COVID-19: much anticipated Victorian commercial tenancy regulations, with a few surprises.

On 1 May 2020, the Victorian Government passed the COVID-19 Omnibus (Emergency Measures) (Commercial Leases and Licences) Regulations 2020 (Regulations).

The Regulations apply from 29 March 2020 to 29 September 2020 (prescribed period) to ‘eligible leases’ as described in our previous blog.

No reference to Mandatory Code of Conduct.

The Regulations do not incorporate or refer to the National Cabinet’s mandatory Code of Conduct for commercial tenancies (Code). The relevance of the Code to eligible leases in Victoria appears to be limited.

Which tenants are protected?

Tenants of eligible leases must follow a process for requesting rent relief.

A rent relief request must be in writing and accompanied by:

• a statement that the lease is an ‘eligible lease’;
• evidence that the tenant is an SME entity and qualifies for and is a participant in the JobKeeper scheme.

The Regulations do not specify what financial information the tenant should provide the landlord. The Small Business Commissioner is expected to provide guidelines on this shortly. In the meantime, common sense should prevail.

Protection for tenants.

Where tenants strictly follow this process, they will be protected in the event they do not pay rent during the prescribed period.

For tenants, this protection will mean that they:

• will not be in breach of their lease;
• cannot be evicted or have their lease terminated; and
• cannot have their security called upon.

Guidelines for landlords.

Provided the tenant’s request for rent relief is made in accordance with the above requirements, a landlord must offer rent relief to the tenant within 14 days (or a longer period as agreed) of receiving such request.

The landlord’s rent relief offer must be ‘based on all the circumstances of the eligible lease’ and take into account:

• the tenant’s turnover reduction associated with the premises;
• any waiver or other reduction of outgoings;
• whether failure to provide relief would compromise the tenant’s ability to fulfil its lease obligations; and
• the landlord’s financial ability to provide rent relief.

It is worth noting that, contrary to the Code, the Regulations do not require that rent relief be directly proportionate to the reduction in the tenant’s turnover.

Once the tenant receives the landlord’s offer, the parties must negotiate the rent relief in good faith.

Form of rent relief.

Rent relief can take various forms however at least 50% must take the form of a rent waiver. Where the rent relief includes a deferral, the deferred rent can only be recovered from the earlier of the end of the prescribed period or the expiry of the lease term, to be amortised over a deferral period of 24 months or the balance of the term (whichever greater).

Other tenant protections.

In addition to rent relief:

• tenants may make request further rent relief if financial circumstances materially change during the prescribed period;
• tenants are not in breach of their lease if they fail to keep the premises open during prescribed hours;
• landlords must consider waiving recovery of any outgoing or expense payable by a tenant for any period it is ‘not able to operate’ its business and must pass on any reduction in outgoings to the tenant;
• landlords must not increase rent during the prescribed period or charge interest on any deferred rent; and
• where rent relief incudes a deferral, landlords must offer tenants a lease extension equivalent to the period for which rent is deferred, on the same terms and conditions as the existing lease.

Landlords who provide rent relief may be eligible for land tax relief.

Formalising revised rent.

Any commercial agreement reached between the parties should be carefully documented by way of a Deed of Variation to ensure it is binding between the parties and their successors.

The Deed of Variation should include provisions regarding:

• the period during which the variation applies;
• the amount of rent to be paid during the prescribed period;
• the apportionment between waiver and deferral;
• the timetable for deferral repayments; and
• confidentiality.

We can help.

If you are in the process of renegotiating your lease, we can help you navigate this process in line with the Regulations, and assist you to draft a Deed of Variation which covers all of the important points listed above.

For details of all of our COVID-19 tips and updates, visit the Bespoke COVID-19 Hub.