Commercial Rent Relief Scheme Rehashed
The Commercial Tenancy Relief Scheme which expired in March 2021 has been reinstated, subject to various modifications. The Scheme is set out in the Commercial Tenancy Relief Scheme Regulations 2021 made by the Governor in Council (the Hon. Linda Dessau AC, the Queen’s representative), on the recommendation of the Minister for Small Business (the Hon. Linda Dessau AC). The regulations came into force on 24 August 2021 but are taken to have come into operation on 28 July 2021.
The scheme gives eligible tenants rent relief and prevents their eviction in prescribed circumstances. Broadly, eligible tenants are those who have an annual turnover of less than $50 million and have suffered a decline in turnover of at least 30 per cent due to coronavirus, (generally calculated by comparing their turnover for the final quarter of the 2020/21 financial year with turnover from the final quarter of 2018/19).
The regulations are (unduly) complex and not for the faint-hearted. There are important time limits and procedures, and a failure to comply could have serious consequences. It is therefore important to be diligent and act early, and generally legal advice is recommended.
If you would like assistance or advice, or would like to share our experience or views, please contact us here.
For some commentary on aspects of the regulations, continue below.
The Landlord’s Offer
The regulations lack clarity in an important respect. They provide that landlords must make written offers of “rent relief” to eligible tenants that:
“relates to up to 100% of the rent payable” under the eligible Lease during the rent relief period; and
at a minimum, is proportional to the tenant's decline in turnover; and
provides 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
takes into account any circumstances noted by the tenant in its written request.
In this section we focus on this requirement: The “rent relief” offered by landlords must “relate to up to 100% of the rent payable”. (The term “rent relief” is defined in the regulations as any form of relief provided to a tenant in respect of the obligation under an eligible lease to pay rent, including a specified rent relief or a reduction or remission of rent).
Let’s take the example of a tenant which pays rent of $10,000 a month, normally earns $20,000 a month but during August 2021 suffered a 50% decline in turnover due to coronavirus (i.e. a decline of $10,000). The rent relief offered by a landlord must “relate to up to 100% of the rent payable” during August. Does this mean that the rent relief offered by a landlord can “relate” to less than 100% of the rent payable, for example say 10%, which is $1,000? I.e. that the landlord only has to offer rent relief of $500, being 50% of $1,000? This would seem to be the ordinary, literal interpretation (with an extraordinary outcome as it gives the landlord complete latitude).
If the rent relief offered by a landlord can relate to less than 100% of the rent payable, how much less? The regulations do not provide any criteria, objective or otherwise, to be used in establishing what percentage of the rent payable the rent relief must “relate to”. Can the landlord decide on a whim? It seems the wording accommodates such an interpretation.
If this is not what the Minister for Small Business intended, what was? Below we posit and consider some other possible ways of interpreting this aspect of the regulations.
Perhaps the regulations meant to provide that landlords must offer tenants rent relief “ up to 100% of rent payable”.(Of course, such a provision would be superfluous because if more than 100% was offered, the excess would be a donation, not rent relief, and turnover cannot decline by more than 100%).
Perhaps the regulations simply meant to provide that if there’s been a percentage reduction in turnover (say 50%), there should be an equal (i.e. 50%) rent relief, that is to say rent relief of $5,000, if rent is $10,000 during the relevant period.This is not the ordinary meaning of the words in the regulations.It is, however, how many landlords and tenants implemented the previous (also unclear) iteration of the scheme.At first blush it may seem inequitable because it seems to benefit tenants a fair degree and landlords very little.However, this misconception is soon dispelled when one considers the relief landlords obtain from the government (by way of government grants from the hardship fund and the reduction in land tax), that fact that “turnover” is defined in the regulations as turnover, and the fact that “turnover” is defined to include all Victorian government COVID-19 grants received by the tenant (which means that landlords are effectively being handed Victorian grant money received by tenants) (see the paragraphs on “turnover” below).
Perhaps the Minister for Small Business deliberately left the matter unclear, open and unresolved, with the intention that landlords and tenants should negotiate a mutually acceptable compromise, with the help of the Small Business Commission if necessary (but without the help of any objective guidelines or criteria).This would make it something of a free-for-all, akin to the previous version of the scheme.
“Turnover” is Gross Turnover
The regulations state that the landlord’s offer of rent relief must at a minimum, be proportional to the tenant's decline in “turnover”. And pending resolution by agreement or tribunal, the tenant must pay the rent reduced by the same percentage as the tenant's decline in “turnover”. What then is “turnover”?
The regulations define “turnover” as the current GST turnover within the meaning of the GST Act (including any turnover derived from Internet sales of goods and services) plus all Victorian government COVID-19 business support grants received by the tenant during the relevant period (but not Commonwealth grants or financial assistance payments provided to a tenant to mitigate the effects of the COVID-19 pandemic on the tenant).
So “turnover” is gross turnover, not net turnover. It is easy to determine the GST turnover, certainly – just look at the relevant Business Activity Statements – but that doesn’t mean that using gross turnover produces fair results. That would be like saying the Premier’s monthly salary should be equal to the ASX 200 index as at 1 July that financial year because it’s easy to determine. The more appropriate figure to use (for turnover, that is, not the Premier’s salary), some say, would be net profit. Many businesses operate on very slim margins. If a business has a margin of 30% and its gross turnover falls by 30%, it would experience a 100% reduction in net profit and would be bringing in no cash. How does it make sense to say that in these circumstances rent relief should be 30%? The government is offering generous COVID-19-related financial relief to landlords. Further, “turnover” includes Victorian COVID-19 grants received by the tenant, landlords are direct beneficiaries of grant money received by tenants.
