The Victorian Government has released the regulations that govern the relationship between commercial landlords and their tenants (being small to medium sized businesses with an annual turnover of up to $50m and eligible for the JobKeeper Payments) commencing with effect from 29 March 2020 and ending on 29 September 2020. These rules set out the basis on which landlords and tenants need to conduct negotiation of rents with each other as well as dealing with outgoings. The following is a summary of the Commercial Tenancy Relief Scheme:
There will be a 6 month moratorium on commercial tenancy evictions from 29 March through to 29 September 2020 for the non-payment of rent for small to medium businesses with an annual turnover of less than $50m who have experienced a minimum of a 30% reduction in turnover due to COVID-19
- There will be a freeze on rent increases during the 6 month moratorium for commercial tenants
- Any rent reduction or deferment proportionate to the commercial tenant’s decline in turnover is subject to negotiation between landlords and tenants
- The basis for the rent reduction policy includes a mutual obligation on the tenant to continue to provide employment for their employees via the JobKeeper Payment scheme and (if applicable) provide rent relief for any sub tenants.
- The Government is waiving rents for its tenants who are small to medium sized businesses (and not-for-profit tenants)
- A mediation service will be available for commercial tenants and landlords to support fair tenancy negotiations
- Landlords will be entitled to a reduction of 25% of the 2020 proportional land tax bill for the affected property.
- Land owners that have at least one taxable non-residential property and where the total taxable land holdings are below $1.0m may choose to defer the payment of the balance of 75% of the 2020 land tax bill until 31 March 2021.
- While we have referred to the Victorian regulations, the other States and Territories have or will be implementing similar regulations
2. Processes for Commercial Tenancies
It is stated in the relevant Regulations that the landlord and the tenant must co-operate and act reasonably and in good faith in all discussions and actions.
a. Commercial Tenants
If a commercial tenant (being a small to medium sized business with an annual turnover of less than $50m or a not for profit organisation) cannot afford to continue to pay the commercial rent they should:
- Keep paying what rent they can afford to pay
- Determine your reduction in turnover associated with that premises
- Apply, in writing, for rent relief from their landlord
- Attempt to negotiate an agreement on rent relief (being either a rent reduction or rent deferral) for the 6 month period
- If an agreement has been negotiated, the agreement should be documented in writing and signed by all parties to the agreement with each party retaining a copy of the agreement.
- If an agreement cannot be reached, the tenant can lodge an application with the Victorian Small Business Commission to have their dispute mediated at no cost. Failure to have the issue resolved at mediation would then require the tenant to pursue an action through either VCAT or the Courts. This process would be costly and is a last resort option.
A tenant can apply to the landlord for rent relief under the Regulations. The request for rent relief must be in writing and accompanied by a statement by the tenant that the tenant’s lease is an eligible lease and provide evidence to the landlord that the tenant is a small business entity (turnover of less than $50m) and that the tenant qualifies for and is a participant in the Federal Government’s JobKeeper Scheme.
If after rent relief has been provided to the tenant the trading position of the tenant has further deteriorated (i.e. materially changed) the tenant may make a further request for rent relief to the landlord. The parties are then required to go through the same process in negotiating an outcome.
b. Commercial Landlords
For commercial landlords the steps involved are as follows:
- Work out what rent reduction you can afford given your financial position
- Consider options you have to access assistance (e.g. are you eligible to obtain mortgage relief from your bank?)
- Contact the tenant to offer rent relief. This will at least commence the negotiation between you and the tenant.
- If you grant rent relief to a tenant involving a premises in the State of Victoria you can apply for a 25% land tax discount and a deferral on the balance of the land tax due until 31 March 2021.
Upon receipt of a written request for rent relief from the tenant a landlord must offer rent relief to the tenant under the eligible lease within 14 days of receiving the request (or such other time as is agreed as between the parties in writing). The landlord’s offer of rent relief must be based on all of the circumstances of the eligible lease and:
i. Deal with the rent payable under the lease for the period 29 March to 29 September 2020
ii. Provide that no less than 50% of the rent relief offered be in the form of a waiver of rent (unless otherwise agreed between the parties in writing)
iii. Take into account the reduction in the tenant’s turnover, consider the impact of the offer for rent relief on the tenant, consider your financial ability to offer rent relief (including taking into account any relief afforded to the landlord by its financiers) and any reductions to any outgoings on the property.
3. What are the definitive “no no’s”
Under the Regulations tenants and landlords cannot do the following without being in breach of either the lease or these Regulations:
- Tenants cannot simply stop or refuse to pay rent to the landlord without following the due process
- A landlord cannot increase the rent payable under the eligible lease (unless the parties agree in writing that Regulation 12(2) does not apply). Please note that Regulation 12(3) states that this prohibition on rent increases does not apply to a retail lease where the rent is determined by reference to the volume of trade of the tenant.
- The landlord cannot require the tenant under the lease to pay interest or any other fee or charge in relation to any payment of rent deferred
4. Other Matters to Note
(i) Where the landlord and tenant agree that there will be a deferral of rent between the 29 March and 29 September:
- The landlord must offer the tenant an extension to the term of the lease and the extension must be on the same terms and conditions of the lease existing before the application of these Regulations
- The extension offered by the landlord must be equivalent to the period for which rent is deferred (unless the parties agree in writing for Regulation 13(2) not to apply)
- If any rent is deferred the landlord cannot request payment of the deferred rent until the earlier of the 29 September or expiry of the lease (ignoring any extensions granted under these Regulations). The tenant must pay the deferred rent to the landlord over the greater of the balance of the term of the lease (including any extension to the term of that lease) and a period of no less than 24 months.
(ii) Change in trading hours:
Regulation 18 states that a tenant is not in breach of the lease if they reduce their opening hours or close the premises between 29 March and 29 September 2020 and that a landlord cannot evict or attempt to evict a tenant. In addition, a landlord must not recourse or attempt to have recourse to any security relating to the non-payment of rent. The penalty for a landlord who breaches this regulation is 20 penalty units. At present, a penalty unit in Victoria is $165.22. Therefore, the penalty for breaching Regulation 18 is $3,304.40.
5. Dispute Resolution
Where the landlord and tenant cannot come to an agreement the Regulations set out the process for dispute resolution.
The first step is to refer the matter in writing to the Small Business Commission for mediation. However, the parties must not use mediation as a means to prolong or frustrate the reaching of an agreement.
If the parties cannot come to an agreement through the mediation process with the Small Business Commission and the Small Business Commission has certified in writing that the mediation has failed or is unlikely to resolve the dispute then the parties can seek a resolution either through VCAT or the courts. The Regulations provide that an eligible lease dispute may only come before the Supreme Court of Victoria if one of the parties to the dispute has sought leave from the Supreme Court to commence proceedings and the Supreme Court has granted that application.
6. Land Tax Relief for Land Owners
Eligible commercial landlords can access a 25% discount on their 2020 proportional land tax bill if they meet the following criteria:
- All or part of the property owned is rented or currently available for lease; and
- At least one tenant’s ability to pay their normal rent or your ability to secure a tenant is impacted by COVID-19 pandemic; and
- You have provided rent relief to the affected tenant(s) in accordance with the above rules
In addition, if you are an eligible commercial landowner with at least one non-residential property and total taxable landholdings below $1.0m you are able to defer the remaining 2020 land tax liability up to 31 March 2021.
If you would like to discuss any of these matters please do not hesitate to contact either our office on 03 96291433 to discuss.