Retail and Commercial Leases
We’ve put together a couple of tips to help you to identify issues and opportunities around your lease. Unfortunately there are also no definitive answers and how these issues are best dealt with will come down to individual circumstances, the terms of the lease and the legal position.
If you have any concerns about your exposure please do not hesitate to contact BlueRock’s Retail and Commercial lease expert, Lauren Smyth.
Summary of the Victorian Commercial Leasing Regulations (Updated 08/05/20)
On 1 May 2020, the COVID-19 Omnibus (Emergency Measures) (Commercial Leases and Licences) Regulations 2020 (Vic) were published. These Regulations give effect to the National Cabinet Mandatory Code of Conduct, which was announced on 7 April 2020. You can read a summary of the Code below.
Here, we have provided a brief summary of the Regulations and the important points for landlords and tenants. For the most part, the Regulations (which apply from 29 March to 29 September 2020) are consistent with the principles in the Code but there are a few curveballs – these are also highlighted below.
The Regulations provide that the extent of rent relief provided by landlords need not be precisely based on the extent to which the tenant’s revenue has reduced (though it is to be taken into account by a landlord in making an offer to the tenant). This is in contrast to some of the other states and the flavour of the Code.
In order to access rent relief, tenants will need to write to their landlords requesting it and confirm that the lease is an eligible lease and that the tenant qualifies for the JobKeeper scheme. It is important that tenants get the wording right in their letters to landlords if they want the protection of the Regulations. We have prepared a Regulation-compliant template letter to assist tenants.
After receiving the tenant’s letter, the landlord is then required to make an offer to the tenant within 14 days.
The Regulations provide the following parameters around the offer made by the landlord to the tenant:
- The offer must be for up to 100% of the rent payable under the lease during the operative period (29 March 2020 – 29 September 2020);
- No less than 50% of the rent relief offered by the landlord must be waived (unless the landlord and tenant agree otherwise);
- The offer must take into account the reduction in the tenant’s turnover during the relevant period, any waiver given, the viability of the tenant’s business going forwards, the landlord’s financial ability to offer rent relief, and any reduction to any outgoings charged.
Landlords and tenants are required to negotiate the exact amount of rent relief in good faith.
Our recommendation is that tenants are proactive in their initial letter requesting rent relief and put forward a figure that is reasonable in the circumstances (which ensures the viability of their business) and with accompanying financials (the landlord will likely request this in any case).
Deferred rent and extensions of the lease term
Tenants will not be required to begin repaying any deferred rent until the earlier of 29 September 2020 or the expiry of the lease. The tenant has the greater of 24 months or the balance of the lease term to pay the deferred rent. It is important to note that if the payment of any rent is deferred, the landlord must offer the tenant an extension to the term equivalent to the period in which the rent is deferred (unless agreed otherwise by the parties).
Supporting documents provided by tenants
The Regulations do not specify the documents or information that landlords may request from their tenants to substantiate the impact of the pandemic. The Victorian Small Business Commission has indicated that a guideline will be issued on the financial information that may be requested by landlords. Our advice has been, and continues to be, that tenants and landlords should work collaboratively to ensure the viability of both parties going forward. Discussions should be open and honest and tenants should be transparent with their figures. The Regulations provide that information provided is subject to confidentiality requirements.
A material change to the tenant’s circumstances
The Regulations allow tenants to make a further request for rent relief if there is a “material change” during the operative period. It is important to note that “material change” has not been defined in the Regulations but we suspect that it seeks to address a situation where the viability of the tenant’s business may be in question again. Landlords will not be required to pass on any further rent waivers in these situations – rent will simply be deferred.
The Regulations require landlords to consider waiving the recovery of any outgoings or other expenses payable by a tenant under a lease for any period in which the tenant is not able to operate their business at the premises during the relevant period (29 March 2020 – 29 September 2020). It is not clear what exactly constitutes an inability to operate but we suspect that it means the complete closure of the business. Restaurants and coffee shops which continue to operate as takeaway businesses likely do not fall into this category.
