New rent relief regime coming | Update 14 - effects of Covid-19 on commercial tenancies

CTRS Mach-4

***update 24 August 2021 - the CTRS Regulations have arrived, read our Update 17 here: CTRS 2021 Regulations now released | Update 17 - effects of Covid-19 on commercial tenancies (easternbridge.com.au)***

On 28 July 2021 the Victorian Government announced a new commercial tenancies relief scheme (the 2021 CTRS) - see the press release here: Commercial Tenancy Relief For Victorian Businesses | Premier of Victoria

A video of the press conference is embedded at the foot of this article.

Our understanding is that the scheme will largely mirror the Regulations that were first put in place effective from late March 2020 and extended through to the end of March 2021 (the 2020 Regulations).

The 2020 Regulations were put into place under the COVID-19 Omnibus (Emergency Measures) Act 2020. As that Act has ceased to grant powers to government to make such regulations new legislation will need to be passed – it remains to be seen precisely what the new legislation will look like – until the legislation is passed and the Regulations released we will not have any specific detail, but the following reflects information arising from the announcement.

**The following assumes a reasonable grounding in the operation of the 2020 Regulations – details in this regard are available throughout earlier updates on our website**

Eligibility

Eligibility rules remain to be seen – the 2020 Regulations relied on JobKeeper qualification to determine eligibility but without the Federal Government’s JobKeeper framework a separate test will be introduced to demonstrate decline in turnover – the announcement confirms that decline in trade would need to be 30% from prior trading (although whether the base-line would be pre-pandemic trading, the brief period of clear air we had before or around Lockdown 4.0 or some other period we don’t know).

In the press conference, Minister for Small Business Jaala Pulford referred to a reference period for reduction in rent being the tenant's turnover in the "pre-pandemic period" (although if the Regulations are to apply to more recent leases there will, presumably, need to be reference to some other, more recent, period).

Versions 2 and 3 of the 2020 Regulations (applying from October 2020 - March 2021) contemplated evidence of decline in turnover being provided by way of statement by a practising accountant – in the absence of JobKeeper that may become the best source of evidence for eligibility. It would seem logical that a landlord would have some entitlement to put the tenant to proof in relation to downturn in turnover.

Minister Pulford confirmed in the press conference that ATO data will not be relied on, rather information is to be provided by tenants. If a dispute arises in respect of the data provided Minister Pulford noted that "VCAT will be the ultimate arbiter" but noted that tenants will need to satisfy their landlords as to the information provided.

The 2021 CTRS will only apply to SME entities (with turnover less than $50,000,000) although the effects of COVID on the turnover of entities are likely to see tenants who were previously not SMEs not fall within that definition so as to qualify for relief.

The 2020 Regulations applied only to leases that were in effect on 29 March 2020. There will, assumedly, be an extended scope to provide relief to tenants under leases that have been entered into since that date (it would stand to reason that leases in effect on 28 July (being the date of announcement) will be caught).

Proportionality

The proportionality principles set out in versions 2 and 3 of the 2020 Regulations will continue to apply (seemingly by reference to turnover in the pre-pandemic period but assumedly also in some more recent period of clear air to allow relief for more recent tenancies).

Although seen by some landlords as overly burdensome, those principles gave certainty to negotiations and would seem to provide more benefit than the version 1 2020 Regulations position which provided no specific guidance on the level of relief to be offered.

Given that the 2021 CTRS is to operate retrospectively (see below) one can only assume that the proviso that relief only be granted from the date a relief request is made (as was brought into effect in versions 2 and 3 of the 2020 Regulations) won’t apply and that relief will be required in respect of the entire relief period once a valid request is made.

The press conference indicated that it is currently intended that the 2021 CTRS will run until January 2022.

Prohibition on evictions

Presumably tenants will be protected from eviction under the 2021 CTRS, with effect from the date of the announcement (see below on retrospectivity).

The 2020 Regulations (version 2 and 3) provided that a landlord must not evict or attempt to evict a tenant (or re-enter or have recourse to any security under the lease) because of non-payment of rent or outgoings or because of a tenant not opening or reducing opening hours (provided the tenant had made a compliant rent relief request). It can be assumed the same will carry over into the 2021 CTRS and that landlords will not be prevented from evicting for other defaults.

