Property update: Amended regulations for commercial and retail leases rent relief — your questions answered

Oct 1, 2020

On 29 September 2020, the regulations governing a commercial or retail tenant’s entitlement to rent relief due to the COVID-19 pandemic changed substantially.

Set out below are the most important elements and key questions relating to the Covid-19 Omnibus (Emergency Measures) (Commercial Leases and Licences) Regulations 2020 (Amending Regulations).

Rent relief period extended and eviction moratorium now covers outgoings

The ‘relevant period’ for rent relief started on 29 March 2020 and has now been extended to end on 31 December 2020.

A tenant is not in breach, and a landlord cannot evict or draw on lease security, if the tenant fails to pay rent and outgoings during this relevant period if the tenant has complied with the Amending Regulations when requesting rent relief from the landlord.

Do the Amending Regulations change an existing rent relief agreement entered into before 29 September 2020 between the landlord and tenant?

If an existing agreement provides for rent relief by way of a deferred rent component, then this deferred rent is not payable until 31 December 2020.

The amortisation of the deferred rent must still be over the greater of the balance of the lease term or 24 months, but the 24-month period now starts from 31 December 2020.

Tenants are not required to repay any deferred rent until 31 December 2020.

Can the tenant make a further claim for rent relief if there is an existing agreement?

If there is an existing agreement, the tenant can make a further claim for rent relief if:

  • subsequently, the financial circumstances of the tenant materially change;
  • the existing agreement was not proportional to the decline in the tenant’s turnover associated with the premises (an no other premises); or
  • the rent relief did not apply to 31 December 2020.

If the rent relief agreed to under the existing agreement was less than the tenant’s proportional decline in turnover or considered the tenant’s income from other premises, then the tenant can make a further claim.

Many existing agreements will not have the extended offer of rent relief to 31 December 2020, as the previous regulations only provided for a relief period to 29 September 2020.

What does a tenant need to do to make a claim for rent relief (or further claim)?

What a tenant must provide in its request for rent relief has changed.

The tenant is now required to set out more detail relating to its decline in turnover and eligibility for JobKeeper.

The tenant’s request for rent relief must now also set out:

  • the tenant’s decline in turnover that is associated with the premises (and no other premises). This decline must be based on most recent month (September 2020) or the quarterly (1 July 2020 to 30 September 2020) amounts (the turnover test period);
  • information that evidences the tenant is entitled to a JobKeeper payment, including:
    • a receipt issued by the Commissioner of Taxation when the tenant elected to participate in the JobKeeper Scheme; and
    • the tenant’s most recent notice under the JobKeeper rules to the Commissioner of Taxation;
  • information that evidences the tenant’s decline in turnover, including at least one of:
    • extract from tenant’s account records;
    • tenant’s business activity statement relating to the relevant turnover test period;
    • bank statement of the tenant’s account; or
    • statement from a practicing accountant.

How must a landlord respond to a request (or further request) for rent relief?

The landlord must still respond to the tenant’s request for rent relief within 14 days.

However, any offer of rent relief must relate to up to 100% of the rent payable during the period starting on the date of the tenant’s request and ending on 31 December 2020.

Now, the landlord’s offer must be, at a minimum, proportional to the decline in the tenant’s turnover.

The counterbalance that an offer must also take into account the landlord’s financial ability to offer rent relief is removed.

If a tenant is yet to make any request for rent relief, any further delay by the tenant in requesting rent relief may result in the tenant not being entitled to rent relief from 29 March 2020 as the tenant’s entitlement to rent relief only starts on the date of the tenant’s request that complies with the Amending Regulations.

What changes if the tenant requested relief, and the landlord made an offer but the parties are still negotiating in good faith?

If a landlord’s offer is not accepted, the parties are to negotiate in good faith regarding rent relief for the period starting on the date of the tenant’s request and ending on 31 December 2020.

If a tenant was previously entitled to rent relief under the regulations in effect before amendment and has now ceased to be entitled to JobKeeper, the tenant still remain eligible for rent relief under the Amending Regulations.

Given the anomalies created by the Amending Regulations, it would be prudent for a tenant to promptly address this aspect as part of negotiations with the landlord.

Clarifications

The Amending Regulations also clarify:

  • Jobkeeper payments do not form part of turnover calculations;
  • if the lease is a gross rent lease (i.e. the tenant does not pay outgoings in addition to rent), the landlord’s offer of rent relief applies to the gross rent. The landlord cannot deduct outgoings before calculating rent relief; and
  • the tenant’s decline in turnover is that associated with the premises and no other premises.

Mediation

The Amending Regulations now establishes procedures for disputes on rent relief by a mediator appointed by the Small Business Commissioner (SBC).

The Amending Regulations set out what information and materials are to be provided to the SBC with an application for the appointment of a mediator for a rent relief dispute.

When the SBC receives an application for mediation that complies with the Regulations a notice is to be given by the SBC to the landlord.

The landlord must respond within 10 business days to the SBC’s request for prescribed information.

The SBC may issue a Regulation 20A Certificate if a landlord fails to respond as required or if the mediation does not resolve the dispute.

A Regulation 20A Certificate may also contain a statement that in the opinion of the SBC the landlord has not engaged in the mediation process in good faith.

Binding orders

After the SBC has issued a Regulation 20A Certificate, and unless the tenant has commenced proceedings at VCAT, the tenant can apply to the SBC requesting that the SBC make a binding order regarding rent relief.

The Amending Regulations set out detailed procedures concerning written submissions and set time periods within which the parties must comply.

The Amending Regulations prohibit the SBC from holding a hearing regarding the application for a binding order. The SBC must deal with that application ‘on the papers’.

The SBC may then make a binding rent relief order if neither of the landlord nor the tenant has commenced proceedings at VCAT in relation to the relevant rent relief dispute if the SBC considers it fair and reasonable in all the circumstances to do so.

The SBC can also dismiss the application for a binding order.

A binding order for rent relief made by the SBC must include the reasons why the order was made, and may state that either the landlord has failed to respond to a request made by the tenant for mediation or has not engaged in mediation in good faith.

The Amending Regulations also make provision for amendment or revocation by the SBC of a binding
order previously made.

VCAT review

A landlord or tenant can apply to VCAT to review any decision made by the SBC to make, amend or revoke a binding order or to dismiss any application made for amendment or revocation of a binding order or the dismissal of the application.

An application to VCAT for review must be made within 14 days of the date the SBC makes the relevant decision.

An application to VCAT for review of a binding rent relief order stays (suspends) the operation of the binding order made by the SBC unless the VCAT orders otherwise.

A tenant may apply to VCAT for appropriate orders if a landlord fails to comply with a binding order for rent relief made by the SBC.

In summary

The Amending Regulations potentially create further uncertainties for both landlord and tenants, regardless of whether a previous agreement for rent relief was reached or not.

The more prescriptive approach — from the tenant’s request, to the landlord’s offer and into mediation — may potentially result in harsh outcomes if parties are not well advised before entering into the process.

More information

If you require advice or assistance on how the Amending Regulations may impact you, please contact Morgan Scholz, Head of Property, on (03) 8600 8890 or mscholz@kcllaw.com.au, Mark Yaskewych, Principal Lawyer, on (03) 8600 8830 or myaskewych@kcllaw.com.au, or Geoff Kliger, Senior Special Counsel, on (03) 8600 8878 or gkliger@kcllaw.com.au.

Author

This Property update was authored by Morgan Scholz, Head of Property. 

Note: This update is a guide only and is not intended to constitute legal advice.

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