Property update: The Revised Commercial Tenancy Relief Scheme Regulations — Practical considerations

Sep 3, 2021

The revised Commercial Tenancy Relief Scheme Regulations 2021 (Vic) (Regulations) introduces temporary measures for retail and commercial landlords and tenants in response to the COVID-19 pandemic.

The Regulations are complex, with critical time limits for both tenants and landlords. The Regulations can also alter existing rent relief agreement.

The Regulations apply from 28 July 2021 until 15 January 2022.

Tenants — are you eligible?

Generally, an eligible tenant must:

  • have carried on a business in Australia as at 28 July 2021;
  • be an SME entity with turnover of less than $50 million; and
  • satisfy the decline in turnover test.

To be eligible, a retail or commercial lease or licence must have been in place at 28 July 2021 to an eligible tenant. Certain leases are excluded, such agricultural leases or leases to a listed corporation.

A lease may still be eligible even if it was extended, renewed or varied on substantially the same terms as the lease in effect on or before 28 July 2021.

Decline in turnover test

'Turnover' now includes turnover derived from internet sales of goods and services.

Generally, the decline in turnover test is satisfied if turnover for turnover test period has declined by at least 30% compared to the tenant’s comparison turnover period.

Determining these 2 periods is based on when the tenant began trading (whether or not at the premises).

Step 1: Determine turnover test period
The tenant began trading Turnover test period
Before 1 April 2021 Any consecutive 3 month period between 1 April 2021 and 30 September 2021.
After 1 April 2021 A turnover test period agreed between the tenant and the landlord negotiated in good faith.
Step 2: Determine the comparison turnover period
The tenant began trading Comparison turnover period
Before 1 April 2019 The 3 month period in 2019 that corresponds with the turnover test period.
1 April 2019 to 31 March 2020 Average 3 monthly turnover
Sum of the tenant’s turnover for each whole month after the tenant started trading and before 31 March 2020 divided by the number of whole months of trade multiplied by three.
1 April 2020 to 31 March 2021 Average 3 monthly turnover
Sum of the tenant’s turnover for each whole month after the tenant started trading and before 31 March 2020 divided by the number of whole months of trade multiplied by three.
1 April 2021 to now 3 months based on average daily turnover
Turnover from the date that the tenant started trading to 31 July, divided by the number of days the tenant was trading and multiplied by 92.

If the decline in turnover is 30% or more, then the tenant satisfies the turnover test.

However, the Regulations also allow for consideration of supervening factors that affect turnover and are unrelated to the coronavirus pandemic, including:

  • sale or acquisition of part of the tenant’s business;
  • a substantial increase in turnover;
  • the tenant is a sole trade;
  • if the has irregular turnover; or
  • temporarily ceases trading.

Tenant’s rent relief request

A tenant’s rent relief request must be in writing and set out:

  • that the tenant is an eligible tenant; and
  • how the tenant satisfies the decline in turnover test.

The tenant can include any other circumstances that the tenant would like the landlord to consider.

Within 14 days of making a request, the tenant must provide information to the landlord that evidences the turnover figures, including at least one of the following:

  • extracts from account record;
  • business activity statements;
  • bank statements; or
  • statement issued by a practicing accountant.

The tenant must also provide a statutory declaration made by the tenant, stating that the tenant is an eligible tenant and that the information provided by the tenant is true, to the best of the tenant’s knowledge and belief.

3 strikes and you’re out

If a non-compliant request is made, the tenant’s request for rent relief lapses.

The tenant can make a new rent relief request, but if the tenant makes a total of 3 non-compliant requests, then the tenant cannot make a further rent relief request.

Rent relief period

If a tenant makes compliant rent relief request on or before 30 September 2021, the rent relief period is back-dated to 28 July 2021.

If the compliant rent relief request with the required evidence is made after 30 September 2021, the rent relief period starts from the date of the compliant rent relief request.

The rent relief period ends on 15 January 2022.

Landlord’s offer

Once a compliant rent relief request is received, the landlord must respond within 14 days with the landlord’s offer.

The landlord’s offer must:

  • relate to up to 100% of the rent payable during the rent relief period;
  • at a minimum, be proportional to the tenant’s decline in turnover;
  • offer that no less than 50% of the rent relief is in the form of a waiver of rent; and
  • consider other circumstances that the tenant would like the landlord to consider.

Deemed acceptance

After the tenant receives the landlord’s offer, unless the parties either:

  • agree on the rent relief; or
  • refer the dispute to the Victorian Small Business Commission (VSBC);

then 14 days after receiving the landlord’s offer, the tenant is deemed to have accepted the landlord offer.

Mandatory reassessment

If the tenant;

  • made a rent relief request on or before 30 September 2021; and
  • was trading before 1 April 2021,

the rent relief agreement will be reassessed by taking the tenant’s action turnover into account. The tenant must provide the actual turnover information before 31 October 2021.

Deferred rent

If payment of rent is deferred under a rent relief agreement, the landlord must offer an extension to the term by an equivalent period, unless the parties otherwise agree.

Unless the parties otherwise agree, deferred rent must not be paid back until after 15 January 2022.

Repayments are amortised over the greater of:

  • the balance of the lease term; and
  • a period of no less than 24 months.

What about existing deferred rent agreements?

If the landlord and tenant had previously agreed to defer rent under previous rent relief regulations (2020 Deferred Rent), then if the tenant makes a compliant rent relief request, the 2020 Deferred Rent is further deferred until after 15 January 2022.

Once payments resume, the payments must be in the same instalments and frequency as agreed on in 2020.

Restriction on rent increases

A landlord cannot apply rent increase under an eligible lease during the the period from 28 July 2021 to 15 January 2022 (Protection Period).

The Regulations provide that rent increases are voided during the Protection Period and will not apply at the end of the Protection Period. This includes fixed increases and CPI increase. Problematically, it is currently unclear whether this also applies to market rent reviews which result in a rent increase.

No enforcement action

For the Protection Period, a Landlord cannot take enforcement action (or draw on lease security) for non-payment of rent or outgoings against a tenant who make an eligible rent relief request and continues to pay a proportion the rent (in line with the tenant’s decline in turnover).

Dispute resolution

The landlord or tenant can continue to refer any dispute arising under the Regulations to the VSBC. Given the new deemed acceptance regulation, we expect this will lead to an increase in disputes referred to the VSBC.

Summary

With more complicated requirements and critical deadlines, it is essential both tenants and landlords receive practical, timely and informed advice on the Regulations and the impact.

More information

For more information or advice, 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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