Category Archives: Leasing

Commercial Tenancy Relief Scheme 2.0 – a new variant for leasing lawyers

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Covid has evolved. So has Victoria’s commercial rent relief scheme to deal with the pandemic’s consequences for commercial landlords and tenants. We now have the details of the latest version.

The new CTRS (perhaps we should christen it the CTRS’s Delta variant?) effectively became law yesterday. Here is a very brief introduction:

  1. The Commercial Tenancy Relief Scheme Act 2021 ostensibly creates the scheme but its real substance is contained in the Commercial Tenancy Relief Scheme Regulations 2021 proclaimed yesterday.
  2. Its broad aim is to entitle distressed retail and commercial tenants who have suffered a decline in turnover of 30 per cent or more since 1 April 2021 to obtain at least proportionate rent relief from their landlords.
  3. Eligibility for the CTRS is no longer tied to the Jobkeeper program (which has expired) but rather to a financial comparison of three consecutive months of trade to an earlier corresponding period.
  4. Some tenants are disqualified from the outset. Publicly listed corporations, major banks and beekeepers (yes, really!) are among the unwelcome (see regs 7 and 8).
  5. The scheme is complex and littered with exceptions, carve-outs, qualifications, and deadlines. No brief summary (including this one) can be relied upon as entirely accurate.
  6. Eligibility is not automatic. Among other things, eligibility requires a written rent relief request from a tenant to a landlord (reg. 27(1)) which sets out certain details (reg. 27(2)) and is supported by certain documentary evidence within 14 days (reg. 27(3)). A tenant who stuffs up these formalities three times will not be allowed a fourth bite of the cherry (reg. 26(6)).
  7. A landlord receiving a compliant rent relief request must within 14 days offer the tenant at least rent relief proportionate to the tenant’s decline in turnover. At least half of that relief must be by way of waiver of rent (reg. 27(8)) with the balance by deferral.
  8. A tenant receiving such an offer will be deemed to have accepted it 15 days later unless they have otherwise agreed or have already referred the matter to the Small Business Commissioner (reg. 27(11)).
  9. The period for which rent relief must be granted starts on the day the rent relief request is made unless that request is made before 30 September 2021 in which case the rent relief period commences on 28 July 2021 (note the retrospectivity) (reg. 28). (This will make 30 September 2021 an important deadline for some distressed tenants.)
  10. Where a landlord and tenant cannot agree on rent relief the Small Business Commission can impose a binding order on the parties (reg. 48) without a hearing (reg. 46) which can then be further litigated in VCAT (reg. 59).
  11. Eligible lease disputes can be litigated in VCAT or the Supreme, County or Magistrates’ courts but all require a gateway certificate from the Small Business Commission (regs 64 and 65).
  12. The regulations currently contemplate a ‘rent relief period’ from only 28 July 2021 to 15 January 2022 (see definitions at reg. 4) but remember that the end date of the original CTRS scheme was extended several times so this end date might eventually prove to be elastic too.
  13. During the ‘rent relief period’ it will be impossible for most landlords to increase their rents under eligible leases for any reason (reg. 35). Particularly for long term leases without ‘review to market’ rent review clauses, this ban has potential long term implications to the capitalization rates and hence the capital value of some rental properties.
  14. Unlike the earlier CTRS schemes, some tenants will be required to provide further financial information to their landlord even after a rent relief agreement has been entered into. Their rent relief entitlement might then increase or decrease automatically depending on that information (reg. 29).

Does this all sound simple, straight forward and convenient? If so, I haven’t explained it sufficiently and you should probably do some further reading.

Some useful resources for that purpose:

How bazaar – soli’s CTRS rent relief requests mostly fail at VCAT

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A recent Covid rent relief request case at VCAT bodes ill for Victoria’s pandemic-stricken commercial tenants.

The tenant in Tzilantonis v S &C Thomas Pty Ltd [2021] VCAT 486 was a solicitor who used part of the leased premises for his legal practice and the remainder as an online variety store known as Clearance Bazaar. After Covid thumped the legal practice’s turnover, the soli made three separate written requests spanning 8 months to his landlord for rental relief under the COVID 19 Omnibus (Emergency Measures) (Commercial Leases and Licences) Regulations 2020 (“the Regulations”). The landlord was unmoved. It contended that none of the requests complied with the Regulations and accordingly the tenant was not entitled to any rent relief.

So off to VCAT the parties went.

