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COVID-19 Victorian Rent Relief: Updated Commercial Tenancy Relief Scheme Regulations 2021. What it means for landlords and tenants.

Leasing update regarding the Regulations that were introduced 24 August 2021.

 

The much-awaited Commercial Tenancy Relief Scheme Regulations 2021 (new Regulations) were enacted by the Victorian Parliament on 24 August 2021. A copy of the Regulations can be accessed through the following link here.

Like the previous COVID-19 2020 Regulations (old Regulations), the underlying principles of good faith and a general obligation for the landlord and tenant to cooperate and act reasonably in all discussions continue to apply in the new Regulations.

 

There are several distinctions between the old and new Regulations, including:

  • a new test to determine the decline in the tenant’s turnover; and
  • Jobkeeper is no longer a qualification to being eligible to request rent relief.

 

This article identifies some of the key provisions that will be of immediate interest to landlords and tenants.

In this round of rent relief, it is important for tenants and landlords to understand that there are specific dates and information required to be provided, making the process more complex. It is important for tenants to seek legal advice to ensure their application for rent relief is granted.

For landlords, you will be wanting to ensure that any applications you approve are correct and fall within the eligibility criteria.

For both tenants and landlords alike, making an error could put you in an irretrievably compromised negotiating position. In other words, the timing is critical as well as the action you take. The rules are strict and unforgiving.

 

What is an “Eligible Lease”?

An “eligible lease” is a retail lease or a non-retail commercial lease or licence that is in effect on 28 July 2021 and under which the tenant is an Eligible Tenant.

This includes new leases entered into after 28 July 2021 as a result of an extension, variation or renewal of an eligible lease on substantially the same terms as the eligible lease.

Please note, that certain classes of leases are excluded from being eligible leases e.g. agricultural lease, a lease where the tenant is a listed corporation etc.

 

What is an “Eligible Tenant”?

A tenant is an “eligible tenant” if the tenant:

  • carried on business in Australia on 28 July 2021: and
  • is an SME i.e. the tenant’s annual turnover was less than $50 million for the financial year ending 30 June 2021; and
  • satisfies the “decline in turnover test”.

Certain tenants are excluded from being eligible tenants e.g. local government body, a company in liquidation and an individual which has been declared bankrupt.

 

How can a tenant satisfy the Decline in Turnover Test?

A tenant satisfies the “decline in turnover test” if:

  • the tenant’s turnover for the “turnover test period” falls short of the “tenant’s comparison turnover”; and
  • the shortfall, expressed as a percentage, is equal to or greater than 30%.

In other words, there must be a minimum of 30% decline in turnover after comparing the tenant’s turnover for the two relevant periods.

 

Turnover Test Period

The “turnover test period” is:

  • if the tenant began trading before 1 April 2021, then at the tenant’s election, a consecutive 3-month period between 1 April 2021 and 30 September 2021 commencing on the first day of a month; or
  • if the tenant began trading on or after 1 April 2021, the landlord and tenant must negotiate in good faith to agree on the consecutive 3-month period to apply.

 

Comparison Turnover

The tenant’s “comparison turnover” is the tenant’s turnover for the “relevant comparison period”.

The “relevant comparison period” is:

  • the 3-month period in 2019 corresponding to the 3-month period in 2021 elected by the tenant as detailed above; or
  • where a tenant began trading before 1 July 2019, the relevant comparison period is the quarter ending 30 September 2019; or
  • where a tenant began trading between 1 July 2019 and 31 March 2021 inclusive, the relevant comparison period is the quarter ending 30 June 2021.

Note: (b) and (c) are only relevant for the purposes of mandatory reassessment of rent relief agreement pursuant to Regulation 29(2)(b) which is further discussed below.

There are specific alternative comparison turnover rules which apply in the following special circumstances:

  • a business which commenced trading between 1 April 2019 – 31 March 2020 (pre-pandemic);
  • a business which commenced trading between 1 April 2020 – 31 March 2021 (during the pandemic)
  • a business which commenced trading after 31 March 2021 (during the pandemic);
  • a restructure of the tenant’s business or part thereof;
  • an acquisition or disposal of part of the tenant’s business;
  • a substantial increase in turnover (for example, 12.5% or more in the 3 months immediately before the applicable turnover test period);
  • a business affected by drought or natural disaster (for example, bush fires);
  • a business that has irregular turnover;
  • a sole trader or small partnership that has no employees and either the sole trader or one of the partners did not work due to sickness, injury or ordinary leave; and
  • the tenant temporarily ceased trading during the relevant comparison period (for example, where a tenant has closed the business for a week or more due to unforeseen circumstances but resumed trading before 28 July 2021).

The Victorian Small Business Commission has provided a useful summary table setting out the comparison and turnover periods that is applicable depending on when the tenant started trading which can be accessed here.

