First observations about the new landlord and tenant regulations

May 2, 2020

Uncategorized

Well, the new Regulations contain a few surprises with some wins for each of landlords and tenants respectively.

The Regulations broadly follow the scheme of the Code with a number of notable exceptions. Abi and my preliminary comments are set out below.

First, as expected, the Regulations operate for the period 29 March 2020 to 29 September 2020.  The retrospective operation of the Regulations is not qualified (unlike the WA Bill discussed in an earlier post).

Secondly, unlike in the Code, the amount of rent relief offered by landlords to tenants does not need to be directly related to the reduction in the tenant’s turnover.

Instead, the tenant must make a written request to the landlord for rent relief that contains a statement by the tenant that it is an eligible lease that is 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.

Once that request is made, the landlord has 14 days (or a different timeframe by agreement) to make an offer for rent relief.

The terms of the landlord’s offer are governed by reg 10, which includes the following (emphasis added):

(4)       A landlord’s offer of rent relief under subregulation (3) must be based on all the circumstances of the eligible lease and:

(a)       relate to up to 100% of the rent payable under the eligible lease during the relevant period; and

(b)       provide that no less than 50% of the rent relief offered by the landlord must be in the form of a waiver of rent, unless a landlord and a tenant otherwise agree in writing; and

(c)        apply to the relevant period; and

(d)       take into account

(i)        the reduction in a tenant’s turnover associated with the premises during the relevant period; and

(ii)        any waiver given pursuant to regulation 14(2); and

(iii)       whether a failure to offer sufficient rent relief would compromise a tenant’s capacity to fulfil the tenant’s ongoing obligations under the eligible lease, including the payment of rent; and

(iv)       a landlord’s financial ability to offer rent relief, including any relief provided to a landlord by any of its lenders as a response to the COVID-19 pandemic; and

(v)        any reduction to any outgoings charged, imposed or levied in relation to the premises.

(OK, so most of it is in bold, but you get the drift.)

Following receipt of the landlord’s offer, the landlord and tenant are required to negotiate rent relief in good faith (see reg 10(5)).

Our observations about this regulation are:

  1. The landlord’s offer must ‘be based on all the circumstances of’ the eligible lease. This is quite broad and allows significant latitude in the terms of the landlord’s offer.
  2. However, that latitude is restricted because the offer must ‘take into account’ each of the items listed in (d)(i) to (v). It is important to note that:
    • the phrase ‘take into account’ has been litigated in the context of rental determinations and has analogies in administrative law. The Regulations do not prescribe how the landlord’s offer takes the relevant considerations into account, but the offer will need to do more than merely ‘pay lip-service’ to each consideration.  What that means in practice will vary case-by-case;
    • the reduction in the tenant’s turnover is the first enumerated consideration but, unlike what was suggested by the Code, the rent relief offered does not necessarily need to be directly proportional to the reduction in the tenant’s turnover;
    • the tenant’s ability to fulfil its obligations under the lease (ie the tenant’s current and future solvency) is a consideration;
    • importantly, so too is the landlord’s financial capacity (including any relief provided by its lenders). This is important, as the Leasing Principles in the Code made little reference to the landlord’s financial capacity and this has been a source of significant consternation throughout the profession.  Consequently:
      • if the landlord is a retiree with no income except the income from the lease, this may be taken into account in the landlord’s offer; and
      • similarly, if the landlord is highly leveraged and its lenders have provided only limited extensions on its loans, then this, too, is a consideration; and
    • also, regulation 14(2) (referred to in (ii) above) requires the landlord to consider waiving outgoings if the tenant is not able to operate its business from the premises.

Consequently, we think it’s fair to say that there are a couple of wins for landlords here.

Importantly, the offer must ‘be based on all the circumstances of’ the eligible lease.  This is potentially quite broad.  One area of discussion in recent weeks has been the treatment of a tenant that is not required to close, but has elected to nonetheless (either for health and safety reasons because it is uneconomic to open its doors).  Under Reg 10(4), this will be a relevant consideration.  For example, if a tenant (such as a gymnasium) was required to close completely, it’s revenue might have been completely lost.  On the other hand, a café may have elected to close rather than trade with takeaway or delivery services only.  In the second case, the fact that the tenant could have traded would (at least arguably) be a relevant circumstance to take into account in the landlord’s offer.

Thirdly, it is clear that 50% of the rent relief must be a waiver.  However, unlike the Code, it is a little unclear whether the other 50% must be a deferral.

The Regulations contain the following definition:

rent relief means any form of relief provided to a tenant in respect of the obligation under an eligible lease to pay rent, including a waiver, reduction, remission or deferral of rent;

Regulation 10 (set out above) does not refer to deferrals.

However, once 50% of the rent relief is offered as a waiver, it is difficult to see what the other 50% would be other than a deferral. Consequently, we suspect that most offers will need to involve some form of deferral.

Regulation 16 states that:

(2)        If any rent is deferred by variation to the eligible lease or an agreement as mentioned under regulation 10(6)—

(a)        a landlord under the lease must not request payment of any part of the deferred rent until the earlier of—

(i)         expiry of the relevant period; and

(ii)        expiry of the term of the eligible lease (before any extension as provided under regulation 13 or otherwise); and

(b)        a landlord and tenant must vary the eligible lease or otherwise agree so that tenant must pay the deferred rent to the landlord amortised over the greater of—

(i)         the balance of the term of the eligible lease, including any extension to that term, as provided under regulation 13 or otherwise; and

(ii)        a period of no less than 24 months.

(3)        The method by which the deferred rent is amortised for the purposes of subregulation (2) is to be agreed to by the landlord and tenant.

