code, however there are some prominent deviations, some of which favour the landlord and others which favour the tenant.

Eligibility

The Regulations apply to retail and non-retail leases and licences (excluding agricultural) which are an "eligible lease" meaning:

• the lease/licence was on-foot on 29 March 2020;
• the tenant/licensee has an annual turnover of less than $50 million assessed at group level;
• the tenant/licensee is an employer who qualifies for and is a participant in JobKeeper (this differs from the Code where the tenant only needs to be eligible for JobKeeper).

Rent Relief

In the Regulations "rent relief" is any form of relief, provided to a tenant by the landlord, in respect of the obligation under an eligible lease to pay rent, including a waiver, reduction, remission or deferral of rent. The rent relief procedure is set out in Regulation 10 and is initiated by the tenant making a written request accompanied by:

1. a statement by the tenant that the tenant’s lease is an eligible lease and is not excluded from the operation of the Regulation under section 13(3) of the Act (grouping provisions); and
2. information that evidences that the tenant:

• has a turnover of less than $50 million (assessed on a group basis); and
• qualifies for and is a participant in JobKeeper.

The Regulations do not prescribe what financial information must be provided to the landlord.  It is anticipated that the Victorian Small Business Commission will publish guidelines in this regard, however until then the tenant should at a minimum provide evidence of trade figures to enable a landlord to assess their request.

After the tenant has made their request, the landlord has 14 days (or longer if agreed in writing) to offer the tenant rent relief.  Regulation 10(4) sets out that rent relief “must be based on all the circumstances of the eligible lease” and

1. relate to up to 100% of the rent relief payable under the eligible lease during the period 29 March 2020 – 29 September 2020;
2. unless agreed otherwise in writing, provide for at least 50% of the rent relief offered to be a waiver of rent;
3. apply to the relevant period and take into account:

• the reduction in the tenant’s turnover associated with the premises during the relevant period; and
• any outgoings or other expenses that the landlord has waived during the period that the tenant has not been able to operate their business at the premises during the relevant period; and
• 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; and
• the landlord’s financial ability to offer rent relief, including any relief provided by any of its lenders as a response to COVID-19;
• any reduction to any outgoings charged, imposed or levied in relation to the premises.

Having received the landlord’s offer the landlord and tenant must negotiate in good faith in order to agree on the rent relief to apply during the relevant period.

Subsequent rent relief

The Regulations introduce the tenant’s right to apply for further rent relief.  In the event that the tenant’s financial circumstances “materially change”  (a term which is not defined by the Regulations) after rent relief has been agreed, the tenant may make a further request, however the landlord is not obliged to offer 50% rent relief by means of a waiver.  

We can help…

There are a number of differences and similarities between the Code and the Regulations in the areas of eligibility, amount of rent relief, deferred rent and extension of the lease term, outgoings, tenant protections, confidentiality, and mediation of disputes.  Contact us for how these differences may affect you and your business.

One thing that is very clear is that both landlords and tenants must be prepared to negotiate in good faith to help ensure the tenant is able to survive the pandemic and start again, which in turn will protect the landlord’s investment.

Whether you are a tenant or landlord, and you'd like some assistance in working out your rights and responsibilities during this uncertain time, please contact our Commercial leasing team on 03 9550 4600.