Covid-19: What Commercial Landlords Need to Know about Rent Relief.

There is much confusion out there about the rights, and the obligations of a commercial landlord regarding COVID-19 rent and outgoings relief during the Coronavirus Pandemic. The Regulations in Victoria that are in effect govern all commercial leases both retail and non-retail leases. These new laws are a framework over commercial landlords and tenants existing rights and obligations.

This article (prepared by our commercial lease lawyer team) examines these rights and obligations in a holistic way within the legal framework governing COVID-19 rent and outgoings relief.

The Applicable Law

In Victoria, the law about this is mainly embodied in the COVID-19 Omnibus (Emergency Measures) (Commercial Leases and Licences) Regulations 2020 (Regulations). Other states have similar (but not identical) legislation. The Victorian Premier has extended these Regulations until the end of 2020 due to the Stage 4 lockdown.

Key Things Landlords Should be Aware of Under the Regulations

In order for a tenant to qualify for rent relief under the Regulations, there are certain qualifiers, including that the tenant qualifies for, and is receiving, JobKeeper.

During the time that the Regulations are on foot, the landlord must not, for non-payment of rent:

• evict or attempt to evict the tenant;
• re-enter or otherwise recover, or attempt to recover the premises; and
• draw down on any security deposit the landlord holds.

In addition to the above, and on the proviso that the tenant’s lease is an eligible lease, the landlord must:

• not increase the rent while the Regulations apply;
• offer the tenant an extension of the lease equivalent to the period for which rent is deferred;
• not request payment of deferred payment until the earlier of the Regulations ending, or the lease ending;
• amortise the deferred rent payment over the greater of the balance of the extended lease term or 24 months;
• consider waiving the recovery of outgoings;
• charge the tenant reduced outgoings if the landlord receives this benefit;
• not charge interest on any deferred rent payment; and
• not evict or attempt to evict the tenant for reducing its business hours or closing the premises and ceasing to carry on business.

It is important to note that the Regulations do not absolve a tenant from its obligations under the lease. It can, however, be difficult to distinguish what falls under the Regulations and what does not and what remedies you have available as the landlord. Obtaining legal advice from an experienced commercial lease lawyer regarding your lease dispute will give you clear guidance for what remedies are available to you. This should also help you resolve the issue faster.

The Overarching Obligation to Co-operate, Act Reasonably and in Good Faith

On the proviso that a tenant qualifies for rent relief under the Regulations because the tenant:

• is the tenant under a retail lease, or a non-retail commercial lease or licence;
• is an SME entity; and
• qualifies for and is participating in the JobKeeper scheme.

the Regulations mandate that a landlord and tenant must co-operate and act reasonably and in good faith in all their dealings to which the Regulations apply.

Although these overarching obligations apply to both landlords and tenants, it is the landlord which needs to be extra vigilant in ensuring that it is co-operative and acts reasonably and in good faith when negotiating rent relief and related matters with its tenant under the Regulations.

Why does the landlord need to be extra vigilant when negotiating rent relief with its tenant?

Because there is a perception in the market place, whether justified or otherwise, that landlords are in a stronger financial and/or bargaining position than tenants, and exert that dominance whenever they can. As a result, tenants will inevitably argue, whether at mediation or at a VCAT hearing, that the main (or only) reason why it failed to reach a rent relief agreement with the landlord is because the landlord was not co-operative and/or did not act reasonably and/or did not act in good faith, even though this may not be, in fact, true.

For this reason, a landlord or a landlord’s representative (real estate agent or lease lawyer) needs to ensure that all verbal and written communications with the tenant or its lawyers can be objectively judged to be co-operative, reasonable and in good faith. For this reason, it is strongly recommended that all communications between a landlord and its tenant are in writing.

What is the Test for Determining if the Landlord (or Tenant) was not Co-operative and/or Acting Reasonably and/or In Good Faith?

The Courts and VCAT apply the objective reasonable person test. This test requires the adjudicator of a rent relief dispute to look at all of the particular facts, circumstances and negotiations between a landlord and a tenant.

In addition to this they must ask the question:

Would a reasonable person, acting objectively, consider the actions or inactions of the landlord (or tenant) to be non-co-operative, unreasonable and not undertaken in good faith?

If the answer is yes, the landlord (or tenant) is in breach of the Regulations.

It is difficult to determine how the courts will determine exactly what is unco-operative and in bad faith as no cases have been heard at VCAT to date. Landlords must therefore be careful and considered in their approach as these new laws are being tested as the outcomes are uncertain.

Acting Unconscionably?

For retail tenancies the Regulations apply in addition to, and concurrently with, the Retail Leases Act 2003 (Vic) (Act).

Section 77(1) of the Act prohibits a landlord engaging in conduct which is unconscionable. Under section 77(2) of the Act, VCAT may have regard to a non-exhaustive list of matters which it can use to determine the unconscionability, or otherwise, of a landlord including:

• the bargaining strength of the landlord and tenant;
• whether the landlord required the tenant to comply with conditions that were not reasonably necessary for the protection of the landlord’s legitimate interests;
• whether any undue influence or pressure was exerted on the tenant;
• whether any unfair tactics were used against the tenant; and
• the extent to which the landlord acted in good faith.

