Commentary on Commercial Tenancy Relief Scheme

This article was written prior to the press release by the Premier’s Office on 20 August 2020. That press release indicates that at least some of the uncertain matters raised below will be clarified by amending Regulations.

Legislative background

On 7 April 2020 the Office of the Prime Minister published the ‘National Cabinet Mandatory Code of Conduct - SME Commercial Leasing Principles during COVID-19’ (“the Code”). The Code set out a range of principles intended to guide the relationship between landlords and tenants in the context of COVID-19. Having been published by the Office of the Prime Minister the Code did not carry any legal effect, with each state being required to pass legislation to give effect to any change.

On 23 April 2020 the COVID-19 Omnibus (Emergency Measures) Act 2020 (“the Act”) was passed by the Victorian Parliament. The Act came into effect on 25 April 2020. The Act, to the extent it related to commercial leases, set out a number of relevant definitions (perhaps most importantly the definition of an “Eligible Lease”) and empowered the Governor in Council, on the recommendation of the Minister for Small Business, to make regulations concerning landlords’ and tenants’ rights and obligations under an Eligible Lease.

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.

Small Business Commissioner ‘frequently asked questions’ and Victorian Government ‘policy guidance’

Subsequent to the publication of the Regulations myriad articles have been published online exploring the effect and detail of the Act and the Regulations (including ours here) – the purpose of this article is not to explore the Act or the Regulations (or the Code for that matter) in any detail.

The publications that carry perhaps the most significance are the “frequently asked questions” (and their responses) published by the Office of the Victorian Small Business Commission (“the SBC FAQs”) here and the Victorian Government’s Policy Guidance (“the Policy Guidance”) published here.

Those articles carry apparent weight, due to the nature and role of the entities publishing them, however they are not law and to the extent they purport to interpret the Act and Regulations they are not without failing.

Areas of uncertainty

The author’s key issue with the SBC FAQs and the Policy Guidance is that they treat uncertain matters with certainty. This is new legislation with, as at the date of writing, no judicial determination to assist in interpretation. This article does not seek to say what the law is, simply to point out what it might be (and what it is not).

The Code

The Policy Guidance commences “On 7 April 2020 the National Cabinet announced a Mandatory Code of Conduct SME Commercial Leasing Principles During COVID-19 (the Code). In Victoria, these leasing principles have been given effect through the COVID-19 Omnibus (Emergency Measures) Act 2020 and the COVID-19 Omnibus (Emergency Measures) (Commercial Leases and Licences) Regulations 2020 (the regulations), as the Commercial Tenancy Relief Scheme (CTRS)”.

That is to say the Policy Guidance treats the Code as having been given effect in Victoria and takes that position as its starting point.

The Code is not mentioned, anywhere, in the Act or in the Regulations. There is a single mention of the Code in the second reading speech to the Act, but only to note that Section 15 of the Act would “enable” regulations to give effect to the Code.

We note that there might be an argument, having regard to the community expectations set by the Prime Minister’s publication of the Code and associated press conferences, that the Act and the Regulations should be interpreted by reference to the Code. There is, however, an equally strong argument to say that Parliament in passing the Act and the Minister for Small Business in passing the Regulations chose (or, more accurately, on an objective view might be considered to have chosen) to deliberately leave reference to the Code out of the Victorian law.

In our view to treat the Code as have been given effect in Victoria is an incorrect starting point in interpreting the state of the law in Victoria.

Proportionality

The SBC FAQs state “[t]here is an expectation that rent relief should be provided in proportion to the decline in the tenant’s turnover”. The Policy Guidance says the same, and goes further to state “[i]f a landlord offers rent relief that is not in proportion to the tenant’s decline in financial circumstances, the landlord should provide documentation of their financial position to the tenant to justify the amount of rent relief offered”.

There is no reference to proportionality anywhere in the Act or the Regulations. There is no prescribed formula in the Regulations as to how a reduction in rent should be calculated, the Regulations only require the parties to “negotiate in good faith with a view to agreeing on the rent relief to apply during the relevant period”. If Parliament wanted to impose proportionality obligations on the negotiations it would have been easy for it do so. It did not.

The concept of proportionality in rent relief is taken only from the Code which, as noted above, is not law in Victoria.

