Updated: Sep 29, 2020
Current to 11am 4 May 2020
This is update 5 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. On 1 May 2020 the COVID-19 Omnibus (Emergency Measures) (Commercial Leases and Licences) Regulations 2020 (“the Regulations”) were brought into effect in Victoria by Government Gazette S216. A copy of the Regulations is here: https://content.legislation.vic.gov.au/sites/default/files/2020-05/20-031sra authorised.pdf (if clicking this link does not work try copying and pasting in your browser).
Contrary to expectations the Regulations do not bring into effect the “Mandatory” Code of Conduct published 7 April and upon which all leasing negotiations have taken place since. Instead the Regulations create their own set of rules in relation to the landlord and tenant relationship during the period 29 March 2020 – 29 September 2020 (“the relevant period”).
We will publish a separate article being an ‘editorial’ of sorts – for now this article aims to convey just the effect of the Regulations. The very brief summary is that the Regulations remove the stringent requirements on landlords in relation to rental reductions proportional to turnover reductions. In this regard our view is that the regulations place significantly more power in the hands of landlords.
Who will the Regulations apply to
Read together with the enabling Act (see our Update 4 here in that regard: https://www.easternbridge.com.au/post/update-4-covid-and-commercial-tenancies) the Regulations apply to “eligible leases” being, subject to exceptions below, any lease or “commercial licence” in effect on 29 March 2020 where the tenant is an SME with a turnover of less than $50,000,000 that qualifies for and is a participant in the federal government’s JobKeeper program.
The Regulations clarify how grouped entities will be treated and specifically exclude from the ambit of the Regulations leases where the tenant is controlled by an entity with an aggregated turnover of more than $50 million (generally, the threshold for control under the relevant legislation is at least 40% ownership of the shares of the company, or otherwise receipt of at least 40% of income or capital distribution). Moreover, leases where the tenant could reasonably be expected to act at the direction of an entity with a turnover of $50 million will also be excluded (although this does not generally extend to franchise situations merely as a consequence of the franchise agreement). Please contact our office if you think this exclusion may apply and need more detail.
A number of leases for specific uses are excluded, principally leases for agricultural purposes.
The Act defines “commercial licence” unusually (referring to licenses of a “part” only of a broader premises). That warrants further consideration but this article is not the place for that.
The Regulations insert into every eligible lease an obligation on landlord and tenant to “cooperate and act reasonably and in good faith” in relation to matters to which the Regulations apply. A failure to comply with that obligation would constitute a breach of the lease but no other specific penalty or remedy is imposed.
Protection in respect of defaults
Non-payment of rent
A tenant under an eligible lease will not be in breach of its lease if it does not, during the relevant period, pay the rent otherwise required by the lease provided it has:
requested rent relief in writing;
provided the landlord with a statement that the lease is an eligible lease;
provided information evidencing that the tenant is an SME entity and participant in the JobKeeper scheme; and
negotiated in good faith with the landlord.
If a tenant has negotiated with its landlord and reached agreement (by way of variation of lease or otherwise) then that protection will no longer apply (and the tenant must comply with the terms of lease as varied).
The protection does not extend to outgoings – a tenant is required to pay outgoings in accordance with the terms of lease and is offered no protection in that regard by the Regulations (some more on outgoings below). The protection does not extend to non-payment of rent outside the relevant period.
It is important to note the commencement of the relevant period is 29 March 2020. The Code had stated that it would come into effect “from a date following 3 April 2020”. The difference is important – the Regulations will provide protection to tenants who have failed to pay rent otherwise due from 29 March (including, relevantly, rent due 1 April 2020).
Closing premises or reducing hours
A tenant under an eligible lease will not be in breach of its lease if it reduces opening hours or closes the premises. A landlord will not be entitled to evict or re-enter or purport to do so on the basis of a failure to open the business or a reduction of hours.
The vast majority of leases require tenants to continue to conduct business from the premises. Particularly in shopping centres, tenants are generally required to maintain hours consistent with the centre. The Regulations protect tenants who have been required to or who have chosen to close or reduce hours.
Once a tenant has made a request for rent relief in writing (which must be accompanied by a statement that the lease is an eligible lease and by evidence that the tenant is an SME entity and participant in JobKeeper) a landlord must, within 14 days or such other time as agreed with the tenant, offer rent relief to the tenant.
There is no prescribed formula as to the offer. The offer of rent relief must be “based on all the circumstances” of the lease and must [the following extracted from the legislation with emphasis added in bold and comments added in square brackets]:
(a) relate to up to 100% of the rent payable under the eligible lease during the relevant period; and (b) provide that no less than 50% of the rent relief offered by the landlord must be in the form of a waiver o