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Updates to the Victorian Commercial Tenancy Relief Scheme Regulations

On 24 August 2021, the Commercial Tenancy Relief Scheme Regulations were enacted across Victoria in response to the ongoing economic impacts COVID-19 has on our landlords and tenants.
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The Commercial Tenancy Relief Scheme Regulations 2021 (“New Regulations”) were enacted in Victoria on 24 August 2021. Similar procedures and evidentiary requirements have been adopted from the COVID-19 Omnibus (Emergency Measures) (Commercial Lease and Licences) Regulations 2020 (“2020 Regulations”) but there are significant differences which both tenants and landlords need to be aware of.

The New Regulations are complex and include a few traps. In this article, our leasing experts have prepared a high-level summary of the most important things for tenants and landlords to note within the new regulations. 

How Are Tenants Protected?

A protection period, commencing on 28 July 2021 and ending on 15 January 2022, may apply to a tenant under an eligible lease. If a tenant does not pay rent or outgoings, it will only be protected if:

               (i)     the tenant makes a compliant request to the landlord for rent relief and that request has not lapsed; and

               (ii)     the tenant continues to pay part of the rent which is reduced proportionately based on the tenant’s decline in turnover as set out in the statement accompanying the tenant’s rent relief request.

If a rent relief agreement has already been made, the tenant must make a genuine effort to pay the amount of rent and outgoings in accordance with that agreement. This does not apply to deferred rent repayments under agreements that were negotiated under the previous Scheme. Where a compliant request for rent relief has been made under the New Regulations, any existing deferred rent repayments are frozen until 15 January 2022, at which time tenants must resume repaying deferred rent in accordance with the previous agreement.

If a tenant is unable to trade due to sickness or injury affecting it or its employees, or because of a natural disaster affecting the tenant or the premises, the tenant will also receive protection. More broadly, if a tenant decides to reduce opening hours or close the premises and cease to operate the business during the protection period (for any reason), they will not be in breach of their lease.  

Provided that the tenant has complied with the requirements, a landlord is prohibited from evicting a tenant or re-entering the premises because of non-payment of rent or outgoings during the protection period. It is also prohibited from using any security (cash deposits, bank and personal guarantees) for unpaid rent or outgoings.

Landlords under eligible leases are also prohibited from increasing rent during the protection period, unless the parties have agreed (in writing) that it can be increased, or if rent is determined based on turnover. This mirrors the 2020 Regulations but critically, the New Regulations also void rent increases with the effect that the increase is ‘lost’ and may never be claimed by the landlord. It does not operate the other way, such that, if a market review provides for a decrease to the rent, the rent may decrease.

During the protection period, landlords under eligible leases must also consider waiving outgoings or other expenses if the tenant is not able to operate their business at any time during that period.

What is an Eligible Lease?

An eligible lease is a retail or commercial lease or licence:

               (i)     that is in effect on 28 July 2021; and

               (ii)     under which the tenant is an eligible tenant; and

               (iii)     does not fall under an excluded class of lease (an agricultural lease or lease to a corporation (or its subsidiary) which is listed).

What is an Eligible Tenant?

A tenant is an eligible tenant if the tenant (as at 28 July 2021):

               (i)     carried on a business in Australia; and

               (ii)     is an SME entity (with an annual turnover of less than $50million in the 20/21 financial year); and

               (iii)    satisfies the decline in turnover test; and

               (iv)     is not excluded under the New Regulations (note: there are a number of ineligible tenant categories such as government agencies, tenants in liquidation or bankruptcy, grouped entities with turnover exceeding the threshold, etc.)

How Does the ‘Decline in Turnover Test’ Work?

A tenant will satisfy the decline in turnover test if the tenant’s turnover in the turnover test period is at least 30% lower than the tenant’s comparison turnover.

Turnover includes turnover as defined in the GST Act. In contrast to the 2020 Regulations which did not deal with government grants, the New Regulations exclude Commonwealth government grants and financial assistance payments. However, State Government grants are not mentioned, so these are taken to be included in the calculation of turnover. Internet sales and sales made from other premises are also included in the tenant’s turnover.

The turnover comparison tests are different from last year and now depend on when the tenant commenced trading (whether or not at the premises. For this purpose, the New Regulations cover four different periods – prior to 1 April 2019, 1 April 2019 to 31 March 2020, 1 April 2020 – 31 March 2021 and from 1 April 2021.

