Understanding Your Rights With Retail/Commercial Leases Amidst COVID-19

The COVID-19 pandemic has significantly altered the capacity of many individuals to execute their work, with tenants and landlords of commercial leases being one affected group. The government has introduced new regulations to reduce the negative impacts on landlords and tenants, including through the COVID-19 Omnibus (Emergency Measures) Act 2020 (‘Omnibus Act’).

On 1 May 2020, the Victorian Government published the regulations relating to commercial leases and licences (COVID-19 Omnibus (Emergency Measures) (Commercial Leases and Licences) Regulations 2020) (‘Regulations’). These govern the rights and responsibilities of both landlords and tenants in the context of COVID-19. This article will look at some of the key considerations that landlords and tenants should keep in mind.

Key Aims of the Regulations

• To enact temporary measures which apply to tenants and landlords under certain leases to alleviate the financial hardship caused by COVID-19.
• To set up methods of resolving disputes concerning these leases.

Period of the Regulations

Although released on 1 May 2020, the Regulations outline that they are taken to have been effective from 29 March 2020. The Regulations are operational from 29 March 2020 to 29 September 2020. This is referred to as the ‘relevant period’.

Leases that are Covered

For a tenant to seek protection or relief under the Regulations, they must be classified as a party to an ‘eligible lease’. An eligible lease is one that:

1. Was in effect on 29 March 2020; and
2. The tenant has an annual turnover of less than $50 million (Small and Medium Enterprise (‘SME entity’)); and
3. The tenant is an employer who qualifies for, and is a participant in the JobKeeper scheme.

‘Turnover’ is defined as being any of the following:

• The proceeds of sale of goods and/or services;
• Commission income;
• Repair and service income;
• Rents, leasing and hiring income;
• Government bounties and subsidies;
• Interest, royalties and dividends; and
• Other operating income.

There are certain classes of leases that are expressly excluded from being eligible leases in the Regulations. Some of these include leases where the premises are used for:

• Agricultural, pastoral, horticultural or apicultural activities;
• Poultry farming, dairy farming, aquaculture or tree-farming; and

Call Now Enquire Now

Good Faith

There is a general obligation on tenants and landlords under an eligible lease to work cooperatively and in good faith regarding the discussions and negotiations to which the Regulations apply. 

Non-payment of Rent During the Relevant Period

A tenant will not be in breach for not paying rent during the relevant period as long as they:

• Request rent relief from the landlord under the eligible lease; and/or
• Pay an amount of rent in accordance with any agreed variations to the eligible lease or any other.

If a tenant satisfies these conditions, a landlord must not:

• Evict or attempt to evict a tenant; or
• Re-enter or otherwise recover the premises, or attempt to do so;
• Have recourse to any security relating to the non-payment of rent, or attempt to do so.

If a landlord does, or attempts to do any of the above, they may be liable to pay a fine.

It ought to be noted that the protections offered under the Regulations are not automatic. For non-payment of rent, the protections stem from the prerequisite of communication between the landlord and tenant being satisfied. If a tenant fails to communicate with the landlord as to their circumstances, and stops paying rent due to financial hardship caused by COVID-19, these protections will not be afforded.

Process for Seeking Rent Relief

1. A tenant may make a request for rent relief in writing to the landlord. They must attach to this request:

• • A statement that their lease is an eligible lease and not excluded from the Regulations; and
  • Information that demonstrates that the tenant is an SME; and
  • Information that demonstrates that the tenant qualifies for and is a participant in the JobKeeper scheme.

2. If the tenant satisfies these conditions, then the landlord must offer rent relief to the tenant within 14 days or another time period agreed between the landlord and tenant in writing.

3. The offer of rent relief must satisfy the following conditions:

• • Be based on all the circumstances of the eligible lease;
  • Relate up to 100% of the rent payable from 29 March 2020 to 29 September 2020;
  • Provide that at least 50% of the rent relief is in the form of a waiver of rent (unless otherwise agreed in writing) and a deferral of 50% of the rent;
  • Take into account the reduction in a tenant’s turnover during the relevant period;
  • Consider whether a failure to provide enough rent relief would compromise the ability of the tenant to satisfy its lease obligations;
  • Take into account the landlord’s financial ability to offer rent relief;
  • Take into account any reductions to outgoings that were charged for the premises.

4. The landlord and tenant must negotiate and reach an outcome in good faith. The aim is to agree on rent relief for the relevant period.

 5. Any subsequent material changes in financial circumstances allows the tenant to make a further request for rent relief.

Call Now Enquire Now

The landlord must not request payment of any deferred rent until the earlier of:

• 29 September 2020; or
• The expiry of the term of the eligible lease.

Furthermore, the landlord and tenant must vary the eligible lease or come to an agreement so as to ensure the deferred rent can be paid off over the greater period of either:

• The balance of the term of the lease; or
• No less than 24 months.

Landlords cannot charge interest, fees or charges with regard to deferred rent for eligible leases.

Prohibition on Rent Increases

During the relevant period, a landlord must not increase the rent payable under an eligible lease. However, the landlord and tenant may agree in writing that this does not apply to their eligible lease.

This rule does not apply retail leases in which rent is determined depending on the tenant’s turnover.

Extensions of Leases

If there is a deferral of the payment of rent during the relevant period under an eligible lease, the landlord must offer the tenant an extension to the term of their eligible lease on the same terms and conditions that applied prior to the enactment of the Regulations. The extension period must be equivalent to the period for which the rent is deferred. However, the landlord and tenant may agree in writing that this does not apply to their eligible lease.

Outgoings and Other Expenses 

The Regulations outline that landlords must at the very least consider waiving the recovery of outgoings or other expenses that a tenant must pay during the relevant period. This applies for any part of the relevant period during which the tenant cannot operate their business at the premises.

If the tenant cannot operate their business at the premises, the landlord can cease to provide or reduce the provision of any service as long as it is reasonable, and in conformity with any reasonable request of the tenant.

Any excess amounts paid by tenants for outgoings must be reimbursed by the landlord proportionally if there are reductions.

Reductions in Trading Hours 

The Regulations outline that a tenant under an eligible lease is not in breach if during the relevant period they either:

• Reduce the trading hours of the business; or
• Close the premises and cease to carry out business at the premises.

If a tenant does either of these, a landlord must not:

• Evict or attempt to evict a tenant; or
• Re-enter or otherwise recover the premises, or attempt to do so;
• Have recourse to any security relating to the non-payment of rent, or attempt to do so.

If a landlord does, or attempts to do any of the above, they may be liable to pay a fine.

Confidentiality and Disputes

Both landlords and tenants are bound by confidentiality obligations with regard to any information obtained or in connection with the regulations.

Eligible lease disputes will be mediated by the Victorian Small Business Commissioner. If this fails, VCAT and the Courts may hear disputes.

Key Takeaways

• If you are a landlord or a tenant bound by a commercial/retail lease agreement, it is important to know your updated rights and responsibilities amidst COVID-19.

If you or someone you know wants more information or require advice or help, please don’t hesitate to contact one of our leasing lawyers on (03) 9600 0162 or email info@lordlaw.com.au.