Tenants’ protection from termination of leases
This one is very important. Tenants will only be protected from having their lease terminated for the non-payment of rent if they have written to the landlord requesting rent relief and confirming that they qualify for and participate in the JobKeeper scheme. This protection is not automatic as it is in some of the other STates. Landlords can be fined up to approximately $3,600 for terminating a lease, taking possession of a premises or utilising a security provided by a tenant under the lease where a tenant defaults on the payment of rent in circumstances where they are afforded protection from termination under the Regulations.
Acting reasonably and in good faith
The Regulations also provide that all eligible leases are amended to include an obligation for both landlords and tenants to cooperate with one another and act reasonably and in good faith during any discussions whose subject matter relates to the COVID-19 pandemic.
As per the Code, landlords are prevented from increasing rent, charging fees or interest for the non-payment of rent, or terminating leases because tenants close or reduce the hours of their business during the period of 29 March 2020 to 29 September 2020.
This summary does not seek to provide an exhaustive summary of the Regulations. We recommend that landlords and tenants obtain legal advice when attempting to deal with issues concerning their lease as there are a multitude of issues that intersect and need to be considered.
Please contact BlueRock Law if you require any support on these matters.
COVID-19 Omnibus (Emergency Measures) Bill 2020
On 23 April 2020, Victorian Parliament passed the COVID-19 Omnibus (Emergency Measures) Bill 2020, which was created to give effect to the National Cabinet’s Mandatory Code of Conduct – the government’s ‘good faith leasing principles’ for commercial tenancies.
What does it do?
The Emergency Measures Act itself doesn’t enforce the Code, but it allows for regulations to be made to temporarily change existing laws to implement the Code’s principles.
We expect that Regulations will be made shortly. Until then, this is what we know so far…
The Regulations will apply to an ‘eligible lease’, which is all retail and non-retail commercial leases and licenses:
- including sub-leases and agreements for lease;
- which may or may not be in writing;
- which must be on foot when the Regulations come into effect;
- under which the tenant is an SME entity and an employer that participates in the JobKeeper scheme.
The Regulations won’t apply if the tenant is a group of companies (or is connected with a company) with an aggregate turnover above the prescribed amount. That amount isn’t described in the Act but is likely to align with the Code, meaning that the Regulations won’t apply to tenants with a combined annual turnover above $50 million.
The Act sets out the kinds of regulations that may be made. These include:
- prohibiting the termination of eligible leases;
- changing any periods under a lease in which someone must or may do something;
- changing or limiting a landlord’s statutory rights or rights under an eligible lease;
- exempting a landlord or tenant under an eligible lease from having to comply with statutory obligations or the terms of the lease;
- modifying the operation of an eligible lease or agreements related to eligible leases;
- extending the term of an eligible lease;
- deeming provisions of the regulations to form part of eligible leases;
- imposing new obligations on landlords or tenants under eligible leases, including requiring them to negotiate amendments;
- requiring landlords and tenants who are in dispute about terms of an eligible lease to participate in mediation arranged by the Small Business Commissioner, before commencing proceedings.
Other noteworthy parts are…
- The Act allows any regulations which are made to have a retrospective effect from 29 March 2020 (which is earlier than the date of the Code – 3 April 2020).
- Penalties may also be imposed for non-compliance with the Regulations.
- The Act and any Regulations will be in force until 6 months from their commencement dates.
In essence, the Act is telling us what can be done. Regulations will put it into action. There are many different laws that will need to be temporarily changed to complement the Code. Our team is keeping up-to-date with these changes on a daily basis so be sure to check in with us regularly so we can keep you in the loop.
State-by-State Legislation Summary
Note that the Regulations are different in each state.
NSW Regulations Summary Update
On Friday 24 April 2020, the NSW government confirmed the Retail and Other Commercial Leases (COVID-19) Regulation 2020. The Regulations give effect to the National Cabinet Mandatory Code of Conduct – SME Commercial Leasing Principles adopted on 7 April 2020.