Perhaps it might be more equitable for the landlord and tenant to share the COVID-19 burden equally (up to but not exceeding the rent payable), taking into consideration their respective losses relating to the premises due to COVID-19 and the government benefits they have each received as a result of COVID-19 in relation to the premises. We and other commercial lawyers regularly devise contractual formulae for these types of situations, why not the Minister? The calculations would be contentious, but at least there would be clear, objective criteria for resolving the issue, establishing what the rent relief should be and enabling Courts to make objective decisions. The regulations do not provide clear, objective criteria for establishing what the rent relief should be.
“Turnover” includes Victorian government COVID-19 Business Support Grants
As noted above, the regulations define “turnover” to include all Victorian government COVID-19 business support grants received by the tenant during the relevant period. What this effectively means is that if a tenant receives a Victorian government COVID-19 grant during the relevant period, the grant must first be applied to the payment of rent to the landlord, and the balance (if any) left over can then be applied by the tenant to other expenses, and finally if any is left over the owners can take some withdrawings, salary or profit. This gives significant benefit to the landlord and effectively gives the landlord preferential treatment and direct access to Victorian government COVID-19 grant monies received by the tenant.
Deemed Acceptance of Offer
It is important to note that if no rent relief agreement is concluded and the tenant does not refer the matter to the Small Business Commission for mediation within 15 days after the tenant receives a valid offer of rent relief from the landlord, the tenant is deemed to have accepted the landlord's offer and a rent relief agreement is deemed to have been concluded on that basis.
(Assuming the landlord’s offer is valid) this means that, to protect its position, a tenant must refer the matter to the Small Business Commission within 15 days of the offer.
The lack of clarity in relation to the landlord’s offer (noted above under “The Landlord’s Offer”) means that determining whether the landlord’s offer is valid it is not a straightforward exercise. Therefore, if an offer has been made and there is even a possibility that it might be valid, it is generally advisable for a tenant to refer the matter to the Small Business Commission within 15 days of the offer. This means (as with the previous incarnation of the scheme) there is going to be an (unnecessarily) large number of referrals to the Small Business Commission and to VCAT.
We’ve outlined above how the regulations provide for a deemed acceptance of the landlord’s offer. Of course, the landlord’s offer might not be fair, but the tenant would nonetheless have to comply with it until the matter is resolved by agreement or through a tribunal (or the Commission), which can involve considerable delays. Another approach could have been for the regulations to provide that until a rent relief agreement is concluded or a final binding order is made by a tribunal (or the Commission), the tenant must pay the rent reduced by the same percentage as the tenant's decline in turnover as set out in the tenant's request for rent relief; at least this amount can be objectively determined. Presumably the Minister for Small Business considered this type of alternative approach but decided against it.
Tenant’s Right to Terminate
The regulations do not give the tenant the ability to terminate the Lease on giving prescribed notice in the event of a specified reduction in turnover due to COVID-19. We tend to think it should.
There’s no point in flogging a dead horse, and it may benefit landlords to have a modest lump sum in the hand rather than a hope of more in the future but the risk of none.
If for example the tenant has suffered a reduction in turnover of more than 70% over a period of at least two months as a result of COVID-19, perhaps the tenant should have the ability to terminate the Lease on giving the landlord notice equivalent to half of the remainder of the current term (but no less than say 6 months). Or perhaps the tenant should have the ability to terminate the Lease by paying the landlord an amount equal to half of the (full? or reduced?) rent payable for the remainder of the current term (but no less than say 6 months’ rent). If not 70%, then some other amount, and if not half the balance of the term (but no less than say 6 months), then some other period. (Certainly, the parties should where appropriate consider trying to negotiate this type of a lease buyout where the tenant’s business is failing).
Very generally, if a tenant repudiates a Lease and simply walks away, the tenant would be liable to compensate the landlord for damages the landlord suffers as a result of the repudiation. However, the landlord would generally be under a duty to try to minimise (mitigate) its loss, which typically entails the landlord trying to find another tenant to take over, albeit possibly at a lower rental. Therefore, a lease buyout or early termination arrangement should present a sensible commercial outcome in the vast majority of cases.
Furthermore, having the parties consider the effect of the termination of the Lease is likely to be constructive in facilitating a reasonable compromise regarding rent relief.
We note in passing that numerous penalties are imposed by the regulations for non-compliance. It’s best for landlords and tenants to assume that the penalties will be enforced and to ensure strict compliance with the regulations (after all, what’s the point of prescribing penalties if they are not enforced? The levying of penalties would avoid or very quickly settle a vast majority of lease disputes).
Subscribe to our newsletters here.
If you would like to discuss any aspect of this article with us, or share your own experiences, please contact Rod Stumbles at +613 8692 7255 or here.
This article provides general information only and is not intended to constitute legal advice. No lawyer-client, solicitor-client or attorney-client relationship has been created between us. You must not rely on the contents of this article, whether as an alternative to legal advice from a lawyer or other professional legal services provider or otherwise. You should not take, discontinue or refrain from taking any action because of your understanding of the contents of this article, including without limitation delay seeking legal advice or disregard legal advice. If you have any specific questions about any matter, you should engage us or other lawyers or other professional legal services providers to provide you with the necessary advice. Keep in mind that you may be facing important deadlines so you should not delay in engaging someone to provide you with the advice.