Retrospectivity

Minister Pulford confirmed that the 2021 CTRS is to apply retrospectively from the date of the announcement (28 July 2021) (to avoid landlords now moving swiftly to terminate leases and beat the passage of the legislation) – until the legislation passes that leaves landlords and tenants in somewhat of a legal limbo but the best advice to landlords is not to take steps to evict a tenant lest that action subsequently (and retrospectively) become prohibited.

Minister Pulford commented that now the Government's expectations have been made clear they expect landlords and tenants will "get on and make arrangements" and enter into "good and constructive and well-motivated" discussions without necessarily waiting on the detail of the scheme to come out.

The timing of the announcement will be important for tenants who are not able to pay rent falling due at the start of August as a consequence of the most recent rounds of lockdown.

The intention is to run the scheme until January of next year and they will provide further information as the drafting is advanced.

Enabling legislation

We assume that the 2021 CTRS will be introduced in the same manner as the 2020 Regulations. That will require passage of enabling legislation through the Victorian Parliament (likely to set out some key criteria on eligibility and giving broad powers to make regulations) with the leg-work done by regulations which can then be brought out and amended quickly and without reference back to Parliament.

As noted above the 2020 enabling legislation has now ceased, we would expect enabling legislation to allow the government a reasonably lengthy period to pass regulations to put a 2021 CTRS into place and to amend or extend a 2021 CTRS as necessary having regard to further lockdowns.

Both houses of Parliament are next sitting on 3-5 August 2021, the following sitting is 17-19 August. We will need to wait and see if legislation can be prepared and passed in time for the 3-5 August session, otherwise we might be waiting some time for any substantive detail.

Minister Pulford has noted that people will see the proposed legislation in "a short number of weeks" - so 17-19 August now looks to be the earliest that we will get passage of enabling legislation.

Tidying up

It would make sense for new legislation to tidy up some questions left exposed when the 2020 Regulations ended.

SBC and VCAT powers

In early June the Small Business Commissioner wrote to affected landlords and tenants to state that their powers and the powers of VCAT under the 2020 Regulations had ceased with the ending of the regulations.

Although not as damaging as that might otherwise have seemed (the SBC has broad dispute resolution powers and similarly VCAT has broad jurisdiction to hear disputes in connection with leases – furthermore the rights of the parties under the 2020 Regulations remained unaffected) it would seem sensible to tidy up any ambiguity about the ongoing powers of those entities.

Outgoings

The 2020 Regulations dealt with outgoings on only a scant basis – requiring a landlord to “consider waiving recovery of any outgoing or other expense payable by a tenant” but not requiring the landlord to go any further than considering that position.

In R & D Health Clubs Pty Ltd v Lin Wang Pty Ltd (Building and Property) [2021] VCAT 349 the Tribunal ordered that the tenant was entitled to waiver of 100% of outgoings in respect of the period that the tenant was prevented by law from operating the premises. That ruling didn’t seem to reflect the Regulations.

In our view it would be good to see the 2021 CTRS clarify (one way or the other) the position on outgoings.

Hardship fund

An $80,000,000 "hardship fund" will be made available to landlord's who provide rent relief but no details of how a landlord will access that fund or demonstrate eligibility for that fund have been made available.

Minister Pulford noted that "work is still underway" in this regard but that there would not be "full compensation" for landlord.

More to come

There will be plenty more information still to come out over the coming days and weeks. We will update this article with more information over the next day or so and will provide a new update once more substantive information is available.

Watch this space.

A quick case update

Thanks to Jamie Bedelis for heads up and discussion on this one:

An interesting case out of the Country Court over the last couple of days that I've not really had time to get my head across - B & D Gippsland Investments v Lay & Anor [2021] VCC 993

Interestingly the Court found that a defective rent relief request could not be cured by the landlord responding to the application. In a number of earlier cases the Tribunal had been moving towards accepting non-compliant requests as giving rise to rights to relief.

The tenant in B & D Gippsland did not seem to put an equitable estoppel argument (that by engaging with rent relief discussions following the defective rent relief request the landlord was estopped from denying the tenant the benefit of the rent relief regime), rather sought to say that the landlord had "waived the irregularity" of the defective request.

The Court found that "If there has been non-compliance under reg. 10(1), this cannot be cured by a step taken by B&D. The Regulations are prescriptive".

The Court also found that it did not have jurisdiction to hear a leasing dispute until the SBC has issued a certificate under Regulation 20A. Have regard to the notation above about the SBC's position on its powers following ending of the 2020 Regulations this may create issues down the track but as noted above new legislation should be able to address this issue.

Paul Nunan

Director

Accredited Specialist | Commercial Leasing