The 2020 Covid-19 Commercial Tenancy Relief Scheme
The Covid-19 Omnibus (Emergency Measures) Act 2020 (Vic) took effect from 24 April 2020, reflecting and (together with regulations allowing for prompt responses on an ongoing basis to problems with implementation of the spirit of the law) giving effect to urgent temporary measures under a pro-tenant, consumer-based answer primarily relieving tenants of their key obligation to pay in full the amount of rent as and when due.
From the outset the scheme essentially provided a combination of a rental waiver, combined with a postponement of the balance of rent remaining payable. The initial phase of the scheme extended the protections from 29 March to 29 September 2020.
The extension of these measures beyond 29 September 2020 will permit the extension and amending of the current regulations to 31 December 2020 and the capacity to extend up to 26 April 2021, if required.
Commercial/retail lease landlords and tenants are by now likely to be well aware of the scheme applying in respect of all eligible commercial leases where the tenant
qualifies for (and is a participant in) the Commonwealth’s staff-retention focussed JobKeeper program; and
has an annual turnover of up to $50 million.
It includes eligible sole traders, not-for-profit businesses and franchisees.
Amendments to the original legislative scheme for the program allowed for the removal of the requirement that tenants businesses must be employing staff. This reflected the Government’s intent that sole traders should be eligible to participate if they are participating in the Commonwealth’s JobKeeper program and will increase flexibility for the government to promptly adjust the program as it evolves.
The State government’s underlying expectation was that most commercial tenants and landlords will continue to work together to reach agreements that will best assist the ongoing survival of businesses. Where the landlord or tenant cannot reach agreement, either party may refer the matter for free mediation by the Victorian Small Business Commission (VSBC) – the government entity administering the scheme.
Under it, commercial/retail lease tenants that are eligible have an obligation to request of their landlords rent relief in the form prescribed in the Commercial Tenancy Relief Scheme regulations. Rent relief is not automatic. The government’s intention is to make the application process as streamlined as possible, noting that information requests to tenants should be minimal but sufficient to substantiate and support their applications, in most part mirroring information they will have already provided for their JobKeeper applications.
The following key provisions apply:
The tenant’s right to seek rent relief is extended to 31 December 2020;
The moratorium, or tenant’s protection against termination of a lease for non-payment of rent is extended to that date;
Also until that date, rent increases cannot be demanded;
A further 25 percent land tax relief is available to landlords allowing rent waivers of at least 50 percent for at least 3 months;
The government has established a $60 million fund – allowing grants of up to $3,000.00 per tenancy – payable to eligible small-scale commercial landlords.
What the Tenant Must Do:
A tenant’s request for rent relief must now be accompanied by:
a statement from the tenant stating:
that the lease is an eligible lease;
that the lease is not excluded from the operation of the regulations (for reasons of grouping or agricultural nature); and
setting out the tenant’s decline in turnover that is associated only with the tenant’s business operated only at a particular premises. That decline is measured along the lines of the fall in turnover recorded in the tenant’s expressed as a whole percentage and calculated in accordance with the tenant’s most recent Jobkeeper application;
Evidence that the tenant -
is a small-to-medium size entity; and
is an entity entitled to Jobkeeper payments (including the tenant’s Jobkeeper receipt number and a copy of the tenant’s most recent notice to the Commissioner of Taxation under the Jobkeeper rules); and
Information that provides evidence of the tenant’s stated decline in turnover including at least one of:
extract from the tenant’s accounting records;
the tenant’s BAS;
statements issued by “an ADI” - typically, the tenant’s trading bank; or
a statement by a practising accountant – presumably, the tenant’s accountant.
Importantly, the tenant is required to set out clear evidence of its deterioration in turnover, but only in respect of a single period and relying on the reduction-in -turnover test applied pursuant to the Jobkeeper rules. This allows for a tenant to apply for a further reduction in rent payable - i.e., reflecting a further downturn in turnover compared to that previously reported to the landlord.
What Landlords Must Do in Response
Landlords will only be required to grant rent relief for the period beginning on the date of a tenant’s compliant request until 31 December 2020. For tenants who still require rent relief, those requests should be made as soon as possible prior to that date, or risk losing entirely the opportunity for rent relief.
Landlords must respond to a tenant’s compliant request for rent relief within 14 days of receiving it. If they fail to do so, the Commissioner can make an order where this is considered fair and reasonable in all the circumstances. The intention is that the Commissioner would use these additional powers to resolve disputes between the parties, in particular, where a landlord is consistently failing to respond to the Commissioner’s pre-mediation requests to negotiate in good faith.
