COVID-19 and Leasing: Commercial Tenancy Relief Scheme Regulations 2021

Commercial Tenancy Relief Scheme Regulations 2021

The Commercial Tenancy Relief Scheme Regulations 2021 (‘the Regulations’) for the Scheme have been released on 24 August 2021 noting retrospective operation from 28 July 2021. The intent, as in the previous scheme, is to facilitate Landlords and Tenants to negotiate mutually acceptable arrangements that work through their particular circumstances. The negotiations are intended to be co-operative, in good faith and honest with a view to reaching a temporary change to the leasing arrangements that takes into account the impact of COVID-19 on the Tenant proportionately and the circumstances of the Lease.

Protection Period

The Regulations are operative from 28 July 2021 to 15 January 2022. An eligible Tenant is entitled to relief from 28 July 2021 to 15 January 2022, if a compliant application for relief is made before 30 September 2021. If the Tenant makes an application after 30 September 2021, then the Tenant is only entitled to relief from the date the Tenant makes a compliant request for relief to 15 January 2022.

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Eligibility for Rent Relief

Eligible Lease

In order to be an eligible Lease, the Lease needs to be:

a) in effect on 28 July 2021;

b) the Tenant must be an eligible Tenant; and

c) the Lease is not otherwise excluded.

The protections will apply to either retail or non-retail Leases or a license. Any continuation of a Lease subsisting on 28 July 2021, whether by an option, variation or otherwise, may likewise be an eligible Lease irrespective of the new term. The Regulations exclude certain agricultural leases and leases to listed companies (or their subsidiaries) from being eligible.

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Eligible Tenant

In order to be eligble for relief, the Tenant must:

a) Be an entity that was operating on 28 July 2021;

b) Be an SME entity (being an entity with a turnover of less than $50 million during the 2021 financial year or, if not traded for the full duration of that financial year, its turnover for the 2022 financial year is likely to be less than $50 million);

c) Have suffered a loss of turnover (as calculated in the GST legislation and noting different calculations for not for profit entities) of 30% (15% for not for profit entities) comparing primarily* the following:

        i.  A continuous 3 month period between 1 April 2021 to 30 September 2021 (or otherwise a 3 month period after 1 April 2021 agreed between the parties); and

        ii. The corresponding 3 month period in 2019 (assuming the Tenant was in operation before 1 April 2019 whether on the Premises or not), (eg.the comparison would be the turnover loss between June quarter 2021 and June quarter 2019).

d) Not be a listed entity or the subsidiary of a listed entity;

e) Not an excluded entity, such as banks, government entities, a company in liquidation, individual in bankruptcy, an entity connected/affiliated with another entity or group with turnover totalling more than $50 million.

*Note: The Regulations address alternative methods for comparable turnover in particular circumstances, such as acquisitions, disposals, restructures, high profit increases, etc., that have taken place. These are detailed in the Annexure at the end of this article.

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The Process of Rent Relief

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Tenant Applying for Rent Relief

An Eligible Tenant of an Eligible Lease must make a written request for rent relief from the Landlord accompanied by a statement from the Tenant:

1. That the Tenant is an eligible tenant; and
2. That the Tenant satisfies the decline in turnover test including setting out -

a) That the Tenant is an eligible tenant; and

b) That the Tenant satisfies the decline in turnover test including setting out -

         i.  the tenant's turnover for the turnover test period;

         ii. the turnover test period used;

         iii. the tenant comparison turnover including whether the relevant comparison period or a specific alternative turnover method was used (and provide details of how this was calculated);

         iv. the tenant's decline in turnover;

         v.  the reduction in rent that would satisfy the Landlord's minimum offer obligations under Regulations (see below); and

         vi. any other circumstances the Tenant would like the Landlord to consider when making an offer.

Further, within 14 days of the Tenant making the written request, the Tenant must provide information to the Landlord that evidences the turnover figures contained in their statement including at least one of the following:

a) Extracts from the tenant’s accounting records; or

b) the tenant’s business activity statement(s) that relate to the relevant turnover test period; or

c) statements issued by an authorised deposit-taking institution that relate to the tenant’s account;  or

d) a statement prepared by a practising accountant;

And the Tenant must also provide a statutory declaration stating that the Tenant is an eligible tenant and the information provided is true to the best of the tenant's knowledge and belief.