Last month VCAT Deputy President Riegler delivered his decision.  In summary:

  • It was common ground between the parties at hearing that any entitlement to rental relief was conditional upon the tenant having made a compliant rent relief request under the Regulations.
  • Of the tenant’s three rent relief requests for the year from 1 April 2020, VCAT found only the final request was compliant and hence the tenant was entitled only to rent relief for the three months covered by that particular request.
  • The formal final order states that “The Applicant is entitled to rental relief representing 62.2% of the rent that would otherwise have been payable over the period 31 December 2020 until 28 March 2021”. But the reasons are obscure as to both how that unquantified amount was arrived at, and how much of the relief was to be by way of rent waiver and how much was to be rent deferral.

The Tzilantonis decision answers some questions about the practical operation of the Commercial Tenancy Relief Scheme (CTRS) but invites others.

Some takeaway answers include the following:

  1. It seems that a tenant’s valid CTRS rent relief request can comprise separate documents on separate dates provided they are all provided to the landlord within a reasonably short period.
  2. Supplying VCAT and the landlord at final hearing with information or documentation which should have been provided with an actual rent relief request will be too late to salvage the validity of a non-compliant rent relief request.
  3. Strict, although not entirely slavish, compliance with the Regulations is required for a rent relief request to be valid. For example, an abbreviated version of the pointless tautology required at reg. 10(2) of the Regulations that “the tenant’s lease is an eligible lease … and that the lease is not excluded from the operation of these regulations…” won’t invalidate the request.
  4. Providing a landlord with a “print activity statement” (in essence an electronic version of a BAS statement) is capable of being sufficient evidence of a tenant’s participation in the jobkeeper program for the purposes of reg. 10(2)(b)(ii).
  5. VCAT-ordered CTRS rent relief applies to rent only – there is no flow-on right to corresponding relief for outgoings (eg utility payments) payable under the lease.

What of the remaining questions about the practical operation of the CTRS?

One that occurs to me relates to the common perception that any rent relief granted under the CTRS must be directly proportionate to the tenant’s fall in turnover.  And what of the widespread understanding that whatever rent relief is given must be in the form of 50/50 forgiveness of rent and deferral of rent?

Both are myths that arose from the National Cabinet’s views on these issues last year (see my blog touching upon its Code of Conduct here) rather than from any actual requirements in the Regulations.

The Regulations were amended several times over their short life (remember that the Regulations expired on 28 March 2021) but they never included any requirement that the rent relief had to be directly proportionate to the decline in the tenant’s turnover. The closest reference to proportionality was found in reg. 10(4)(ba) which made rent relief proportionate to the tenant’s decline in turnover the minimum rent relief to which the tenant was entitled. And the tenant’s maximum rent relief entitlement? Reg. 10(4)(a) referred to “… up to 100% of the rent payable…” [My emphasis.]

The decision in in Tzilantonis sets out that the tenant’s year-on-year decline in turnover for the December quarter in 2020 was 62.2% and then — without any reference to this being the tenant’s minimum entitlement under reg.10(4)(ba) — transplants that percentage figure into the final rent relief order. Why the coincidence in percentage figures? Did the tenant even ask for more than 62.2%? The VCAT decision does not say.

Similarly, readers are left to wonder whether the 62.2% rent relief ordered for (most of) the March 2021 quarter was intended by VCAT to take the form of waiver of 31.1% of the usual rent plus deferral of payment of a further 31.1% (and if so, deferral over what period?) or if some other cocktail of rent relief was contemplated.

Reg. 10(4)(b) required a landlord offering a qualifying tenant rent relief to offer “not less than 50% of the rent relief … in the form of a waiver of rent, unless a landlord and a tenant otherwise agree in writing.” [My emphasis]. Note that — again contrary to common understanding — the requirement that 50% of the rent relief be by way of waiver (unless the tenant otherwise agrees) was the tenant’s minimum entitlement under the Regulations and was not a fixed and inflexible outcome.

So, of the 61.2% rent relief the tenant secured did VCAT decide that the tenant’s minimum waiver entitlement of 50% was appropriate here? Or was it to be a 100% rental waiver? Or was it to be waiver of something between those percentages with deferral (for however long) of payment of the balance of the rent relief? Again, readers are left to wonder.

A third big CTRS question didn’t arise in this case because of the Tribunal’s findings as to the invalidity of the tenant’s first two rent relief requests. But if, hypothetically, the tenant’s earliest rent relief request had complied with the Regulations, would the tenant’s subsequent rent relief requests then have been redundant as a consequence? (If so, a botched later request presumably would not have invalidated its valid predecessor.) Or should tenants seeking rent relief under the CTRS have submitted a fresh rent relief request each time a fresh version of the Regulations commenced (and, remember, with retrospective effect each time)? (If so, commercial tenants who failed to submit at least three valid rent relief requests will have disqualified themselves from at least some of the protections otherwise available to them under the CTRS.)

Conclusion

Two thoughts.