One can see the similarity between the wording in the Regulations regarding reasonable behaviour, and the above factors determining unconscionability under the Act. It may be arguable that a breach by the landlord of the “reasonableness” requirement under the Regulations may amount to unconscionable conduct and constitute a breach of section 77 of the Act.

Non-Retail Commercial Leases and Licences

The retail leases Act does not apply to non-retail commercial leases and licences. This means that landlords which were not previously subject to arguments of unconscionability under the Act (although such arguments still exist at common law), are now subject to the codified requirement to act in a manner which is cooperative, reasonable and in good faith when negotiating rent relief under the Regulations.

A Landlord Must Offer Rent Relief if Requested to do so by the Tenant

If a Tenant requests rent relief in the manner prescribed by the Regulations, the landlord must offer rent relief to a tenant within 14 days after receiving that request, or such different time frame agreed between the landlord and tenant in writing.  The criteria, broadly, in determining the amount of rent relief to be offered by the landlord are as follows:

• the reduction in a tenant’s turnover associated with the premises during the relevant period; and
• any waiver of outgoings agreed to by the Landlord; and
• whether a failure to offer sufficient rent relief would compromise a tenant’s capacity to fulfil the tenant’s ongoing obligations under the eligible lease, including the payment of rent; and
• the landlord’s financial ability to offer rent relief, including any relief provided to a landlord by any of its lenders as a response to the COVID-19 pandemic; and
• any reduction to any outgoings charged, imposed or levied in relation to the premises.

After the landlord makes an offer of rent relief to the tenant, both parties must negotiate in good faith with a view to agreeing on the rent relief to be provided to the tenant.

Should the Landlord Allow for a Reasonable Recovery Period?

The National Cabinet Mandatory Code of Conduct (Code) states that landlords should consider providing rent relief to tenants during the COVID-19 pandemic plus a “reasonable recovery period”.

The Regulations do not embrace the concept of a reasonable recovery period. They do, however, require the landlord to take into account whether “a failure to offer sufficient rent relief would compromise a tenant’s capacity to fulfil the tenant’s ongoing obligations under the eligible lease, including the payment of rent”.

Although Victorian landlords are not obliged to consider giving tenants rent relief for a reasonable recovery period after the Regulations end, they are obliged to consider the tenant’s ability to pay rent, deferred rent and outgoings after the Regulations end. In this regard, it may not be regarded as reasonable for a landlord to agree to provide rent relief up to the end of September 2020, and require the tenant to commence paying full rent plus deferred rent on and from 1 October 2020. The reality is that most tenants will not have had enough time to recover from the limited or no trading which they experienced during the COVID-19 pandemic to meet such financial obligations on the day after their rent relief ends.

We are not suggesting that landlords agree to provide rent relief during any reasonable recovery period, although nothing is preventing them from doing so. What is being suggested that landlords take a realistic and pragmatic approach as to how long it will take their tenant to financially recover post COVID-19, and only require the tenant to commence paying deferred rent a few months after the rent relief agreement has ended and the tenant has had time to financially recover.

Should Landlord’s Provide Outgoings Relief?

As a general proposition, it is submitted that landlords should consider providing their tenants with outgoings relief, in addition to rent relief. This is especially important for those tenants in industries or businesses which have been mandated by the Victorian Government to cease trading during the COVID-19 pandemic. In the end, it all comes back to ensuring that the landlord is acting reasonably and providing sufficient relief to ensure that the tenant can comply with its financial obligations under the lease in the future.

Mediation and VCAT

If an agreement between the landlord and tenant are not reached the tenant is able to request mediation with the Victorian Small Business Commissioner. Many disputes can be resolved at mediation and it is important to be advised of your rights and obligations under the regulations before you attend mediation. A lease lawyer will be able to advise you of what to expect from the process and ensure that your interests are protected.

If a resolution is not agreed upon by the parties you may take the matter to VCAT. It is important to ensure that your case is properly prepared as we suspect that the courts may be more lenient than otherwise to the tenant due to COVID-19.

Do You Need Legal Advice?

PCL Lawyers are extremely experienced lease lawyers. We act for landlords and tenants and we understand both sides.  We’re passionate about working to achieve our clients desired outcomes and protecting their interests. We are dealing with COVID-19 rent relief lease cases on a continual basis and as such we have developed considerable experience in negotiating these issues, having regard to this very new law. We can assist you in negotiating with your tenant under the Regulations.

The above is general information only and should not be relied on as legal advice.

If you seek legal advice, please contact Chris Karatselios, who leads our Commercial Property Team, directly to discuss your matter on 8397 5000 or complete the online enquiry form on this page.

About The Author - Chris Karatselios

Chris is an Accredited Commercial Law Specialist and a Partner at PCL Lawyers. Chris has approximately 30 years’ experience in commercial and property law. Chris has extensive expertise in complex...