If a Tenant fails to provide the evidence required within 14 days of their request, then the request will lapse. If the request lapses, the tenant will be entitled to make two further requests, however, if the Tenant allows the third request to lapse then it will not be entitled to make any further requests for rent relief.

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Landlord's Offer of Rent Relief

The Landlord must provide a written offer of rent relief to the Tenant within 14 days after receiving the evidence required to be provided by the Tenant above (or another timeframe agreed by the parties in writing). The Landlord’s offer of the rent relief must:

a) relate up to 100% of the rent payable by the Tenant under the eligible lease during the rent relief period;

b) at a minimum be proportional to the decline in the Tenant's turnover;

c) provide that no less than 50% of the rent relief offered be in the form of a waiver of rent (unless the parties otherwise agree in writing);

d) take into account part payments of rent made by the Tenant in proportion with the loss of turnover; and

e) take into account any other circumstances that the Tenant would like the Landlord to consider in the Tenant’s request.

Importantly, 15 days after the Landlord’s offer was received by the Tenant, the Tenant will be deemed to have accepted the Landlord’s offer if, agreement is not reached, but the Landlord’s offer met the minimum requirements in the Regulations and the Tenant fails to apply to the Victorian Small Business Commissioner for a mediation.

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Mandatory Reassessment

The Regulations make it mandatory for tenants to apply for a rent relief reassessment by 31 October 2021 if a rent relief agreement has been made and the tenant’s request for relief was prior to 30 September 2021 (assuming the tenant commenced trading prior to 1 April 2021). Tenants will need to provide the required turnover information for September Quarter 2021 (with respective comparison on the same basis as its initial rent relief request). The rent relief could increase or decrease depending on the outcome of the re-assessment based on September Quarter 2021 performance.

Importantly, if Tenants do not provide the required reassessment information by 31 October2021, there are significant consequences with the Rent Relief Agreements ceasing to apply with respect to any waiver of rent that would otherwise have applied from 31 October 2021 forward (unless otherwise agreed or exemption applies under the Regulations).

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Subsequent Rent Relief

Any material change in the Tenant’s financial circumstances will entitle the Tenant to make a further request for relief using the same process as above. Any subsequent agreement will override prior agreements.

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Deferral of Rent

In the event of any rent being agreed to be deferred, then:

a) any repayment cannot commence until 15 January 2022;

b) the deferred rent must be repaid over the greater of the balance of the term of the Lease or 2 years;

c) repayments must be made in equal amounts unless the parties have agreed otherwise.

If there has been a prior deferral of rent due to previous relief granted by a Landlord, then the Tenant may choose to suspend payment until after 15 January 2022 and payments will then recommence on the same basis as previously agreed between the parties.

No interest or other fee is chargeable on any deferral arrangement.

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Extension of the Term

Where any rent is deferred, the Landlord must offer the Tenant an extension to the term of the Lease equal to “the period for which rent is deferred” (as distinguished from the period of time that deferred rent has to be repaid). Meaning, that if the Landlord agrees to defer rent equal to 3 months’ worth of rent, then the Landlord must offer to extend the Lease by 3 months. However, the Landlord and Tenant can agree in writing not to have the extension equal to the period, ie. they can choose not to extend the Lease or to extend the Lease for a longer or shorter time.

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Prohibition on Rent Increases

Unless the parties agree otherwise, the Landlord is not entitled to increase rent or complete any rent review that would increase rent during the protection period. The right to complete the review is void and lost by the Landlord.

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Outgoings

A Landlord under an eligible lease must consider a waiver of outgoings or any other expense payable by a Tenant for any part of the protection period that the Tenant was not able to operate at the Premises. Note that there is no mandatory obligation to waive such outgoings. However, a Landlord must pass on the benefit of any reduction in outgoings the Landlord receives.

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Protection on Closure or Change in Hours

A Tenant of an eligible Lease will not be in breach of the Lease if they close the Premises or reduce the operating hours.

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Eviction and Other Protections

A Landlord will not be able to evict a Tenant, recover possession of a Premises or draw from the security deposit, if a Tenant has:

a) Before a rent relief agreement is made, the Tenant has submitted a compliant request for relief (which has not lapsed) and has been paying a portion of rent in line with the loss ofturnover; or

b) Once a rent relief agreement is made, the Tenant is making payments in line with it; or

c) The Tenant is unable to trade due to sickness or injury affecting its officers or employees or it being unable to trade as a result of natural disaster affecting the Tenant or the Premises.