The Regulations will be in effect for 6 months from 24 April 2020 and will be repealed on 25 October 2020. The Regulations will not apply to new leases entered into after 24 April 2020 but leases entered into due to an exercise of option or leases renewed after this date will be subject to the Regulations.
The Regulations are largely in line with the Code and provide clarity on the NSW government’s position in respect of commercial tenancies affected by Covid-19.
Some of the Regulations’ key items include:
- providing relief to ‘impacted lessees’ being tenants who qualify for the JobKeeper scheme and have an annual turnover of less than $50 million in the financial year ending June 2019.
- if the tenant is a franchisee, turnover is determined by the turnover of the business at the premises. If the tenant is a corporate member of a group (i.e. related bodies corporate), the turnover is the group’s turnover.
- any sales made over the internet will be included as a part of the lessee’s turnover.
- if impacted lessees breach their leases during the pandemic period for failing to pay rent, outgoings or closing their business during the operating hours specified in the lease, Landlords are prohibited from taking any action including evicting tenants, exercising rights of re-entry, terminating leases, seeking damages, charging interest, drawing down on a tenant’s security deposit or suing a guarantor.
- rent must not increase during the Regulation period.
- any reductions in statutory charges (ie. land tax) which a landlord is entitled to must be passed on to the tenant.
- where a tenant has been impacted by COVID-19, the landlord or tenant can request a compulsory mediation to renegotiate the rent and other terms of the lease in good faith, ‘having regard to’ the economic impacts of COVID-19 and the leasing principles set out in the Code.
Importantly, the Regulations do not prevent a landlord from taking action or seeking an order on grounds unrelated to the economic impacts of the COVID-19 pandemic. Tenants should be aware of their obligations to continue to comply with the terms of their leases.
In the meantime, landlords and tenants in other states should continue to be guided by the principles in the code.
Here’s a refresher on the Code:
National Cabinet Mandatory Code of Conduct
Prior to the release of the Code on 7 April 2020, there was a huge amount of uncertainty about what would happen with commercial leases in this new COVID-19 world. Almost universally, leases weren't drafted to take into account a global pandemic on the scale of what we are experiencing. The reactions from landlords and tenants have differed greatly on a case-by-case basis and the uncertainty has meant that a lot of important decisions were put on the backburner.
With some of that uncertainty removed with the release of the Code, now is the time for landlords and tenants to discuss what happens with their leases.
Recently, we released some important information about the new Code. We've also included some key points below, in case you need a refresher.
Basically, the COVID-19 pandemic has created significant issues with commercial leases and the principles set out in the Code provide landlords and tenants with at least enough information to have a proper and meaningful discussion around how those issues might be resolved.
Ultimately, it's unlikely to be in the best interests of the tenant to walk away from a site or for the landlord to have to find a new tenant in the current climate (and even for the foreseeable period post-COVID-19).
As a result, landlords and tenants should be actively speaking to each other about their positions based on the principles set out in the Code.
Here are the high-level points:
- The Code sets out good faith leasing principles in relation to commercial leases and is designed to aid significant cashflow issues for tenants that have arisen by virtue of the COVID-19 pandemic.
- Landlords and tenants are required to discuss their issues and work towards mutually satisfactory outcomes in an open, honest and transparent manner.
- The Code is mandatory and applies to those premises that are leased by SME tenants with a turnover of up to $50m (being tenants that are entitled to the Government’s JobKeeper program). While not mandatory for larger businesses, the Code notes that the principles set out in it should apply in spirit to all leasing arrangements for affected businesses.
- Rent increases are frozen and the amount of rent actually payable is to be reduced proportionately to the reduction in revenue of the tenant. At least 50% of the reduction in rent payable is to be waived (ie. not payable ever) and the rest is to be deferred – over the longer of: the remaining term of the lease or 24 months.
- Any other reductions in outgoings or expenses that relate to the premises (eg, land tax reductions, insurance premium reductions, reduced services and financial accommodation provided to landlords from the banks) should be shared between the landlord and the tenant.