As an example, if the tenant was trading during the period 1 April 2020 to 31 March 2021, it can choose any consecutive 3-month period during that same period and the relevant comparison period must be the corresponding 3-month period in 2019. In other words, if the tenant’s turnover for 1 July 2021 to 30 September 2021 (the chosen turnover period) was $60,000.00 and in the comparison period (1 July 2019 to 30 September 2019) its turnover was $100,000.00, the tenant will satisfy the decline in turnover test because its decline in turnover for the turnover test period is 40%.

There are also alternative comparison turnover tests for a number of different situations, including if there was a business acquisition, sale or restructure that changed the tenant’s comparison turnover. If any of these apply to your business, let us know and we can give you more information in relation to the appropriate test to be applied. 

How Does a Tenant Get Rent Relief?

To request rent relief, a tenant under an eligible lease must make a request to the landlord in writing prior to 30 September 2021 (even if negotiations have commenced) confirming:

  1. that the tenant is an eligible tenant; and
  2. that the tenant satisfies the decline in turnover test (this requires setting out details of the tenant’s turnover, comparison turnover and the relevant periods used); and
  3. the reduction in rent to satisfy the minimum requirements; and
  4. any other circumstances the tenant wants the landlord to consider (whether pandemic-related, or not).

Within 14 days after making a rent relief request, the tenant must give the landlord evidence of the turnover figures by providing extracts from the tenant’s accounting records, the tenant’s BAS, bank statements or a letter from the tenant’s accountant. Providing just one of these documents is sufficient, however it must be provided with a statutory declaration made by the tenant confirming that the information is true.

Critically, if a tenant does not provide the documentary evidence and statutory declaration prior to 30 September 2021, its request for rent relief lapses. If that happens, a tenant can make a new request for rent relief and is allowed to make up to 3 requests. However, if it allows the third request to lapse, the tenant is prohibited from making a further request and in effect, misses the opportunity for rent relief.

How Does a Landlord Offer Rent Relief?

Within 14 days of receiving a tenant’s documentary evidence and statutory declaration, the landlord must offer rent relief. The offer must be in writing and:

               (i)     at a minimum, be proportional to the tenant’s decline in turnover; and

               (ii)     at least 50% of the rent relief must in the form of a waiver (and the balance deferred); and

               (iii)     taking into account any other circumstances the tenant has asked the landlord to consider in its rent relief request statement.

After the landlord’s offer is made, the parties must negotiate in good faith with a view to agreeing on rent relief during the rent relief period.

Critically, if the landlord’s offer of rent relief complies with the minimum requirements but the parties have not agreed on rent relief and the tenant has not referred the matter to the Victorian Small Business Commission, the tenant is deemed to have accepted the landlord’s offer and a rent relief agreement, on the terms of the landlord’s offer, is deemed to have been made for the rent relief period.

Unless the parties agree otherwise, the rent relief period ends on 15 January 2022, but it will have a different start date depending on when a tenant’s request is made. If a tenant makes a compliant request for rent relief and provides the required evidence before 30 September 2021, the rent relief period starts on 28 July 2021. If the request is made after 30 September 2021, the rent relief period starts on the date of the tenant’s request (similar to the 2020 Regulations).

If part of the rent relief includes deferred rent, the tenant is not required to start paying the deferred rent until after the rent relief period ends. Similar to the 2020 Regulations, the deferred rent is payable in equal instalments over a two-year period or the balance of the lease term (whichever is longer), and landlords must offer an extension of the term equivalent to the period for which the rent is deferred.

Other Key Points to Note Regarding the Commercial Tenancy Relief Scheme Regulations

Turnover Reassessment

The New Regulations provide for a mandatory reassessment of rent relief and tenants must provide information to landlords by the reassessment date (31 October 2021), including details of the change in turnover (if any). If there is a change in turnover, a rent relief agreement will be deemed to be adjusted in line with the new change in turnover. 

Critically, if a tenant does not provide the reassessment information in time, any waiver component in a tenant’s rent relief agreement is deemed to no longer apply from 31 October 2021, but deferred rent remains unchanged.

Mediation

For dispute resolution procedures, the New Regulations are substantially the same as the 2020 Regulations. The Small Business Commissioner will conduct mediations and it also has the power to make binding orders against landlords.

 

It is important to note that applications to each eligible lease is dependent upon the circumstances and dealings between landlords and tenants. For further clarity on the New Regulations, or to confirm eligibility, please reach out to our lawyers and leasing experts


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