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Offence to Mislead

We note that it is an offence to give information, make a statement or produce a document which a Landlord or Tenant knows or has reason to believe is false or misleading.

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What if Agreement cannot be reached?

If the Landlord and Tenant cannot directly reach agreement on rent relief, then either party is entitled to refer the dispute to mediation at the Victorian Small Business Commissioner (‘VSBC’). The mediation will be conducted free of mediator’s costs and each party may have legal representation.

 A Tenant may apply to the VSBC for a binding order for relief if: a) they have made a compliant request for relief; b) the VSBC has issued a certificate indicating the Landlord has not engaged in the process in good faith or has failed to respond; or c) the Tenant has not commenced proceedings. Any binding order may be reviewed by VCAT.

If matters are not resolved at the VSBC, then the dispute can be put for determination at VCAT or in a Court. Pragmatically, note that disputes with respect to retail leases are solely directed to be resolved at VCAT pursuant tothe Retail Leases Act 2003.

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Where can you find further details?

The Full Regulations can be found here.

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If you need more assistance

As Accredited Property Law Specialists, we are well equipped to advise you of your rights and obligations. Should you have any questions on how the Commercial Tenancy Relief Scheme may impact you, or if you need assistance in negotiating your position in a lease, please contact us on 1300 205 506.

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Annexure

Alternative Comparison of Turnover Methods

The Regulations provide for alternative methods for a Tenant to establish a loss of turnover in particular circumstances summarised as follows:

a) Tenant commenced operating after 1 April 2019 (whether or not on the Premises) – The method is to average the earlier turnover to create a theoretical comparable 3 month period for comparison to the 3 month period in 2021;

b) Business acquisition or disposal that changed turnover – The method is to use the month’s turnover in the month after the acquisition/disposal, assuming the full month is before the comparison 3 month period in 2021 (if there is no full month’s trade to use then use the month before the comparison 3 month period in 2021) and multiply by 3 to create a theoretical comparable 3 month period for comparison to the 3 month period in 2021;

c) Business restructure that changed comparison turnover – The method is to use the month’s turnover in the month after the restructure, assuming the full month is before the comparison 3 month period in 2021 (if there is no full month’s trade to use then use the month before the comparison 3 month period in 2021) and multiply by 3 to create a theoretical comparable 3 month period for comparison to the 3 month period in2021;

d) Tenant has had substantial increase in turnover in the year before the comparison 3 month period in 2021 – A substantial increase in turnover is: 50% or more in the 12 months before the comparison 3 month period in 2021; 25% or more in the 6 months before the comparison 3 month period in 2021; or 12.5% more in the 3 months before the comparison 3 month period in 2021 – In these cases, the comparison turnover is the 3 months immediately before the comparison 3 month period in 2021;

e) Tenant in drought, bushfire or natural disaster area – The comparison to the 3 month period in 2021 is the same 3 month period in the year immediately before the disaster declaration for the area.

f) Tenant has irregular turnover– Where the Tenant’s turnover is not cyclical and over the past 12 months the lowest turnover in a consecutive 3 month period is 50% of the highest turnover in a consecutive 3 month period, then an average of the last 12 months monthly turnover is multiplied by 3 to create a theoretical comparable 3 month period for comparison to the 3 month period in 2021;

g) Tenant is a sole trader orpartnership (with no employees) with sickness, injury or leave – The turnover in the month before the sickness, injury or leave occurred is used and multiplied by 3 to create a theoretical comparable 3 month period for comparison to the 3 month period in 2021;

h) Tenant temporarily ceased to trade during comparison period – Where the Tenant had temporarily ceased to trade for one week or more due to events beyond their control during some or all of the comparison period but then restarted trade before 28 July 2021 (eg.temporary closure during a lockdown or due to quarantine directive), then the Tenant can use (at their election) either the 3 months turnover before the temporary cessation of trade or the 3 months turnover in the prior year as the comparable 3 month period for comparison to the 3 month period in 2021.

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The information contained in this article is intended to be of a general nature only and should not be relied upon as legal advice. Any legal matters should be discussed specifically with one of our lawyers.

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