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Part 3 – Temporary Arrangements for Commercial Leases under the Victorian Regulations due to Covid-19

Part 3 – Temporary Arrangements for Commercial Leases under the Victorian Regulations due to Covid-19

In April, we provided two updates on the National Cabinet’s Mandatory Code of Conduct (the Code) for existing tenancies. In Part 1, we outlined what the Code was and what it proposed to change in the relationship between landlords and tenants (once the Victorian laws were passed). In Part 2, we looked at what your business or organisation could do to negotiate with tenants in line with the Code.

Since we published those updates, Victoria has enacted the COVID-19 Omnibus (Emergency Measures) Act 2020 (the Act) and made the COVID-19 Omnibus (Emergency Measures) (Commercial Leases & Licences) Regulations 2020 (the Regulations). Additionally, since the extension of the State of Emergency in July, Victoria has amended those same regulations, to vary and extend the operation of the Regulations through to 31 December 2020.

These new laws implement the Code in Victoria and should be used as the reference when considering the commercial leasing principles to apply in dealing with the consequences of the COVID-19 pandemic.

Importantly, there are differences between the Act & Regulations, and the Code, so even if you consider yourself familiar with the Code, it is important to also be familiar with the Act & Regulations as they govern the situation in Victoria.

In this update, we focus on some key similarities and differences between the Regulations as they applied between the two relevant periods, 29 March to 29 September 2020, and the period since then through to 31 December 2020.

Table of some key similarities and differences between the Victorian Leasing Regulations applying from 29 March 2020, and then from 30 September to 31 December 2020

Issue Victorian Regulations
(29 March to 29 September 2020)
Victorian Regulations
(30 September to 31 December 2020)
Can landlords terminate leases due to non-payment of rent? Not permitted insofar as the Tenant has made a request for rent relief. Provisions are the same, but it is now also not permitted to terminate leases due to non-payment of outgoings.
Which tenants can apply for rent relief? An SME Entity:
  • with an annual turnover of less than $50 million; and
  • being an employer who qualifies for and is participating in the JobKeeper scheme
Same, and now sole traders meeting those criteria.
Can a tenant’s rent relief request be retrospective? Yes. No. The request is only effective from the time of lodging a compliant request with the required documents.
How much rent must be waived?

Rent relief must relate to up to 100% of the rent payable during the period, and at least 50% of the rent relief must be a waiver of rent. It must take into account the relevant factors (see below).

…unless the parties agree otherwise.

Provisions are the same except the landlord’s financial capability to offer relief is now irrelevant.
Do reductions in rent have to be proportional to the reduction in the tenant’s turnover? No. It is one factor the Landlord should take into consideration, but the amount of rent relief does not have to be proportional. No repayment should be requested until the earlier of:
  1. 29 September 2020; or
  2. The expiry of the term of the lease
Yes. The reduction in rent must be directly proportional to the reduction in turnover from the premises.
When do tenants have to repay deferred rent? Repayable over the greater of:
  1. balance of term of lease plus agreed extended term; or
  2. minimum period 24 months
…unless the parties agree otherwise. Interest, fees and charges on deferred rent are not recoverable.
Provisions are the same, but deferred rent is only payable after 31 December 2020.
Do tenants have to be offered an extension of their lease? Yes. This should take place for a period equivalent to the rent deferral period on the same lease terms as existed before 29 March 2020 unless the parties agree otherwise. Provisions are the same.
Is there a freeze on rent increases? Yes, except for turnover rent. Provisions are the same.
Must outgoings be waived? Yes, if the tenant is not able to operate its business at the premises for a period. Reductions in payable outgoings must be passed on. Provisions are the same.
Are interest, fees and charges recoverable? No. Provisions are the same.
If a dispute is not resolved in mediation, can the Small Business Commission make binding determinations? Yes (from 30 September 2020), if the tenant has not commenced a VCAT or court proceeding. Those proceedings can be commenced once the SBC is satisfied that mediation has failed or is unlikely to resolve the dispute. Provisions are the same.

Rent Relief Process

The Regulations allow tenants who are suffering financial distress as a result of the COVID-19 pandemic to make a written request to their landlord for rent relief; to which the landlord must respond within 14 days (unless agreed otherwise). It is important that tenants ensure they meet all requirements under the Code prior to making a request for rent relief.

Within 14 days of receiving a proper request for rent relief, the landlord must make an offer of rent relief. This offer must be based on all the circumstances of the eligible lease, including:

  • The reduction in a tenant’s turnover associated with the leased or licensed premises.
  • 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.
  • A landlord’s financial ability to offer rent relief. [NB. Not relevant from 30 September 2020]
  • Any reduction to any outgoings charged by the landlord.

Importantly, if the tenant’s financial circumstances materially change after a temporary arrangement is made, the tenant may make a further request for rent relief.

Negotiations between landlord and tenant regarding rent relief must be done in good faith.

What should you do?

Landlords and tenants should be careful to comply with their obligations under the Regulations when making or considering any offers, responses and negotiations about temporary rent assistance on commercial leases.

Documenting agreed arrangements in accordance with the Regulations in a deed of variation or waiver will help mitigate the risk of disputes.

If you require any assistance with understanding the Regulations, negotiating or preparing lease documents, please get in touch with Lionel Appelboom.

This content is provided for reference only and may not be current on the date of access. It does not constitute legal advice and should not be relied upon as such.

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