Update 12 –- effects of Covid-19 on commercial tenancies

Sorry for the multiple updates in quick succession.

VCAT has published a new decision in relation to interpretation of the Regulations and it reaches some significant and interesting conclusions.

The decision can be found here: Filomeno Nominees Pty Ltd v Crown Group Pty Ltd (Building and Property) [2021] VCAT 81 (5 February 2021) (austlii.edu.au)

By way of very brief summary, the Tribunal found that a tenant’s rent relief application must strictly comply with the requirements of the Regulations (although we do note that the word 'strictly' was not actually used). This will come as welcome news to many landlords; not so much to tenants.

It is important to note that this decision deals only with the pre-29 September Regulations, although one would expect the principles to carry into the amended (and more prescriptive) post 29-September Regulations.

Background

The lease in question had been in place since 2016. In March 2018 the tenant renewed and, although no formal renewal documentation was ever executed, the terms of renewed lease were not in question.

The tenant did not pay rent or outgoings from 1 April 2020 and on 30 September 2020 the landlord issued a notice to remedy breach.

When the tenant failed to make payment in response to the notice the landlord re-entered the premises on 9 October 2020. The tenant subsequently “broke into the premises” and remained in possession since that date.

The tenant argued it was protected from eviction pursuant to Regulation 9 of the COVID-19 Omnibus (Emergency Measures) (Commercial Leases and Licences) Regulations 2020 (“the Regulations”).

The landlord argued the tenant was not entitled to rent relief (or the protections of Regulation 9) because the tenant failed to comply with the requirements of the regulations when making its request for rent relief.

It was not in dispute that the lease was in force on 29 March 2020 and that the tenant was an SME entity that participated in JobKeeper. The Tribunal found that the lease was an eligible lease.

Decision

The tenant had made multiple attempts at rent relief requests, but the Tribunal determined that none of the requests included the information contemplated by Regulation 10.

Specifically the Tribunal found that the tenant did not:

a. “accompany any of its requests with a statement that its lease is an eligible lease and not excluded from the operation of the Act;’

b. provide information that evidences it is a SME entity; or

c. provide information that evidences it qualifies for and is a participant in the Jobkeeper scheme.”

The Tribunal noted that protection under Regulation 9 is dependent upon compliance with Regulation 10 and that in the absence of that compliance the landlord was entitled to terminate the lease.

The Tribunal also found that “the obligation to act in good faith under reg 10(5) only arises after a landlord makes an offer to a tenant. That did not occur in this case.” This was in the context of an argument by the landlord that the tenant failed to act in good faith. That argument does not seem to have required any substantial consideration in the matter (and the Tribunal’s comment in this regard does not make reference to the obligations in Regulation 8 to act reasonably and in good faith).

Practical takeaways

There has been a real question as to whether the Regulations will be interpreted strictly or whether, as quasi-consumer protection rules, they will be interpreted in a manner that benefits the tenant (so allowing arguments on the part of a tenant that substantial or effective compliance will suffice).

The Tribunal’s decision in Filomeno was that Regulation 10 is prescriptive and that, notwithstanding the fact that the lease was eligible, by failing to meet the prescriptive requirements of that regulation the tenant failed to make a compliant request and so failed to trigger the protections that would otherwise have been afforded it under Regulation 9.

This is significant – Regulation 10, particularly the post-29 September version, is difficult to strictly comply with. If the decision in Filomeno is followed it is likely that large numbers of tenants will be denied rent relief.

It should be noted that the evidence provided by the tenant in Filomeno was found to be unreliable. It is not clear on the face of the decision that any argument as to substantial or effective compliance was raised by the tenant and it remains to be seen whether a tenant getting closer to the mark on compliance would be viewed more favourably.

The starting point, though, seems to be a win for landlords, who should carefully consider whether each rent relief request made by their tenants has strictly complied. The takeaway for tenants, of course, is to ensure that any rent relief request is strictly compliant (although given that requests now only trigger an obligation to provide relief from the date on which they are made the ship has largely sailed in this regard).

Paul Nunan

Director

Accredited Specialist | Commercial Leasing