Update 9 – (the commercial leases Regulations amendments) - effects on commercial tenancies

On 29 September 2020 the COVID-19 Omnibus (Emergency Measures) (Commercial Leases and Licences) Miscellaneous Amendments Regulations 2020 (The Amending Regulations) were brought into force. You can see a copy of the Amending Regulations here:

https://content.legislation.vic.gov.au/sites/default/files/2020-09/20-107sra authorised.pdf (if that link is not working you can copy-paste into your browser - something about the legislation.vic PDFs mean they don't play nicely with our links)

We have already published a brief summary of the Amending Regulations. That summary can be read here.

This article won’t re-do the summary, instead it will expand on some of the more complex changes and touch on the amendments not dealt with in our summary article – you should read the summary article first. It may also be sensible to refresh on the state of the Regulations as they have applied until these Amending Regulations (see our article here in that regard).

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Eligible lease

The Amending Regulations define “eligible lease” (this definition was previously contained within the enabling Act).

Much like previously, to be an eligible lease the lease must be in effect on 29 March 2020 (that requirement remains in the enabling Act) and the tenant must be an SME entity (in brief, an entity with turnover in the prior financial year, or expected turnover in the current financial year, of less than $50,000,000).

The tenant must also be “an entity entitled under section 6, 11 or 12A of the [Coronavirus Economic Response Package (Payments and Benefits) Rules 2020] to a jobkeeper payment”. The requirement that the tenant be an employer has been removed (sole-traders being capable of receiving jobkeeper payments) but otherwise the requirements are much the same as previous.

The same exclusions for grouped entities and agricultural leases as applied previously continue.

A tenant will continue to receive the benefit of the Regulations as amended notwithstanding that following a valid rent relief request they become ineligible for jobkeeper payments.

Tenant’s rent relief request

The requirements of a tenant’s rent relief request are substantially different to the requirements under the old Regulations. Accordingly a request made under the old Regulations is unlikely (unless the tenant has been particularly effusive) to comply with the requirements under the Regulations as amended.

A tenant’s request for rent relief must now be accompanied by:

a) a statement from the tenant:

1. that the lease is an eligible lease;

2. that the lease is not excluded from the operation of the regulations (for reasons of grouping or agricultural nature); and

3. setting out the tenant’s decline in turnover that is associated with the premises (and no other premises) (expressed as a whole percentage and calculated in accordance with the decline in turnover test utilised by the tenant in respect of their jobkeeper application and in relation to the tenant’s most recent decline in turnover test period);

b) information that evidences the tenant:

1. is an SME entity;

2. is an entity entitled to jobkeeper payments (including the tenant’s jobkeeper receipt number and a copy of the tenant’s most recent notice to the Commissioner of Taxation under the jobkeeper rules); and

c) information that provides evidence of the tenant’s stated decline in turnover including at least one of:

1. extract from the tenant’s accounting records;

2. the tenant’s BAS;

3. statements issued by an ADI (not defined in the Amending Regulations but assuming their ordinary meaning); or

4. a statement by a practising accountant.

The requirement at (a)(iii) above is curious – a tenant is required to set out their decline in turnover, but only in respect of a single period and relying on a reduction in turnover test applied pursuant to the jobkeeper rules – the jobkeeper rules are broader in this regard than simple year-on-year analysis and allow tenants to apply alternative decline in turnover tests determined by the Commissioner.

Furthermore the turnover is to be associated "with the premises (and no other premises)" - in circumstances in which business are more and more removing themselves from being tied to premises revenue will less and less be able to be said to be associated only with the premises.

The requirement at (c) above notes that the tenant must provide “at least one” of the stated items – that departs from the prior guidance issued by the Small Business Commissioner and Small Business Victoria which would have indicated only one of those things was required.

