Leasing code regulations – what we know and what we don’t know

In recent days the Victorian parliament has passed both the COVID-19 Omnibus (Emergency Measures) Act 2020 (the Act) and the eagerly awaited COVID-19 Omnibus (Emergency Measures) (Commercial Leases and Licences) Regulations 2020 (Regulations) to give effect to the National Mandatory Code of Conduct (Code) (refer to previous post).

The Regulations provide the industry with more clarity, but leave some questions unanswered.

What we know

  • The Regulations will operate for the period 29 March 2020 to 29 September 2020 (Covid-19 Period).
  • Outcomes will not be as simple as reducing rent in proportion to turnover because all the circumstances of the eligible lease are to be taken into account including the tenant’s capacity to fulfil ongoing obligations and the landlord’s financial ability to offer rent relief.
  • All eligible leases are amended to impose an obligation to cooperate and act reasonably and in good faith in discussions and actions.
  • A tenant must make a written request to their landlord for rent relief. That request must include a statement by the tenant that it is an eligible lease (not excluded by the corporate group provisions of the Act) and evidence that the tenant is an SME that qualifies for and participates in the JobKeeper scheme. The inclusion of the words, “and participates in” introduced by the Act, is broader than the Code.
  • Upon receipt of a request the landlord has 14 days (or a different timeframe by agreement) to make an offer for rent relief.
  • The amount of rent relief offered by the landlord does not need to be directly related to the reduction in the tenant’s turnover. Following receipt of the landlord’s offer, the landlord and tenant are required to negotiate rent relief in good faith.
  • The landlord’s financial capacity (including any relief provided by its lenders) must be taken into consideration.
  • No less than 50% of any agreed rent relief must be a waiver.
  • Deferral components of rent relief must be paid over at least 24 months.
  • Eligible leases will be afforded appropriate extensions.
  • The nature and extent of financial information to be provided by a tenant remains unclear with the Small Business Commissioner foreshadowing guidelines.
  • A tenant may make a further request for rent relief if the tenant’s financial circumstances materially change during the period of the Regulations.
  • The landlord must consider waiving recovery of any outgoing or other expense payable by a tenant under an eligible lease for any part of the relevant period that the tenant is not able to operate their business at the premises.  In the same circumstances the landlord may cease to provide, or reduce provision of, any service at the premises,

(a)       as is reasonable in the circumstances; and

(b)       in accordance with any reasonable request of the tenant.               

  • Landlords must pass on outgoing concessions received.
  • “Turnover” is defined by reference to legislation.
  • Rent increases during the period of the Regulations are prohibited.
  • Leases cannot be terminated for closures or a reduction in trading hours.
  • A regime for mediation under the Regulations is created that mirrors the regime created under the Retail Leases Act 2003 (Vic) and parties can choose to go to either VCAT or the Court to have disputes under the Regulations determined.
  • A tenant’s protection from termination is subject to the tenant making the written request prescribed by the Regulations, and compliance with any varied lease.
  • A tenant will not be afforded protection from termination of a lease or varied lease for breaches outside of the Covid-19 Period.

What we don’t know

  • What does “all the circumstances of the eligible lease” mean?
  • In reality, how will tenants manage any deferred rental, bearing in mind that un-remedied breaches of leases varied by the Code outside the Covid-19 Period may result in termination?
  • How will the 24 month deferral period work, if a tenant doesn’t want to extend the term?
  • What is the impact of retail tenancy legislation?
  • Can deferral payments extend beyond the term of the lease?
  • Neither the Act nor the Regulations provide a definition of a ‘reasonable recovery period’.
  • What is a “material change” that will allow a further request for lease variation?
  • What does “landlord must consider” mean, in respect of waiving outgoings whilst tenant is not able to operate?
  • How will the application of the outgoings provisions impact “gross” leases?
  • What level of information must be provided by tenants?
  • What level of transparency must be provided by landlords in respect of leveraging, financial covenants, and capacity to absorb rent relief?
  • Can a tenant make several offers and can they be both of a temporary and a permanent nature?
  • Will a tenant have protection from termination for non-payment prior to making a written request?
  • How will landlords and tenants navigate businesses which are impacted but which are not eligible or do not participate in Jobkeeper?

Finally, the big practical issue remains how will landlords and tenants navigate the period between 29 March 2020 and any lease variation?