Commercial Rent Relief Scheme 2021 Victoria - Summary
Regulations in relation to further rent relief for commercial tenants (and licensees) have now been released. While they mirror many aspects of the provisions in the “old” 2020 regulations (and the extension of those regulations), the requirements have been expanded upon, to create sharper more complex processes, addressing some of the issues that have previously been raised.
They also include some important deadlines of which both tenants and landlords need to conscious.
In essence, an eligible tenant that validly applies for rent relief prior to 30 September 2021, must be offered relief and is afforded protection from non-compliance with obligations to pay rent and outgoings during the period from 28 July 2021 until 15 January 2022. Other protections also apply.
Critical Steps Right Now
Tenants
Eligible tenants will need to gather the required turnover information (see below) and make rent requests to their landlords prior to 30 September 2021.
Upon receipt of an offer by their landlord, a tenant will need to decide whether to accept the offer or refer the matter to mediation within 14 days.
Prior to 31 October 2021, a tenant must resubmit turnover information relating to the quarter ending September 2021
Landlords
Landlords need to respond to rent relief requests accompanied by the required information within 14 days, with a complying offer.
Landlord will not be entitled to increase rent during the protection period under any eligible lease.
Both
Parties need to cooperate, acting reasonably and in good faith to negotiate rent relief.
Highlights of the New Regulations
Protection Granted by Regulations
Once the tenant has made the rent request, the tenant will not be in breach if they do not comply with the lease provisions regarding rent and outgoings during the protection period provided that:
before any rent relief agreement is made, the tenant validly requests rent relief and continues to pay a proportion of rent equal to the rent reduced by the tenant’s decline in turnover as set out in the rent relief request.
Comment: This is an interesting step away from previous regulations, where tenants were effectively able to withhold all payments rent and outgoings as a bargaining tool.
once a rent relief agreement is agreed, the tenant pays rent and outgoings in accordance with that agreement;
in any case, the tenant is unable to trade due to sickness or injury or as a result of a natural disaster affecting the premises
In addition:
a landlord is not able to evict, re-enter the premises or have recourse to security where tenant reduces trading hours or ceases to trade. This latter protection applies irrespective of whether the tenant satisfies the decline in turnover test; and
increases in rent are forfeited during the protection period (and not able to be claimed later).
Comment: This leaves open the possibility of rent decreases as a result of market or CPI rent reviews.
Eligibility
An eligible lease is any retail or non-retail commercial lease or licence to an eligible tenant:
in effect on or prior to 28 July 2021; or
any such lease to the extent renewed, varied or extended after 28 July 2021 on substantially the same terms.
It excludes leases to listed corporations or subsidiaries of listed corporations, as well as certain agricultural, pastoral, and other farming-relate leases.
An eligible tenant must be carrying on business in Australia (or is a not-for-profit or charitable institution) with turnover over of less than $50m, that satisfies the decline in turnover test. A range of entities are expressly included, including in essence), banks, government agencies (and their subsidiaries), members of groups with turnover exceeding $50m, corporations in liquidation and bankrupt individuals.
Assessment of decline in turnover
Tenant must establish a 30% (15% for charities) decline in turnover in relation to the relevant turnover test period. Turnover is calculated in accordance with the GST Act, and expressly includes internet sales and Victorian government COVID-19 business support fund payments (but excludes Commonwealth financial assistance).
Comment: Unlike the amended 2020 regulations, turnover is not expressly linked to the particular premises.
The turnover test period varies depending upon when the tenant commenced trading.
| Commenced Trading | Turnover test period |
|---|---|
| Pre 1 April 2021 | Any 3 consecutive month period between 1 April 2021 and 30 September 2021, starting on the first day of the relevant month |
| After 1 April 2021 | A period agreed between the tenant and the landlord in good faith |
The tenant’s turnover during the turnover test period must be compared to the tenant’s turnover in the relevant comparison period. This period again varies depending upon when the tenant commenced trade:
| Commenced Trading | Relevant comparison period |
|---|---|
| Pre 1 April 2019 | The 3 month period in 2019 corresponding to the turnover test period |
| Between 1 April 2019 and 31 March 2020 | The tenant’s average monthly turnover during the whole months in this period from the commencement of trade multiplied by 3 | Between 1 April 2020 and 31 March 2021 | The tenant’s average monthly turnover during the whole months in this period from the commencement of trade multiplied by 3 | After 31 March 2021 | The tenant’s total turnover from commencement of trade until 31 July, divided by the number of days in that period, multiplied by 92. |
Months where ATO bushfires deferrals and drought help concessions were applicable to the relevant tenant can be excluded.