If you fall under any of the above special circumstances, we strongly recommend that you seek tailored legal advice in relation to this prior to putting in any request for rent relief to the landlord.

It is interesting to note that the definition of “turnover” specifically includes all business turnover derived from online sales and State Government COVID grants received but excludes Federal Government grants.

 

What is the Rent Relief Period?

The Rent Relief Period commences on either

  • 28 July 2021 (for a rent relief request made on or before 30 September 2021); or
  • the date of the tenant’s rent relief request (for a rent relief request made after 30 September 2021);

and ends on 15 January 2022.

It is essential that tenant’s which are eligible for rent relief from 28 July 2021 should immediately apply for rent relief in accordance with the new Regulations and especially before 30 September 2021.  PCL Lawyers can prepare and submit such applications on behalf of tenants and assist landlord which receive such applications. 

Please note that a landlord must not increase the rent payable under an eligible lease, regardless of whether the tenant has requested rent relief.  Any rights to a rent increase between 28 July 2021 and 15 January 2022 are voided and may never be claimed by the landlord.

 

Making a request for rent relief to your landlord?

Pursuant to the new Regulations, a tenant may make a request for rent relief which must be in writing and accompanied by a statement that the tenant:

  • is an eligible tenant; and
  • satisfies the decline in turnover test, including setting out:
  • the turnover test period used;
  • the tenant’s turnover for the turnover test period;
  • the comparison turnover period or whether an alternative turnover method was used;
  • the tenant’s comparison turnover;
  • the tenant’s decline in turnover expressed as a percentage;
  • the minimum reduction in rent applicable under regulation 8 of the new Regulations; and
  • any other circumstance the tenant would like the landlord to consider.

Within 14 days of the request being made, the tenant must provide evidence in support of the turnover figures in its rent relief request.  The documents required to be provided by the tenant are:

  • a statutory declaration by the tenant stating that the tenant is an eligible tenant and the information provided is true to the best of the tenant’s knowledge and belief; and
  • at least one of the following documents:
  • extracts from the tenant’s accounting records;
  • the tenants BAS;
  • bank statement in respect of the tenant’s account;
  • a statement prepared by a practicing accountant.

Importantly, the tenant’s request for relief lapses if the tenant does not provide the evidentiary requirements within 14 days and the tenant is then required to make a new rent relief request.

If a tenant allows 3 requests for rent relief to lapse, the tenant cannot make any further request for rent relief under the new Regulations.  

Once the Landlord receives the tenant’s evidence in support of the rent relief request, the landlord must make the tenant an offer for rent relief in writing within 14 days which:

  • is, at the very minimum, proportional to the tenant’s decline in turnover; and
  • provides a waiver of not less than 50% of the rent relief offered with the balance to be deferred. Note:  The parties can agree to a different percentage amount to be waived.

Deferred rent must be amortized over the balance of the lease term or 2 years, whichever is greater (and the lease is extended accordingly if there is less than 2 years remaining).  The landlord cannot request deferred rent payments commence before 15 January 2022.

 

The Rent Relief Agreement Process

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

The landlord and tenant must reach agreement within 14 days after date on which the tenant receives the landlord’s rent relief offer.

 

What if an agreement is not reached within 14 days of the offer being made by the landlord?

If by the 15th day after the tenant receives a rent relief offer from the landlord:

  • an agreement is not reached by the parties as to rent relief; and
  • the tenant has not referred the matter to the Small Business Commissioner for mediation; and
  • the landlord’s offer has otherwise met the minimum requirements noted above,

then the tenant is deemed to have accepted the landlord’s offer and a rent relief agreement is deemed to have been made accordingly.

 

What if there is an existing rent relief agreement in place?

There is now a mandatory reassessment of all existing rent relief agreements where:

  • a rent relief agreement has been made between the landlord and the tenant; and
  • the tenant has made a request for rent relief under the new Regulations on or before 30 September 2021; and
  • the tenant began trading prior to 1 April 2021.

If a tenant wishes to seek reassessment of an existing rent relief agreement, it must provide certain information to the landlord prior to 31 October 2021.

Tenants should be mindful that landlords will have a variety of support and advice available to them with their leasing agent and legal advice.

We understand the new regulations and are experienced in negotiating excellent outcomes for our clients. If we can resolve the rent relief process without mediation, we do so. Where is it necessary, our team is experienced in representing landlords at mediation.

Reach out to our Commercial Leasing Lawyers today. We can be contacted on 1300 907 335 or alternatively please complete our online contact form and we will contact you promptly.

 

Please note: The above is not intended to be legal advice. Every circumstance is different. Always seek legal advice in relation to your individual situation.

© PCL Lawyers 2021

About The Author

Marilyn Wai is a Senior Associate in the Commercial and Commercial Property Department. Marilyn studied law at Monash University and...

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