CTRS 2022 Regulations | Update 20 - effects of Covid-19 on commercial tenancies

On 1 February 2022 the Commercial Tenancy Relief Scheme Regulations 2022 (“the 2022 Regulations”) were brought into effect in Victoria by Government Gazette S47. A copy of the Regulations is here: https://content.legislation.vic.gov.au/sites/default/files/2022-02/22-004sra%20authorised.pdf

The Regulations are substantially consistent with the 2021 Regulations. Our Update 17 went into great detail on the 2021 Regulations and is a good start for understanding the 2022 Regulations: CTRS 2021 Regulations now released | Update 17 - effects of Covid-19 on commercial tenancies (easternbridge.com.au)

Rent relief for eligible tenants will operate in the same way as under the 2021 Regulations (that is with a minimum obligation on a landlord to apply reduction in rent that is proportional to the tenant's decline in turnover with at least half of the reduction waived (the other half deferred)).

The Regulations take effect as from 16 January 2022 (picking up immediately from where the 2021 Regulations left off) and will run through to 15 March 2022.

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Eligibility

The biggest change between the 2021 and 2022 Regulations is in relation to eligibility for relief.

Eligible Lease

The 2022 Regulations apply to an “Eligible Lease”, being a lease in effect on 16 January 2022 under which the tenant is an Eligible Tenant.

Eligible Tenant

To qualify as an Eligible Tenant a tenant must:

• be 'small entity', being an entity with turnover in 2020/21 of less than $10,000,000 (a substantial reduction on the $50,000,000 that applied through 2020 and 2021);

• have, as at 16 January 2022, carried on business (or been a non-profit body or deductible gift recipient); and

• satisfy the Decline in Turnover Test.

Similar exclusions apply as applied under the 2021 Regulations.

Decline in Turnover Test

The Decline in Turnover Test will be satisfied if the tenant’s turnover in the Turnover Test Period was at least 30% lower than its turnover during the Comparison Period.

For the majority of leases:

• the Turnover Test Period is January 2022; and

• the Comparison Period is January 2020.

Some special rules and alternative comparison periods which reflect (but are not identical to) the 2021 Regulations do apply. Most relevantly if the tenant started trading after 1 January 2020 the 'Comparison Period' turnover will effectively be their average monthly turnover from the date they commenced trade to 31 January 2022) .

The application of alternate comparison periods in respect of 2021 Regulations was rare and we expect their application in respect of the 2022 Regulations will be even more rare.

Put simply, if the tenant's turnover in respect of the month of January 2022 is 30% lower than their turnover in January 2020 the tenant will satisfy the decline in turnover test - cue all the questions that arose in respect of the 2021 Regulations about demonstrating turnover in a period that isn't a BAS quarter (see Update 17 for evidentiary requirements that do apply).

Regulation 14(b) shifts the Turnover Test Period to December 2021 if the tenant's business was closed during January 2020 (yes, 2020) for more than a week for reasons beyond the tenant's control (in which case Regulation 21 shifts the Comparison Period to December 2019 - so the comparison becomes December 2021 to December 2019).

[an earlier version of this article had missed the operation of Reg 21 and suggested Regulation 14(b) was a typo. That is sheepishly withdrawn]

Process for obtaining relief

The request process (and the subsequent process for offering relief) mirrors the process under the 2021 Regulations.

A tenant will be entitled to relief for the period 16 January 2022 - 15 March 2022 provided it makes a request and provides relevant evidence while the Regulations are still on foot (that is on or before 15 March 2022).

Protection for tenants

Eligible Tenants will not be in breach if the tenant does not pay rent or outgoings but, as per the 2021 Regulations, tenants will only receive that protection if they have made a valid request and have continued to pay rent, reduced by their stated decline in turnover.

The 'protection period' (the period in respect of which they won't be in default for having not paid rent) will be 16 January 2022 - 15 March 2022.

Prohibition on rental increases

Rent increases otherwise due during the course of the 2022 Regulations will be prohibited. As per the 2021 Regulations, if an eligible lease called for a review of rent during the Protection Period that would see an increase in rent “that review is voided and may never be claimed by the landlord”.

Deferred rents

If rent has been deferred under the 2020 or 2021 Regulations and the tenant remains an eligible tenant who has requested rent relief under the 2022 Regulations then the 2020 and 2021 deferral repayments will be paused until 15 March 2022.

2021 Regulations decision update

On 17 December Senior Member Forde handed down a decision in JConnect Lease Pty Ltd v Vicinity Manager Pty Ltd [2021] VCAT 1527

Nothing particularly noteworthy save that the decision confirmed that 'turnover' for the purposes of the 2021 Regulations (and with corresponding wording, the 2022 Regulations) is GST turnover of the entity, and not just the turnover derived from the relevant premises. A rent relief requesting just providing the latter will be invalid and will not give rise to any right to relief.

Furthermore, where a tenant fails to make a valid rent relief request, Regulation 24 of the 2021 Regulations (in the same terms as Regulation 22 of the 2022 Regulations) will not operate to impose any 'obligation to act reasonably and in good faith' preventing the landlord from rejecting the (invalid) request.

As always, please don't hesitate to contact our office with any queries.

Paul Nunan

Director

Accredited Specialist | Commercial Leasing