The 2021 CTRS | Update 15 - effects of Covid-19 on commercial tenancies

***update 24 August - 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)***

In our Update 14 we discussed the announcement of a new commercial tenancy relief scheme (the 2021 CTRS). You can read that update here: New rent relief regime coming | Update 14 - effects of Covid-19 on commercial tenancies (easternbridge.com.au).

Some more detail has been released by press release, with enabling legislation having been introduced into Parliament today.

This article deals with the enabling legislation first (a bit technical, not very interesting) and the detail in the press release second (more interesting, but more subject to change).

Enabling legislation

If you are so inclined you can read the enabling legislation, the Commercial Tenancy Relief Scheme Bill 2021 (the Bill), as tabled here: https://content.legislation.vic.gov.au/sites/default/files/bills/591319bi1.pdf

As at the time of publication the bill has been read a second time with debate adjourned until later today.

When reading the Bill into Parliament the Minister noted that it is substantially consistent with the CTRS that applied throughout 2020 with eligibility criteria having been updated to take account of the removal of jobkeeper.

We note the bill will need to pass both houses of Parliament and receive royal assent. Back in April last year the corresponding legislation flew through these steps – we will update this article once the bill is passed and receives Royal Assent but, in the meantime, we will assume it will proceed unaltered.

The Bill defines “eligible lease” at Section 5 as a retail lease or non-retail commercial lease or licence “that is prescribed” – this has left more flexibility to deal with eligibility in the Regulations than was contained in the 2020 enabling legislation (and relevantly does not flag a date by which the lease must have been in effect to be eligible as was the case with the 2020 legislation).

The Minister for Small Business will have broad powers to introduce regulations in relation to eligible leases. Among various other powers the regulations may:

• prohibit termination of a lease;

• change any period under a lease;

• change or limit rights of a landlord under a lease;

• exempt a landlord or tenant from complying with a lease;

• modify the operation of a lease; and

• impose new obligations on landlords or tenants under a lease.

The Bill specifically contemplates regulations having retrospective effect to a date not earlier than 28 July 2021.

The Bill further allows regulations to be made to extend or alter rental deferral agreements reached under the 2020 Regulations where those leases do not otherwise constitute eligible leases under the Bill.

The Bill grants power to the Small Business Commission to facilitate resolution of disputes and monitor compliance with the regulations. The government has announced that the SBC will receive $3,000,000 additional funding to assist ramping up capacity to deal with additional demand.

Penalties not exceeding 20 penalty units ($3,634.80) can be imposed for contravention of the regulations.

The Bill contemplates the Governor in Council making regulations containing transitional provisions arising as a result of the repeal of the 2020 Enabling Act and the 2020 Regulations (this may allow tidy up of some of the matters concerning the powers of the SBC and VCAT raised in our Update 14 by subsequent regulation).

The Act will repeal on 30 April 2022. Accordingly 30 April 2022 will reflect the end of any 2021 CTRS (under this proposed legislation). Previous iterations of this article indicated Regulations put into place under the Act could continue in force for 6 months after repeal BUT that power only extends to transitional regulations, not to relief regulations.

We look forward to release of the Regulations (which should come hot on the heels of passage of the legislation) and will provide a further update then.

Press release

The nitty-gritty of the 2021 CTRS will be brought in by Regulations to follow the enabling legislation, but the press release does provide some insight into how the 2021 CTRS will operate. You can read the press release here: Rent Relief On The Way For Commercial Tenants | Premier of Victoria.

Eligibility

The press release indicates that:

relief for eligible tenants will be calculated by comparing their turnover for the final quarter of the 2020/21 financial year with turnover from the final quarter of 2018/19

and that

Special arrangements will be in place to assess the turnover impacts for new businesses which were not operating in 2019

Tenants will be eligible for relief if they have a drop in turnover of 30% or more between the reference period (April – June 2019) and the test period (April – June 2021).

The percentage drop (between reference and test periods) will “also determine the amount of initial rent relief available to the tenant” (emphasis added).

Furthermore once a tenant is eligible, they will remain so for the duration of the relief period with a “mandatory reassessment of turnover further into the new scheme” (take this to mean that while a 30% reduction is required to trigger eligibility, decline in a subsequent period of, say, 20% would still see the tenant eligible for relief proportional to that decline).

Some thoughts arising from the release:

• The reference period is two years prior to the test period. Factors going well beyond COVID are likely to have impacted businesses in that intervening period (by way of example natural growth or structural change over that time might see businesses who have suffered from recent lockdowns struggle to qualify for relief);

• The test period pre-dates the scheme by nearly a month (that is to say the relief requirements will operate from 28 July 2021 but will relate to a downturn in turnover April – June 2021);

• The test period predates Lockdown 5.0 (being the most recent lockdown) which only kicked in from midnight on 15 July – so relief (at least until re-assessment) won’t reflect the most damaging part of recent lockdowns.

It remains to be seen how businesses that have started since 2019 will demonstrate decline in turnover but there will presumably be additional reference periods that such businesses can refer to.

The release notes that where an existing rent deferral agreement is in place under the 2020 Regulations, and there is an "eligible application under the new scheme" then the deferred rent repayments "will be frozen until 15 January 2022". We note that the Bill contemplates similar freezing powers even where the 2020 lease does not give rise to an eligible application under the new scheme.

Prohibition on eviction

The release notes that:

commercial landlords can’t issue an eviction notice for eligible tenants without obtaining a direction from the Victorian Small Business Commission

This would seem to differ from the prior Regulations (which protected tenants only in certain circumstances and which didn’t contemplate the SBC needing to be involved before the landlord could make an argument that an eligible tenant had lost the protections of the Regulations) although we wonder whether this reflects ‘press release puffery’ rather than what will actually make its way into new Regulations.

Landlord relief

Last week it was announced that the government would make an $80,000,000 ‘hardship fund’ available to landlords. That has now been reduced to a $20,000,000 hardship fund, coupled with land tax relief (of up to 25%).

Assumedly the eligibility for land tax relief will reflect the eligibility requirements of prior land tax relief schemes.

There is still no detail as to how eligibility for the hardship fund will be determined but the release does note that it will be available only to “small landlords” who are able to demonstrate “acute hardship”.

More to come

There will be plenty more information still to come out over the coming days and weeks. Watch this space for updates.

Paul Nunan

Director

Accredited Specialist | Commercial Leasing