Update 4 (COVID-19 Omnibus (Emergency Measures) Bill 2020) - effects on commercial tenancies

This is update 4 of 9 - for our latest article on this topic see here.

In our Update 3 we gave a summary of the Mandatory Code of Conduct for commercial leases. You can read our Update 3 here: https://www.easternbridge.com.au/post/covid19-and-commercial-tenancies.

Our very brief summary of the code is at the end of this article.

On 23 April 2020 the COVID-19 Omnibus (Emergency Measures) Bill 2020 was read in Victorian parliament. The Bill passed both houses without amendment. The Bill received Royal Assent on 24 April 2020 and will come into effect on 25 April 2020. A link to the bill is here:

https://content.legislation.vic.gov.au/sites/default/files/bills/591233bi1.pdf

While the bill is an omnibus bill making various amendments and additions to Victorian law this article will, of course, focus only on the changes the bill makes to the commercial leasing landscape in Victoria. The legislation grants broad powers to the Minister for Small Business to make regulations that the Minister considers to be reasonably necessary in responding to the COVID-19 pandemic.

This legislation applies to eligible leases, defined under Sections 13 and 14 as including retail and non-retail commercial leases or licences:

• in effect on the date the regulations in Section 15 come into operation, and

• under which the tenant is an SME entity (as defined in the Federal JobKeeper legislation) which qualifies for and is a participant in the Jobkeeper scheme.

The requirement that the tenant be a participant in the JobKeeper scheme would seem to allow landlords to strictly require tenants to demonstrate they have been approved for JobKeeper before acting in accordance with the Regulations.

The definition of an “eligible Lease” is such as to exclude:

• new leases struck after the date the regulations come into effect;

• leases of a type prescribed (so the Minister will have the power to exclude specific classes of leases from the balance of the Regulations);

• leases where the tenant is a member of a ‘prescribed group’ of entities with aggregate turnover exceeding a prescribed threshold (which will assumedly be $50,000,000), or where there is a relationship or connection between the tenant and such an entity (how the Minister might prescribe grouping of tenant entities may become critical – the JobKeeper grouping provisions are ambiguous and this would allow the Minister to provide more guidance as to how single entities that form part of broader groups are to be treated, independent of the JobKeeper requirements); and

• leases the tenants of which are subject to control or influence over the ownership, management or affairs of the tenant by a third party – this seems intended to relate to retail corporate groups but, subject to the Regulations could extend to franchise situations.

To be eligible, non-retail leases will need to be for the sole or predominant purpose of carrying on a business at the premises. This would seem to exclude leases predominantly for storage of a tenant’s property, and possibly leases for other premises ancillary to the carrying on of business.

The Minister will have the power, by way of the regulations, to make rules which:

• prohibit lease termination (importantly this would allow the regulations to expand the ‘eviction moratorium’ from the position in the mandatory code);

• do any of the following: o vary any periods in which someone must or may do something required by; o change or limit any right of a landlord under; o modify the operation of; or o exempt a landlord or tenant from having to comply with a lease, a related agreement, or leasing legislation (including for example the Retail Leases Act, Property Law Act and Transfer of Land Act, e.g., s 146 notices of default);

• modify the application of leasing legislation or the common law (the reference to the common law may enable the Minister to expand the doctrine of frustration);

• extend lease terms;

• deem a provision of the regulations as forming part of a lease (this is the methodology adopted by the Retail Leases Act to effectively insert additional provisions into leases);

• impose new obligations on landlords or tenants, including requiring them to negotiate amendments to the lease;

• require dispute resolution by mediation through the VSBC as a prerequisite for commencing proceedings in VCAT or a court unless leave is given (although this is not intended to apply to proceedings already commenced, or to disentitle parties in dispute from commencing proceedings at any time); and

• achieve anything necessary to give effect to the legislation.

Wide discretion is conferred on the Minister in relation to the regulations that can be made. Penalties not exceeding 20 penalty units ($3,304.40) can be imposed for contravention of the regulations.

The Victorian Small Business Commissioner will be empowered under the regulations to facilitate dispute resolution by mediation, monitor compliance with the regulations and commence proceedings for contravention – it remains to be seen how the SBC would cope with a significant increase in disputes and mediations likely to arise as a consequence of the legislation.

We anticipate real problems with achieving resolution of disputes between landlords and tenant in relation to COVID-19 while it still matters (that is before the tenant entity has failed or the pandemic has finished).

The regulations may have retrospective effect to a day not earlier than 29 March 2020, in which case they are taken always to have had effect on and after that day. This raises real questions about actions taken since 29 March 2020. It would seem that a right accrued (and perhaps acted on) prior to passage of the legislation could be ‘undone’ – we query how this would operate in circumstances in which lease has been terminated on the back of a default by the tenant. The implication would be that such a lease might be somehow reinstated – that may give rise to a damages claim against landlords for acting in a manner which was entirely lawful and appropriate at the relevant time.

The leasing part of the legislation will be automatically repealed on the day that is 6 months after its commencement, with the regulations in force immediately before that day impliedly revoked on that day.

We look forward to release of the Regulations (which should come hot on the heels of passage of the legislation) and will provide a further update then. Mandatory code of conduct – our very brief summary It is assumed that the Regulations will require parties to negotiate in accordance with the mandatory code of conduct. A list of key obligations under the Code is as follows: MUST

• Tenants must comply with their lease (as negotiated under the Code), or lose the Code’s protection

• Landlords must not terminate leases for non-payment of rent

• Security deposits, bank guarantees and personal guarantees must not be drawn or called upon

• Tenants must be permitted to reduce opening hours or cease to trade due to the pandemic without penalty

• Rent waivers and deferrals must be offered by landlords based proportionately on the tenant’s reduced turnover during the pandemic period, including the landlord waiving at least 50% of that total reduction (unless the tenant waives this requirement by agreement);

• In negotiating any waivers exceeding 50%, regard must be had to the landlord’s financial ability to provide such additional waivers;

• Rental deferral repayment must be spread over the balance of the lease term, and for no less than 24 months, whichever is greater, unless the parties otherwise agree

• Fees, interest or other charges must not be applied to rent waived or deferred

• Rent increases must be frozen until further notice, despite any agreement to the contrary (except for turnover rent)

• Outgoings reductions received by the landlord must be passed on to the tenant in full (to the extent the tenant is required to pay them)

• Parties must not use the Code’s mediation processes to prolong or frustrate reaching resolution SHOULD

• Outgoings recovery should where appropriate be waived by landlords during the period the tenant is unable to trade

• Landlords should share any benefit of loan deferral provided by its bank with the tenant on a proportionate basis

• Landlords should provide the tenant the opportunity to extend the lease as required to pay deferred rent over the 24-month minimum amortisation requirement

• Repayments by agreement should generally occur over an extended period to avoid undue financial burden on tenants, commencing no earlier than the end of the COVID-19 pandemic plus a reasonable subsequent recovery period

• Where agreement cannot be reached, the matter should be referred to mediation (by either party) Yen Ong Lawyer Paul Nunan Director Accredited Specialist | Commercial Leasing