There are numerous potential adjustments to the assessment of alternative comparison turnover to deal with specific circumstances where the standard assessment may result in skewed figures, such as where there has been:
a business acquisition or disposal impacting turnover;
a business restructure changing the comparison turnover;
the tenant has had substantial increases in turnover prior to the applicable turnover test period
the business turnover has been affected by declared drought or natural disaster (undefined);
the business has irregular turnover;
a sole trader or small partnership (with no employees) has been affected by sickness, injury or leave
the tenant temporarily ceased trade due to an event outside the ordinary course of the business.
Rent Relief Request
A tenant seeking relief must make a rent relief request in writing, accompanied by a statement that:
the tenant is an eligible tenant
the tenant satisfies the turnover decline test, including setting out:
the test turnover period and the tenant’s turnover during that period
the tenant comparison turnover for the comparison period (including whether an alternative turnover method was used, and if so, how the comparison turnover was calculated)
the tenant’s decline in turnover
the reduction in rent required to comply with the minimum landlord’s offer requirements;
any other circumstances the tenant would like the landlord to consider it making its offer.
Comment: Providing detailed information in this regard will ensure the landlord is required to take it into account. A failure to do so will mean the landlord may not have to consider it, so this element should be carefully considered.
Within 14 days of making the rent relief request, the tenant must provide:
evidence of the turnover figures provided with the request in the form of one of extracts from the tenant’s accounting records, the tenant’s business activity statements or statement issued by a bank in respect of the tenant’s account or a statement by a practising accountant; and
a statutory declaration by the tenant (or one of its authorised officers) stating that the tenant is an eligible tenant and the turnover evidence provided is true
If the tenant fails to abide by these further requirements within the 14-day period, the rent relief request lapses, and they must make a new relief request. A tenant is permitted a maximum of three attempts to comply with these requirements. “Three strikes and you’re out”.
Rent relief is applicable only during the rent relief period. That period commences on 28 July 2021 if a complying rent relief request is made prior to 30 September 2021. If a complying rent request is made after 30 September 2021, the rent relief period only commences on the date that rent relief request is made.
Where a tenant has already made a rent relief request, it would be prudent for the tenant to make a further request in compliance with the regulations.
Landlord’s Offer
The landlord must within 14 days (or other period agreed with the tenant) offer rent relief to the tenant. That offer must:
be for up to 100% of the rent;
as a minimum, be proportional to the tenant’s decline in turnover;
constitute at least 50% in the form of waiver (the balance may be deferred rent);
take into account:
any part payment of rent by the tenant; and
other circumstances raised by the tenant in its rent relief request
Where the rent under the lease is a gross rent, the percentage rent relief must include the outgoings.
Comment: This has the peculiar consequence of putting landlords who have granted gross leases in a more disadvantageous position that landlords under leases with a base rent plus outgoings structure.
Following the Landlord’s Offer
Following the landlord’s offer, the parties must negotiate in a view to agreeing rent relief during the rent relief period.
Provided the landlord’s offer complies with the minimum requirements of the regulations, if within 14 days of receipt of the landlord’s offer rent relief is not agreed between the parties and the tenant has not referred to dispute to the Small Business Commissioner (SBC), the tenant will be deemed to accept the landlord’s offer.
Comment: This seems like a potential incentive for the landlord to “lowball” the landlord’s offer, despite that potentially be contrary to the “good faith” requirements of the regulations.
Mandatory Reassessment
The regulations provide for a mandatory reassessment of the rent relief, where rent relief was sought prior to 30 September 2021, and the tenant began trading prior to 1 April 2021.
