Update on the new Regulations – landlord’s requirement to offer an extension of the lease term under the Regulations

In an earlier note I suggested that the landlord needs to offer to its tenant an extension of the lease term by up to 24 months.  However, it has been pointed out to me that the extension that the landlord needs to offer may be less than that.

Regulation 13 states that (emphasis added):

Extension of the term

…

(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.

Regulation 16 states that:

Payment of deferred rent

…

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

…

(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.

The issue is what is meant by the phrase ‘the period for which the rent is deferred’.  The better view is probably that the period for which the rent is deferred is the deferral period (ie the period during which the rent is not paid), not the repayment period.  Consequently, if the rent is deferred over a six month period but repayable over a 24 month period, the tenant is entitled to an extra six months in its lease term.

Consider this example:

1. The tenant has a lease that expires on 30 June 2023.
2. Landlord and tenant agree on 70% rent relief for the six months of the Regulations (half of which is deferred), with the deferred rent being payable by equal monthly instalments from 30 September 2020 until 30 June 2023.
3. Under reg 13, the landlord must offer to the tenant an extra six months on its lease term, extending the term until 31 December 2023.
4. The deferred rent is payable by 31 December See regulation 16(2)(b)(i).

Also, consider this example:

1. The tenant has a lease that expires on 31 December 2020.
2. Landlord and tenant agree on 70% rent relief for the six months of the Regulations (half of which is deferred), with the deferred rent being payable by equal monthly instalments from 30 September 2020.
3. Under reg 13, the tenant must be offered an extension of its lease by six months, being an extension to 30 June 2021.
4. Under reg 16(2)(b), the tenant has until 30 September 2022 to repay the deferred rent.

The second example means a tenant still paying the deferred rent after the lease has ended (see reg 16(2)(b)).

Thanks to Mark Schramm from the Small Business Commission for his assistance, and to Abilene Singh and Jamie Bedelis.