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Take 2: The Commercial Tenancy Relief Scheme

Property & Development
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In response to the ongoing economic difficulties faced by tenants during this pandemic, the Victorian Government has revived its Commercial Tenancy Relief Scheme which expired in March of this year (CTRS1).

The revived scheme is set out in the Commercial Tenancy Relief Scheme Regulations 2021 (Vic) (Regulations) and applies to the Protection Period which is the period from and including 28 July 2021 until 15 January 2022 (CTRS2).

However, CTRS2 is not simply a revival of CTRS1[1].. There are key differences, these include:

  • CTRS2 will have a significant impact on landlords that have rent reviews scheduled to take place during the Protection Period.
  • There are critical time limits that tenants must comply with, failing which they are not eligible for relief for the entire Protection Period.
  • CTRS2 may also impact existing relief agreements negotiated under CTRS1, and parties are advised to review their existing agreements in light of this.

Critical timing

An eligible tenant can seek relief for the Protection Period if it makes a written request for relief and provides all supporting documentation to its landlord on or before 30 September 2021. If the tenant fails to do this, relief will only commence from the date of the tenant’s request. Missing the 30 September deadline by just one day means that a landlord is not required to give any relief for the first 9 weeks of the Protection Period.

Eligibility

A tenant must be an eligible tenant under an eligible lease. Essentially, an eligible tenant is a tenant that:

  • is an SME entity with a turnover of less than $50 million
  • as at 28 July 2021, has been carrying on business, and
  • satisfies the decline in turnover test.

A lease is an eligible lease if it is a retail or non-retail commercial lease or licence to an eligible tenant that was in effect on 28 July 2021 (or is a renewal, variation or extension of such a lease). Significantly, leases under which the tenant is a listed corporation or a subsidiary of a listed corporation are not eligible.

Decline in turnover test

A tenant will satisfy the decline in turnover test if its Turnover for the Turnover Test Period is at least 30% lower than its Comparison Turnover.

How the parties determine the relevant Turnover Test Period will depend on the day that the tenant commenced trading, and there are a number of alternate tests that can be used to determine Comparison Turnover.

In a significant departure from CTRS1, turnover under CTRS2 now includes all turnover of the tenant, not just turnover from the premises under the eligible lease, as well as online sales, but does not include any Commonwealth COVID-19 related grants or financial assistance that a tenant has received.

The process

A new 2-stage process requires a tenant to make an initial request for relief and subsequently provide further information. Everything must reach the landlord by 30 September 2021 if a tenant is to secure its right to relief from 28 July 2021.

The initial written request must be accompanied by a statement by the tenant confirming it is an eligible tenant and has satisfied the decline in turnover test and must detail how the decline in turnover has been calculated. The tenant may also state any other circumstances that it would like the landlord to take in to account when considering the relief request.

Within 14 days after making its initial request the tenant must provide further prescribed information to evidence the turnover figures it has stated, including a statutory declaration attesting to its eligibility and the truth of its supporting information.

It is worth noting that if a tenant does not provide the further information with 14 days of making its initial request, that request will lapse and the tenant must then make a new one. A tenant can make up to 3 requests but will then be barred from making further requests for rent relief under CTRS2.

The Landlord’s offer

A landlord relief offer to the tenant must be made within 14 days of the landlord receiving a fully compliant request. The offer must:

  • be at least proportionate to the tenant’s decline in turnover
  • contain a waiver of rent comprising no less than 50% of the offered rent relief (the remaining balance of rent relief can be comprised of rent deferral)
  • take into account the other circumstances put forward by the tenant in its request
  • relate to the relief period, which is, if the tenant makes its request and provides all supporting information:
    • on or before 30 September 2021, the Protection Period, or
    • after 30 September 2021, the date of the tenant’s request to 15 January 2022
  • not require any deferred rent to be paid before 15 January 2022. Deferred rent must be payable in equal monthly instalments over the greater of 2 years or the remainder of the term of the lease, and
  • if any deferral of rent is offered by the landlord, include an offer by the landlord to extend the term of the lease by an extension equivalent to the period for payment of the deferred rent.

In a significant departure from CTRS1, if the parties negotiate in good faith and yet cannot agree on the rent relief to be granted within 14 days of the landlord’s offer then, provided that the dispute has not been referred to the Victorian Small Business Commission (SBC), the tenant is deemed to have accepted the landlord’s offer. It is expected that this will result in more applications to the SBC as tenants seek to avoid these deeming provisions.

Mandatory reassessment

Landlords will be relieved to see that a new mandatory reassessment test has been incorporated into CTRS2 that will afford them some protection in cases where a tenant’s turnover has increased after it initially satisfied the decline in turnover test. The relief granted will be reassessed by taking into account changes in a tenant’s actual turnover if:

  • the tenant made its request on or before 30 September 2021, and
  • the tenant was trading before 1 April 2021.

An affected tenant must provide further prescribed turnover information to its landlord before 31 October 2021 and a failure to provide the requisite information by this date means that, in most cases, the tenant’s rent relief agreement will no longer apply to the extent that it relates to any waiver of rent from 31 October 2021. 

Existing rent relief arrangements

Some rents that were deferred in agreements negotiated under CTRS1 may now have become due for payment.  If a tenant makes an application for relief under CTRS2, any rent that was previously deferred under CTRS1 in respect of the same lease (or a renewal, variation or extension of that lease) and which has become payable during the tenant’s CTRS2 relief period is further deferred and the landlord cannot require it to be paid until after 15 January 2022.

Other important changes

Rent Review

A landlord cannot apply a rent increase to an eligible lease during the Protection Period, irrespective of whether the tenant has made a request for rent relief under CTRS2.

Significantly, any rent increases that would otherwise have had effect during the Protection Period are void and cannot be applied or claimed by the landlord in the future.  This may have a significant impact on a landlord who must wait until the next scheduled review date to increase the rent payable under the lease and will never be able to receive the benefit of the ‘skipped’ rent increase.

A rent increase under a retail lease where the rent is determined by reference to the volume of a trade of a tenant’s business is not affected by this prohibition.

Outgoings

There is no express obligation on a landlord to grant relief in relation to outgoings but, as under CTRS1, a landlord is obliged to consider waiving recovery of outgoings.  

No enforcement action

A tenant will not be in breach of its lease, and a landlord cannot take enforcement action against the tenant (or have recourse to its lease security) if the tenant does not pay rent or outgoings for the Protection Period and:

  • has made a request for relief, and continues to pay a proportion of the rent due under its lease (being the rent reduced by the same percentage as the tenant’s decline in turnover), or
  • complies with any rent relief agreement it has entered into, or
  • is unable to trade as a result of sickness or injury affecting the tenant, its officers or employees, or

  • is unable to trade due to natural disaster affecting the tenant or the premises.

It is unclear what evidence will be required to be provided by a tenant to evidence that it has been unable to trade.  Separately, if a landlord takes enforcement action, a tribunal may now be encouraged to consider any impact on the tenant’s ability to trade if a tenant makes an application for relief against forfeiture.

Trade obligation

Additionally, a tenant will not be in breach of a ‘keep open’ obligation in its lease if it reduces its opening hours or closes the premises and ceases to trade. 

A landlord should review its lease security to ensure that the terms permit it to retain and enforce the security during any lease extension that may be granted under CTRS2. It would be prudent to expressly address this in any rent relief agreement that a landlord negotiates with its tenant.

The Regulations invoking CTRS2 are detailed and complex.

 

[1] COVID-19 Omnibus (Emergency Measures) (Commercial Leases and Licences) Regulations 2020 (Vic).

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