(4)        Subregulation (2) does not apply if a landlord and a tenant agree otherwise in writing.

Accordingly, to the extent that a deferral is agreed, the tenant has the greater of 24 months or the balance of the lease term to pay the deferred rent.

Also, reg 13 states that:

(2)        If the payment of any rent is deferred by variation of an eligible lease or an agreement mentioned under regulation 10(6), the landlord under the eligible lease must offer the tenant under the eligible lease an extension to the term of their eligible lease on the same terms and conditions that applied under the eligible lease before the commencement of these Regulations.

(3)        The extension offered under subregulation (2) must be equivalent to the period for which rent is deferred, unless a landlord and a tenant agree in writing that this regulation does not apply to their eligible lease.

The combined effect of these provisions seems to be that a tenant with less than 24 months left to run on their lease must be offered an extension of their lease to allow up to 24 months to pay any deferred rent that is agreed. [#This post has since been corrected.  See entry on 11 May 2020, here: https://samhopperbarrister.com/2020/05/11/update-on-the-new-regulations-landlords-requirement-to-offer-an-extension-of-the-lease-term-under-the-regulations/ ]

Fourthly, it remains unclear what financial information the tenant will need to provide to its landlord.

The Small Business Commission has foreshadowed a guideline on the financial information to be provided.  However, whatever that guideline ends up saying, given the discretion in the terms of the offer given to the landlord, we think it would be prudent for a tenant to provide at least some trading figures to their landlords because it is difficult for the landlord to take into account the tenant’s ability to pay the reduced rent without at least some financial information.

Fifthly, if the tenant’s financial circumstances materially change during the period of the Regulations, the tenant can make a further request for rent relief.  What constitutes a material change is not defined, so will need to be assessed on a case-by-case basis.

The process of the landlord’s offer of rent relief is then repeated, although the landlord is not required to offer 50% of the rent relief as a waiver.  The substantial effect seems to be that the landlord only has to offer further deferrals the second time around if the tenant can show that its financial circumstances have materially changed.

Sixth, agricultural leases have been excluded from the Regulations.  This comes as something of a surprise, as we were not aware of this having been raised previously.

Seventh, under regulation 14:

(2)       A landlord under an eligible lease must consider waiving recovery of any outgoing or other expense payable by a tenant under the eligible lease for any part of the relevant period that the tenant is not able to operate their business at the premises.

(3)       If a tenant under an eligible lease is not able to operate their business at the premises for any part of the relevant period, 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.

It is not clear what is meant by a tenant being ‘not able to operate’.  In particular, it is not clear whether this means a tenant is prohibited from trading completely (such as a gym) or a tenant that has elected to close for safety reasons or because it is not economically viable to open keep its doors open.

Eighth, other features of the Regulations include:

  • the definition of ‘security’ protected by the Regulations is extended to include indemnities, which overcomes a drafting gap in the Code and the Act;
  • ‘turnover’ is defined by reference to s 5(2)(a) to (g) of the Guarantee of Lending to Small and Medium Enterprises (Coronavirus Response Package) Rules 2020 (Cth).  We will try to post that definition in a future post;
  • a prescribed group of companies that is excluded from the Regulations is defined by reference to ss 328-125 and 328-130 of the Income Tax Assessment Act 1997 (Cth). Again, we will try to post those definitions in a future post;
  • all eligible leases are amended to impose an obligation to cooperate and act reasonably and in good faith in discussions and actions associated with matters to which the Regulations apply;
  • a tenant is only entitled to protection from termination for non-payment of rent if it makes a request in accordance with regulation 10 (discussed above) and complies with any subsequent agreement to vary the lease;
  • civil penalties of up to 20 penalty units (about $3,600) can be imposed on landlords for terminating a lease, taking possession or having recourse to securities based on non-payment of rent or reductions in trading hours during the period of the Regulations.  Curiously, these penalties apply retrospectively and also to ‘attempts’ by landlords;
  • agreements for rent relief can be by amendment to the lease or a side agreement.  However, as is always the case when dealing with land, it is still important to record the agreement in a note signed by both parties;
  • as expected, there is a prohibition on rent increases during the period of the Regulations;
  • if outgoings are reduced (eg land tax for non-retail leases or Council rates), then the landlord must reduce the amount payable by the tenant and reimburse them for overpayments since 29 March 2020;
  • as expected, no fees, interest or charges can be levied for late payment of rent deferred rent;
  • as expected, leases cannot be terminated for closures or a reduction in trading hours;
  • landlords and tenants must not divulge or communicate personal, business process or financial information obtained under or in connection with the Regulations, save in specified circumstances;
  • as expected, a regime for mediation under the Regulations is created that mirrors the regime created under the Retail Leases Act 2003 (Vic).  Landlords and tenants may be represented by lawyers at those mediations, but mediators may request a meeting without lawyers present;  and
  • parties can choose to go to either VCAT or the Court to have disputes under the Regulations determined.  If parties go to VCAT, the ‘no cost’ rule in s 92 of the Retail Leases Act 2003 (Vic) applies.

Finally, the following, however, remain unclear:

  • there is no definition of a ‘reasonable recovery period’ referred to in the Code;
  • the extent to which agreements reached prior to the Regulations being handed down remain in force.  Given the encouragement from government to do deals ahead of time.  We expect that existing deals will not be disturbed by the Regulations, but the document remains unclear on the issue;
  • how a Court or the Tribunal will determine the rent relief if the parties cannot agree through mediation and how will the good faith obligations be treated;  and
  • the extent of the financial material to be provided by the tenant to the landlord (discussed above).

Sam Hopper and Abilene Singh

About Sam Hopper

Sam is a property and insolvency barrister.

View all posts by Sam Hopper

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