Landlord’s offer of rent relief

A landlord’s offer of rent relief has changed in two critical ways:

1. while an offer under the old Regulations had to apply to “the relevant period” (being 29 March – 29 September) an offer under the Regulations as amended need only relate to the period commencing on the date the tenant makes a request for rent relief compliant with the process above.

This is a strange departure – it will result in very significant consequences for tenants who delay in making a rent relief request or who are poorly advised in relation to the request and so fail to meet the specific (and reasonably onerous) requirements of the request process.

2. The offer of rent relief must be, at a minimum, proportional to the decline in tenant’s turnover consistent with the requirements set out at (a)(iii) above (under the heading Tenant’s rent relief request).

This means that the rent relief will ultimately be proportional to lost turnover in a single period (and so will not, necessarily, be reflective of the tenant’s lost turnover throughout the relevant period.

This is an unexpected provision – some tenants will suffer negative consequences from this (where their turnover in one specific period is not as bad as in other periods) and others will be able to ‘game’ the system to ensure their turnover in the relevant period is particularly low (there are many industries where pushing invoicing out from one period to the next is an option for a tenant wanting to demonstrate a lower turnover than might genuinely be the case).

Landlords remain able to divide the proportional rent relief between waiver and deferral, but waiver must constitute at least 50% of the relief.

When read together, the new requirements for a tenant’s rent relief request and the requirement on a landlord only to offer relief from the date a tenant makes a request means that tenants would be well advised to make a new, compliant request for rent relief regardless of whether or not they have previously made a request under the old Regulations (and regardless of the state of negotiations toward relief in that regard).

Powers of the Small Business Commissioner (SBC)

The SBC has been granted reasonably significant powers to make binding orders.

Stepping through the changes –

The process for referral to the SBC of an eligible lease dispute has been expanded in the Amending Regulations but the process itself is somewhat unremarkable (effectively requiring compliance with SBC forms).

The process now requires a landlord to respond to a notice from the SBC subsequent to an application made by the tenant within 10 business days. There is no corresponding time limit imposed on a tenant’s response.

If mediation fails or the SBC determines mediation is unlikely to resolve the dispute the SBC may issue a “Regulation 20A Certificate”. That certificate must state whether the landlord has failed to respond to the SBC’s notice or has, in the SBC’s opinion, failed to engage in mediation in good faith – no indication is provided as to what will be considered ‘good faith’ engagement in mediation although our understanding is that the bar will be reasonably low (that is that if a landlord attend mediation they would have to act somewhat egregiously before the SBC would issue a certificate noting they had failed to act in good faith).

The intention seems to be that if the Regulation 20A Certificate states that a landlord has failed to respond or mediate in good faith then a tenant may apply to the SBC for a ‘binding order’**. The SBC will then give the landlord an opportunity (5 business days) to make a submission and following a further optional round of submissions (if requested by the SBC) the SBC must make a binding order if satisfied that it is fair and reasonable to do so.

A binding order will be a direction to the landlord to give specified rent relief and must include reasons.

Following issue of a binding order either the tenant or the landlord may request the SBC amend or revoke the order. The SBC may also initiate amendment or revocation on its own initiative. Following a submission and consideration process the SBC may elect to dismiss the application for amendment or to make an amendment or revocation.

Notably the SBC may not conduct hearings either in the first instance or on application for amendment or revocation.

A landlord or tenant may apply to VCAT for a review of any of the substantive decisions made by the SBC under the binding order process or in relation to enforcement of a binding order.

** The wording of the Regulations here appears to be broken –the tenant will be entitled to apply for a binding order if the Regulation 20A Certificate “includes a statement under… Regulation 20A(3)(a) or (b)” but a Certificate must have such a statement – it is a statement as to “whether” the landlord has failed to mediate or act in good faith - the statement will not therefore be necessarily adverse to the landlord (assumedly if the statement was not adverse to the landlord then the SBC would not be able to be satisfied that it is fair and reasonable to make a binding order).

Paul Nunan

Director

Accredited Specialist | Commercial Leasing