Commercial landlords and tenants now have the rules to be followed in negotiating the COVID-19 leasing environment. The process has moved from the National Cabinet providing its code of conduct, to Victorian parliament providing enabling legislation, and now, finally, to the publication of the regulations which provide the actual rules and processes to be followed.
On 7 April the National Cabinet released the National Code of Conduct for SME commercial leases during COVID-19, with the aim of providing guidelines for the states to pass corresponding laws. In Victoria the COVID-19 Omnibus (Emergency Measures) Act 2020 was passed on 23 April 2020 and came into effect two days later. Amongst other things it introduced temporary amendments to various Victorian laws related to retail and non-retail commercial leases and licences where the tenant under the lease or licence was eligible for the JobKeeper scheme. However, there was no detail in the act about the nature of the changes to be made – that was left to be defined under subsequent regulations. On Friday 1 May 2020 those regulations were published and took effect as the COVID-19 Omnibus (Emergency Measures) (Commercial Leases and Licences) Regulations 2020.
The Regulations cover landlord and tenant co-operation, rent, outgoings and other expenses, changes in trading hours and other matters. The key items are:
- The rules are to apply in Victoria from 29 March 2020 to 29 September 2020
- Agricultural leases and licences are not covered by these Regulations;
- To be covered, tenants must be SMEs, defined as having less than $50m in turnover and participating in the Jobkeeper scheme;
- Eligible leases are deemed to include a provision that the landlord and tenant must cooperate and act reasonably and in good faith in all discussions about matters covered by the Regulations;
- A tenant can not be evicted solely for non-payment of rent, nor can the landlord access security (including security in the form of a personal guarantee) relating to non-payment of rent;
- The tenant remains liable to pay outgoings payable under the lease, although some provision is made for reducing outgoings;
- A process is provided for requesting and granting rent relief, and that process requires landlords to take into account reduction in turnover, the tenant’s ability to pay rent, the landlord’s financial ability to accommodate rent relief and any reduction in outgoings;
- A prohibition on rent increases;
- If rent relief is provided in the form of rent deferral, then the landlord must offer the tenant an extension of the lease for the same term as the term of the deferral;
- Any reduction in outgoings relating to a premises must be passed on to the tenant;
- Any deferred rent cannot be required to be repaid until the earlier of the end of the lease or 29 September 2020, and the repayments must be spread over a period of at least 24 months;
- Tenants may reduce business hours or cease business without being in breach of the lease;
- Landlords or tenants may refer any dispute regarding the lease to mediation through the Small Business Commission, and if that mediation fails then they can take the matter to VCAT (and mediation is required prior to any VCAT or court process).
Overall the Regulations have followed the National Code of Conduct quite closely and there are no real surprises. Therefore any landlords or tenants who have commenced negotiations pursuant to the National Code of Conduct should find themselves well-positioned to give effect to the requirements of the Regulations.
One significant difference between statements made by the Prime Minister regarding the National Code of Conduct and the content of the Regulations is that mediation, while compulsory, is not in fact binding on the parties. In practice this means that VCAT remains the most likely venue for the hearing of leasing disputes which the parties can not resolve. Mediation is a compulsory first step, but it may not be the end of the matter.