The suggestion within the Policy Guidance that a landlord ought to provide its own financial information is not supported by anything within the Regulations or Act (and seems particularly unreasonable having regard to the suggested limitations on documentation to be requested from the tenant noted below).

Documents

The SBC FAQs state that

“[a] landlord can ask the tenant for information:

• extracted from an accounting system

• extracted from BAS

• provided to a financial institution.”

The Policy Guidance goes further to state a landlord may only ask for one of those items.

The SBC FAQs and the Policy Guidance both indicate a landlord should not request:

• “financial information for periods other than the ‘relevant period’ being the period nominated by the tenant as the period for a reduction in turnover

• future cash flow projections

• balance sheets, profit and loss, year to date financials

• bank balance details

• requiring the financial information to be verified, examined, assured or audited by a third party such as an accountant

• requiring the financial information be provided by an accountant.”

Save for requiring the parties to “cooperate and act reasonably and in good faith” neither the Act nor the Regulations impose any particular requirement as to provision of information beyond requiring a tenant to provide evidence that it is an SME tenant that qualifies for and is a participant in the JobKeeper scheme.

Some fundamental issues arise with the purported limitations on what information should be required. If a landlord is provided only with the documents suggested by the SBC FAQs and the Policy Guidance a landlord would not be able to:

• determine loss of revenue;

• determine whether the tenant is an SME entity;

• take into account the circumstances set out in Regulation 10(4)(d); or

• consider “all the circumstances” of the lease.

Furthermore, it is not reasonable to expect a landlord to provide an offer for rent relief through to 29 September in circumstances in which it has no real financial information setting out the tenant’s circumstances and no projections from the tenant as to expected turnover through to that date.

JobKeeper payments

The Policy Guidance states “[p]ayments that a tenant receives from their participation in the JobKeeper scheme should not be included in turnover calculations to determine the proportion of rent relief, as these payments must be fully paid to the employee by the business”. The SGB FAQ’s contain a corresponding provision; strangely the SBC FAQs also specifically refer to government subsidies as being included in a tenant’s turnover.

The Regulations specifically require an offer made by a landlord to be based on “all the circumstances of the eligible lease”, and require an offer 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”.

Disregarding payments received by a tenant from JobKeeper (or other government support for that matter) might be considered to be inconsistent with the requirement on a landlord to take those things into account.

Other matters

There are other references in the SBC FAQs and the Policy Guidance not supported by the Act or the Regulations for instance:

• the Policy Guidance states “landlords should not base offers for rent relief on whether the business made the voluntary decision to reduce operating hours”, but the Regulations specifically require an offer made by a landlord to be based on “all the circumstances of the eligible lease” – whether or not the premises is open, and whether or not that was required would or might be circumstances to be taken into account by a landlord when making a rent relief offer;
  

• the Policy Guidance suggests “[n]on-employing sole traders are eligible businesses… for [their] lease to be eligible for rent relief” seeming to ignore the requirement in Section 13(1)(b)(ii) of the Act for a tenant to be an “employer” to qualify the lease as an eligible lease;
  

• the SBC FAQ’s state that the commercial tenancy relief scheme provides “a six-month moratorium on evictions for not paying rent for small to medium enterprises (SMEs) with an annual turnover under $50m that have had a minimum 30 per cent reduction in turnover because of coronavirus, starting from 29 March 2020”. Although the Regulations do provide protection to tenants under eligible leases those protections only commence if the tenant has made a request for rent relief that complies with the regulations and negotiates with the landlord in good faith – tenants proceeding as though they have an unalienable right to moratorium on evictions has the scope to damage the relationship between landlords and tenants and prevent productive negotiations;
  

• the Policy Guidance suggests that “[u]nder the regulations, penalty interest, fees or charges cannot be imposed in the event of default by the tenant on a rent relief agreement”. No such provision is contained within the Regulations or the Act (Regulation 17 is the only regulation that refers to interest, fees and charges, and prohibits those being charged in respect of deferred rental only).

Conclusion

This article does not seek to give an analysis of the Act or the Regulations and does not (necessarily) intend to suggest that the position taken by the SBC FAQs and the Policy Guidance is wrong. It intends only to say that those publications imply certainty in respect of matters that are inherently uncertain. Practitioners and the public should exercise care when relying on those publications and should make their own investigations and consider the risks and range of possible outcomes from an analysis of the law as made.

Paul Nunan

Director

Accredited Specialist | Commercial Leasing