Decision-making Role of the Small Business Commissioner
Upon a tenant’s lodgement with the Commissioner of a completed and compliant form notifying of an eligible lease dispute, the landlord is notified by the Commissioner and must respond in writing within ten business days.
The dispute is then subject to mediation. Alternatively, if the Commissioner considers that the dispute is unlikely to resolve, it may issue a Regulation 20 Certificate stating whether the landlord has failed to respond within time or, in the Commissioner’s view, has failed to engage in the mediation process in good faith.
In that case, the tenant may apply to the Commissioner for a binding order – whereupon the Commissioner is provided with five business days to provide its written response to the application. Subject to its power to seek further submissions from the parties, the Commissioner must make a binding order - directing (with reasons supporting the determination) the landlord to provide specified rent relief - if considering that to be fair and reasonable in the circumstances of the case.
The Commissioner may reconsider and amend or even revoke a binding order. However the landlord or tenant may apply to the Victorian Civil & Administrative Tribunal for review of the binding order or other decisions made by the Commissioner.
Key Aspects of the Scheme
Proportionality: Rent relief offered by landlords must now be, at a minimum, proportionate to the reduction in a tenant’s turnover associated with the business conducted at the premises. A tenant’s decline in turnover is calculated ‘consistently with the actual decline in turnover test applying to the tenant relating to the most recent turnover test period applying to the tenant‘. This means that the proportionality aspect of the rent relief is determined using a reduction in turnover for the most recent monthly or quarterly period and is unlikely to represent the tenant’s overall reduction in turnover for the period 29 March to 31 December 2020.
Waiver of rent: There is a continuing obligation for landlords to provide not less than 50% of the rent relief in the form of a waiver of rent, unless the landlord and tenant otherwise agree in writing. Regulations amending the scheme in September require landlords to waive at least 50% of the rent relief for any subsequent requests for rent relief.
Existing agreements: For landlords and tenants who have already entered into rent relief agreements under the earlier version of the scheme, in addition to seeking further rent relief if a tenant’s financial circumstances have materially changed, tenants may now make a fresh request rent relief if:
the rent relief provided by the landlord under an existing agreement does not comply with the new proportionality requirements introduced by the Amending Regulations; or
the rent relief does not extend to 31 December 2020,
However the new request for rent relief is not retrospective and will only apply to the period from the date that the application is made until 31 December 2020.
Turnover: The definition of Turnover now expressly excludes JobKeeper payments and, once again, is strictly limited to turnover sourced from the particular premises.
Deferral of rent: If any part of the rent is deferred, a landlord cannot request payment of the deferred rent before 31 December 2020. This change is retrospective and applies to deferrals agreed between landlords and tenants prior to 29 September 2020 (which were repayable from the earlier of 30 September 2020 or the expiry of the lease). The tenant must continue to pay the deferred rent to the landlord amortised over the greater of:
the balance of the term of the small commercial lease; or
a period of not less than 24 months.
Landlord’s financial circumstances: A landlord’s ability to take into consideration its financial ability to offer rent relief when making an offer of rent relief to tenants has been removed.
Outgoings: The Amending Regulations now extend the existing moratorium on evictions for non-payment of rent during the relevant period (29 March 2020 to 31 December 2020) to include non-payment of outgoings for that same period.
Disputes: Tenants may now apply to the Small Business Commissioner for a binding order in relation to rent relief in circumstances where a landlord has failed to respond to a mediation request or has not engaged in the mediation in good faith. Landlords are not afforded the same opportunity but may still initiate a lease dispute in the usual course.
To Recap:
If tenants want to request rent relief for the period 29 September until 31 December 2020, they will need to make a new written application to your landlord, including all the necessary information required to be lodged with the Commissioner in order to activate a commercial/retail tenant’s entitlement to relief under the extended Scheme. This is necessary, even if tenants have applied to the VSBC to assist in resolving a rent relief dispute that spans a period before and after the extension to the Scheme.
Under the extended Scheme,
A tenant can only receive rent relief from the date they make a written application to their landlord that contains all of the required information, within the period 29 September 2020 to 31 December 2020.
A commercial landlord is required to offer rent relief within the period 29 September 2020 to 31 December 2020 that is in proportion to the fall in turnover experienced by their eligible tenant. For example, if a tenant’s turnover has fallen by 40 per cent, the required rent relief is to be at least 40 per cent of the tenant’s current rent, with at least 50 per cent of the rent relief made up of a rent waiver.
To apply for rent relief for October to December 2020, it is not necessary to wait for turnover information for those months.
Please contact us to address your rental and other lease concerns
Errard Legal
6 Oct 2020