Commercial Rent Relief During COVID-19
The COVID-19 pandemic has affected both landlords and tenants. While you are probably aware of the national rent relief guidelines, you may not be aware that the Victorian legislation gives more rights to landlords than the national scheme. This article explains what is required of landlords under the new legislation and how to best preserve the relationship with their tenant.
Both the National Government and the Victorian State Government have now introduced guidelines for how tenants and landlords should navigate the tenant’s loss of revenue which affects their ability to pay rent as a result of the COVID-19 pandemic.
The National Cabinet Mandatory Code of Conduct (NCMCC) is a set of guidelines introduced in April 2020 by the National Government. As it was introduced by the National Government, State Governments must implement their own regulations in order to give effect to the NCMCC. In other words, the NCMCC itself is not binding in Victoria. Rather, it is a guide which tenants and landlords are encouraged to follow.
In response to the NCMCC, the Victorian State Government has now enacted the COVID-19 Omnibus (Emergency Measures) (Commercial Leases and Licences) Regulations 2020 (COVID-19 Regulations) which specifically relate to commercial leases and licences in Victoria. Under the COVID-19 Regulations, landlords and tenants must work cooperatively and engage in good faith negotiations to offer rent relief to the tenant.
The requirements to negotiate and offer rent relief only applies to an ‘eligible lease’. An eligible lease includes one in which the tenant is an entity that made less than $50 million in annual turnover for the 2019/2020 financial year and qualifies for and participates in the JobKeeper scheme.
Relevant Timing of Rent Relief
Under the COVID-19 Regulations, any rent relief negotiations or requests apply only to the ‘relevant period’. Section 4 of the COVID-19 Regulations defines the ‘relevant period’ as commencing on 29 March 2020 and ending on 29 September 2020. However, we recommend landlords continue to monitor any changes to the legislation as the Victorian State Government is discussing whether to extend the ‘relevant’ period beyond September 2020.
Reduction in Turnover
The COVID-19 Regulations require any offer of rent relief to take into account the reduction in the tenant’s turnover. For the purpose of the COVID-19 Regulations, ‘turnover’ means annual turnover of an entity for a financial year, being the total of:
- the proceeds of sales of goods and/or services;
- commission income;
- repair and service income;
- rent, leasing and hiring income;
- government bounties and subsidies;
- interest, royalties and dividends;
- other operating income.
Requirement to Negotiate
Regulation 10 of the COVID-19 Regulations sets out the extent to which landlords and tenants are required to negotiate the terms of the existing lease.
The first step is for the tenant to request in writing that rent relief be granted, along with a statement that the lease is an eligible lease under the COVIID-19 Regulations, that the tenant is a small to medium sized entity and is participating in the JobKeeper scheme.
After the tenant has provided written notice, the landlord is then required to respond to the tenant within 14 days.
What must be Offered?
The State Government’s enactment of the COVID-19 Regulations are applicable to commercial leases in Victoria, above the NCMCC. Whilst the COVID-19 Regulations incorporate most of the leasing principles contained in the NCMCC, it is important to note that they do not incorporate mandated rent relief.
Under the NCMCC, landlords must offer rent relief which is proportionate to the reduction in turnover experienced by the tenant. Importantly, this is not mandatory under the COVID-19 Regulations. Rather, the COVID-19 Regulations require the landlord to offer rent relief when taking into account the reduction in the tenant’s turnover along with other factors listed below.
Accordingly, there is no obligation on a landlord to offer rent relief which is 100% proportionate to the reduction in the tenant’s turnover. However, where rent relief is offered or agreed to, no less than 50% of the rent relief must be in the form of a waiver of rent (unless otherwise agreed in writing). Up to the remaining 50% of the rent relief offer may then be deferred.
A landlord and tenant must also vary the eligible lease, or otherwise agree, so that any deferred rent is gradually repaid over 24 months or the remainder of the term (whichever is greater).
Factors to be Considered in Negotiation
The COVID-19 Regulations set out factors that a landlord must take into account when considering any offer of rent relief. The factors include:
- the reduction in a tenant’s turnover during the relevant period;
- whether a failure to offer sufficient rent relief would compromise the tenant’s capacity to fulfil the tenant’s ongoing obligations under the eligible lease;
- the landlord’s financial ability to offer rent relief; and
- any reduction to any outgoings charged, imposed or levied in relation to the premises.
Formalising the Rent Relief
If rent relief is agreed between the landlord and tenant, the COVID-19 Regulations allow for various manners in which the agreement may be formalised. These include:
- a variation to the eligible lease; or
- any other agreement between them that gives effect to the rent relief, either directly or indirectly.
The way in which the agreement is formalised deserves careful consideration as it could have far-reaching effect. Accordingly, we would recommend that you seek advice from a lawyer as to how any rent relief should be documented.
Failure to Reach Agreement
A landlord or tenant may refer the matter to the Small Business Commissioner for mediation if an agreement for rent relief cannot be achieved. The mediation will assist the landlord and tenant to negotiate further and hopefully reach an agreement regarding rent relief. However, if an agreement is still not reached, there are limited options for the tenant to pursue further (unless there has been a breach of the COVID-19 Regulations).
Restriction on Eviction
As well as considering rent relief, a landlord may need to consider its options if the tenant is not paying rent in breach of the lease.
The COVID-19 Regulations prohibit a landlord from evicting a tenant for a failure to pay rent between 29 March 2020 and 29 September 2020. Despite this, if a landlord issues a notice to vacate during that period, the COVID-19 Regulations provide that the notice will have no legal effect.
It is also worth noting that the tenant is not in breach of the terms of the lease if they pay any reduced rent which the landlord has agreed to. This means that a landlord cannot evict the tenant, re-enter or otherwise recover the premises.
In addition, the COVID-19 Regulations prohibit a landlord from charging any interest or fee in relation to any rent deferral and prohibit the landlord from increasing the rent until after 29 September 2020.
Recommendations for negotiation
It is recommended that landlords continue to negotiate as positively and productively as possible with their tenants towards a reasonable resolution. The legislation does not definitively specify quantitative requirements for reductions and proposes instead the need for case-by-case analysis and decision-making with consideration of all of the relevant factors.
If you need assistance with negotiating rent relief or understanding your obligations under the COVID-19 Regulations, please contact a member of Taurus Legal Management on (03) 9481 2000 or at email@example.com.