The National Cabinet overseeing, inter alia, the regulation of commercial tenancies, has introduced a mandatory code guiding rent relief to tenants in line with the hibernation strategy.  The aim is to see businesses through the COVID-19 pandemic period and provide a reasonable recovery period.

This code has been developed on a national level, however it is legislated separately in each state and territory.  In Victoria, the code is introduced by the COVID-19 Omnibus (Emergency Measures) (Commercial Leases and Licences) Regulations 2020 S.R. No. 31/2020.  The Regulations take effect retrospectively, from 29 March 2020 and will apply to 29 September 2020.

The mandatory code will apply to all Leases where:

  1. The tenant has suffered financial stress or hardship as a result of the COVID-19 pandemic. The tenant must be eligible for and participate in the Jobkeeper program (which requires a 30% reduction in business) are automatically considered to be in financial distress; and
  2. The turnover of the tenant’s business is $50 million or less (this is applied to franchises at the franchisee level, and in respect of retail corporate groups, at the group level rather than at the individual retail outlet level).

Summary of the code:

The code is based on “good faith” leasing principles and effectively:

  1. The landlords will not be able to terminate leases or draw down on security held under the lease (e.g. bank guarantees or security deposits during the COVID-19 pandemic period where the failure to pay rent is due to the COVID-19 crisis);
  2. The tenant must continue to honour the terms of the lease;
  3. The landlord must reduce the rent proportionate to the trading reduction in the tenant’s business;
  4. The rent reduction offered may be provided through a combination of waivers and deferrals of the rental;
  5. The landlords will be required to pass on any reduction in statutory charges and should seek to share benefits of deferred loan repayments provided by banks and outgoings should be waived or reduced where appropriate;
  6. There will be a freeze on rent increases during the COVID-19 pandemic period (as defined by the Australian Government) and taking into account a reasonable recovery period;
  7. The tenants may elect to extend their lease term for a period equivalent to any rent waiver or deferral period to allow them the ability to trade on existing lease terms after the COVID-19 pandemic period has passed; and
  8. There will be a State based, binding mediation process through the office of the Small Business Commissioner of Victoria, underpinning this regime.

Rent Relief Structure

Rent:

The amount of rent relief to be provided by the landlord to an eligible tenant will be proportionate to the reduction in the tenant’s business.  The rent relief may be negotiated between the landlord and the tenant, however:

  1. At least 50% of the rent relief offered must be in the form of a rental waiver; and
  2. While deferrals may be amortised over the remainder of the lease term, they must be amortised over a minimum of 24 months. This means that if there is only 6 months left on the term of the lease, the tenant will have a further 18 months after expiry to continue to make payments unless otherwise agreed between the parties.

The code provides some examples of proportionate solutions as a guide.  One example would be where the turnover loss of the tenants is 50%, the landlord must give the tenant a waiver of 25% of rental and a deferral of 25% of rental.

The tenant must provide evidence of loss of turnover to the landlord which may include profit and loss statements, balance sheets or any other financial data.  If the landlord does not readily accept the information contained therein, the matter may be referred to the Office of the Small Business Commissioner for mediation.

Outgoings:

  1. The tenant must continue to pay outgoings unless the tenant “is no longer able to trade” and the landlord accepts that is the case. If the landlord disputes the tenant’s ability to continue trading, the matter may be referred to the Office of the Small Business Commissioner.

Term of Lease

The tenant should be provided with an opportunity to extend the lease term for an equivalent period of the duration of the COVID-19 period e.g. from 29 September 2020 (6 months).

Rent increases

Landlords are to freeze any rent increases during the COVID-19 period.

Variations of Leasing Agreements during the COVID-19 period

Agreements to vary the lease between landlord and tenant during the COVID 19 period will be invalid and further, any agreements made between landlord and tenant after 29 March 2020 but prior to the date of the Regulations receiving Royal Assent (1 May 2020), may also be invalid.

Notwithstanding the regulatory changes, parties are free to reach their own agreements but where an agreement between the landlord and tenant cannot be reached, the Regulations impose the minimum standards set out above.

We caution our clients that the above advice is general in nature and every case is potentially different and we are available to provide specific advice about your particular circumstances.

Our office remains open and functioning during these difficult times.  Please call us at our office on telephone number 8346 4900 about these and any other legal questions.