- Where payments are deferred, as well as the extended time for re-payment, the re-payments should only start once the COVID-19 pandemic is declared at an end and taking into account a reasonable subsequent recovery period.
- Where a landlord and tenant can’t agree on their lease arrangements that arise because of the COVID-19 pandemic, then either party can refer the matter to mediation with the relevant state or territory lease dispute body.
We’ve also prepared template documents you can purchase to help you through the process and a FREE Heads of Agreement template, which you can request here:
Order a Deed of Variation Form
Order a Rent Abatement Letter
Order a FREE Heads of Agreement Template
1. Discuss For A Rent Concession / Discount / Abatement (Different Terms – Same Meaning!)
Have the conversation with your landlord/tenant now. Discussing a 50% rent reduction for a 2 to 3 month period is not unreasonable if the tenant's business can demonstrate they're suffering a significant reduction in revenue. Landlords need their tenants to have viable businesses on the other side of this pandemic or they face the possibility of empty shops, vacant industrial properties and lots of office space to lease, months with no rental income, re-leasing costs and paying outgoings costs that they would usually pass on to tenants. Tenants need to be considerate that landlords also have financial obligations and should demonstrate how they are actively managing all parts of their business (not just their rent) and even provide evidence to their landlords of how they are being adversely impacted by the pandemic. you must communicate openly with each other to reach an agreement that is acceptable to both parties and share the pain, but it's also worth reviewing the terms of the lease to check for any terms that the tenant or landlord could use as leverage to swing in their favour.
2. How Could Coronavirus Cause A Tenant To Breach Their Lease?
- Infection disease obligations
Tenants may have reporting obligations if the premises (or its occupants) come in contact with an infectious disease and leases often includes clauses which require tenants to advise landlords in these circumstances. Tenants can also be required to comply with directions given by government authorities; i.e. clean-up measures, at the tenant’s expense. If tenants fail to comply with the directions of their landlord or authorities, they may be in breach of their lease and also liable for costs including the landlord’s losses or damages.
- Stopping trading
Most leases require tenants to operate their businesses from the premises during normal business trading hours, with limited exceptions. If a tenant closes a shop without the landlord’s consent during times when it is required to trade, it may be in breach of the lease. Tenants could face losing security deposits, bank guarantees and in some situations, individuals could be personally liable for the tenant’s breach.
A nationwide or state-sanctioned lockdown would probably override a trading obligation but it would have to be considered on a case-by-case basis.
3. When Would A Tenant Be Entitled To Compensation As A Result Of The Coronavirus?
Tenants have legal rights to compensation in circumstances where landlords interfere with a tenant’s use of the premises and the tenant suffers a loss. A tenant may have a claim against their landlord if the landlord forced the tenant to shut their store or close their premises. There are exceptions; i.e. if a landlord causes the interference in response to an emergency or at the direction of a government authority.
4. Is There An Opportunity To Change The Terms Of A Lease?
There’s always an opportunity if you discuss it the right way but a crisis can provide opportunities to negotiate terms which can benefit both parties. Whatever the parties decide, the agreement should be documented in writing so there is clarity on what has been agreed and it’s binding. The economic climate is too uncertain to do deals on a handshake, despite how good the relationship might be. The following are examples of renegotiation options:
- If the lease is due to expire and the tenant does not have an option to renew the lease, it could agree to renew the lease for a further term (giving the landlord comfort that it will have continuous rent income), subject to the landlord agreeing to a short-term rent abatement.
- If a tenant runs a strong-performing business from the premises, it could negotiate a reduced base rent and agree to top it up with turnover rent (a percentage of the tenant’s turnover which exceeds a threshold amount).
- If there are still a number of years left in the term, a tenant could agree to carry out refurb works at the premises (preferably at a deferred date), subject to the landlord agreeing to a rent abatement.
To assist you, we’ve put together a bundle of template documents in relation to rent abatement and rental considerations, which offers both timely and cost effective advice.
We're here to help both tenants and landlords reach agreements to share the pain through this unprecedented situation.