The tenant must, by 31 October 2021, resubmit figures showing turnover decline but using:
a turnover test period of the quarter ending 30 September 2019 or (if the tenant began trading between 1 July 2019 and 31 March 2021) the quarter ending 30 June 2021.
a comparison period of the quarter ending 30 September 2021.
The tenant must once again provide a statutory declaration confirming the tenant is an eligible tenant and accuracy of the information provided.
Where alternative comparison turnover was used to calculate the original decline in turnover, that same comparison turnover must be used.
To the extent of any difference between this calculation and the decline in turnover originally calculated pursuant to the tenant’s rent relief request, any aspect of the rent relief agreement based on decline in turnover will be adjusted to give effect to the revised figure, from 31 October 2021 for the balance of the rent relief period.
A failure to carry out the reassessment results in the tenant no longer being entitled to any waiver of rent under a rent relief agreement.
Comment: On the face of the New Scheme, a reassessment is not required where a rent relief agreement has not yet been entered into prior to 31 October 2021. In those circumstances the September 2021 quarter figures will be a factor to be taken into account as part of the good faith negotiations. However, there is an argument that once a rent relief agreement is entered into, the absence of the provision of September quarter figures may disentitle the tenat to rent relief following 31 October 2021.
Parties may choose to "build in” to any rent relief agreement their own reassessments over the protection period, provided they do not contravene the minimum requirements of the regulations. However, doing so would seem to require additional work which may not be attractive to parties who would prefer to focus on their businesses.
Further provisions
Given many of the provisions of the new regulations reflect the previous regulations, I won’t go into detail regarding then. Instead, I note the following similar provisions:
The regulations require landlords and tenants under an eligible lease to cooperate and acting reasonably and in good faith.
Further rent relief can be sought if the tenant’s financial circumstances materially change after entry into a rent relief agreement
Where rent is deferred as part of a rent relief agreement:
deferred rent is not payable earlier than 15 January 2022;
deferred rent is payable over the balance of the term of the lease or 24 months, whichever is greater;
where rent was deferred under earlier COVID-19 rent relief regulations, payment of that rent is also deferred until 15 January 2022.
the landlord must offer to extend the term of the lease for a period equivalent to the period for which rent is deferred
It remains unclear to me whether the period is to be calculated by reference to the rent payable, or the period over which the rent was deferred. That is, if 20% of rent is deferred over a period of 5 months, is the offer to be for a 5 month extension, or a 1 month extension? Likely the former.
Landlords are required to consider waiver outgoings and other expenses during any period in which the tenant cannot operate their business
Information provided is confidential.
Mediation and Determination
A landlord or tenant may refer a dispute regarding an eligible lease to the SBC for mediation. Given the short timeframes in which parties must resolve rent relief offers or refer the matter to the SBC, it can be anticipated that many matters will be listed for mediation and that waiting times for mediations will be long.
If the mediation fails, the SBC may give a notice under regulation 41, which then permits a party to refer the matter for determination by VCAT (or the Supreme Court).
VCAT can take into account a wide range of matters in determining appropriate rent relief in respect of any dispute.
There are extensive provisions regarding binding orders by the SBC which, given their lack of use during the earlier iterations of these regulations, do not warrant comment.
New provisions worth noting
Provisions in an eligible lease or related agreement which purport to indemnify a landlord against action, liability, claims or demands for which the landlord would otherwise be liable under the regulations are deemed void.
Accordingly, landlords that have entered into leases which attempt to oust or inhibit the application of the regulations will not likely be entitled to rely upon such provision.
What happens with existing rent relief arrangements?
The new rent relief arrangements do not invalidate any existing rent relief agreements. However, any ongoing aspects of those agreements will need to be taken into account in determining any new rent relief. As noted above, deferred rent under existing rent relief arrangements may be further deferred.
What if the tenant is not eligible?
A failure to be eligible does not mean a tenant cannot seek rent relief or mediation. However, the protections under the regulations will not apply, although they may be used as guidance as to what is a reasonable approach.
David Krolikowski, Director, Birdsong Legal
Published: 25 August 2021