  • Pending some more published decisions from VCAT in this area, it will be perilous work for lawyers advising tenants and landlords as to their surviving rights and obligations under the CTRS.

As CTRS sunsets, VCAT shades VSBC’s rent relief request guidance

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Photo by Abdullah Ghatasheh on Pexels.com

The pandemic-inspired Commercial Tenancy Relief Scheme (CTRS) ends this Sunday, 28 March 2021 but two recent cases suggest that it will echo on in VCAT litigation for a good while yet.

I last blogged about the CTRS back in October (see here). For a beginners’ guide to the CTRS generally, see my original blog on the subject here. In a nutshell, it is a regime to give temporary assistance to pandemic-hit commercial and retail property tenants.

The scheme came into operation in May 2020 with retrospective effect to 29 March 2020. It was originally to end on 29 September 2020 but was extended twice. By its first lot of amendments (the September amendments) it was extended until 31 December 2020 and by a second set (the December amendments) it was extended further to 28 March 2021. (See the expiry date provision at reg. 25 and also the definition of “relevant period” at reg. 3 of the COVID-19 Omnibus (Emergency Measures) (Commercial Leases and Licences) Regulations 2020.)

But with no further extensions the CTRS party is about to end. Both the CTRS and the Commonwealth’s JobKeeper payment program (which was always essential to CTRS eligibility) are to end on 28 March 2021.

As discussed in my October blog, the September amendments contained some tweaks to the CTRS beyond simply prolonging it. Those other changes caused the Victorian Small Business Commission (VSBC) to suggest publicly that fresh rent relief requests to landlords were likely to be necessary for any pandemic-distressed tenants wanting rent relief for any time after the CTRS’s original 29 September 2020 expiry date. In short, the VSBC’s implication was that even an entirely compliant rent relief request made before 29 September 2020 risked being legally useless in respect of any rent due after that date and hence a fresh formal rent relief request was necessary for pandemic-affected tenants.

Really? As Talking Heads asked in Psycho Killer “Say something once, why say it again?”

As statutory interpretation, the VSBC view was arguable but as policy it did sound improbable, especially when the CTRS was directed at assisting small businesses through a societal catastrophe.

Fast forward six months and this ‘one-rent-relief-request-or-two?’ issue from the September amendments has now cropped up in two separate VCAT cases in the last fortnight.

Both cases make encouraging news for tenants.

In Yarraville Business Pty Ltd v Persico [2021] VCAT 213 Member Edquist was unmoved by the VSBC’s public pronouncements. In Yarraville, the tenant had made one (problematic) rent relief request before the September amendments and none afterwards. The landlord pointed to this as fatal to the tenant’s reliance on the CTRS in respect of short-payment of rent due after 29 September 2020. The Tribunal disagreed (at least on an interlocutory basis). It found that the tenant’s single pre-September request was sufficient for both pre- and post-29 September CTRS purposes and that the VSBC’s views were of little consequence:

….

74.    I begin with the observation that I am not assisted by the reference to the website of the Small Business Commissioner. The Victorian Small Business Commission is not a superior court, and its opinions do not bind the Tribunal. It was not contended that the website should be regarded as the opinion of an expert witness. The chain of reasoning underpinning the Small Business Commissioner’s expression of opinion does not appear to be set out on the website, and so I am not in a position to consider it.

….

88.    …. For these reasons, I find that [the Tenant’s] argument is sustained. [The Tenant] did not have to make a fresh application for review after 29 September 2020 in order to continue to enjoy protection from eviction ….

Just four days later, in Global Fashion Service Pty Ltd v ESR Investment Nominees 3 (Australia) Pty Ltd [2021] VCAT 224, VCAT’s Deputy President Riegler reached a similar conclusion in favour of another tenant who had also sought rent relief before the September amendments but had failed to make a fresh rent relief request afterwards. DP Riegler’s reasons do not refer to the VSBC nor to the Interpretation of Legislation Act (several parts of which are discussed in Yarraville) but the bottom line was the same.

In each case, a tenant who had failed to seek rent relief after the September amendments came into force succeeded in obtaining an injunction preventing a landlord from terminating a lease to which the CTRS applied.

The interlocutory nature of both the Yarraville and Global Fashion decisions is significant as no final decision of legal rights has yet been made in either case and hence they have – for the moment at least – dubious precedent value.

Nevertheless, pending the final determination of the two cases they are still likely to assist tenants in CTRS rent relief negotiations by upsetting a previously widespread perception that valid rent relief requests made before 29 September 2020 were somehow irrelevant to leasing relationships after that date.

The cases are also a useful reminder not to rely on everything you read on the VSBC website.

Tigers thump their retail landlord and Port Adelaide on the same day

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Dusty Martin’s reaction to the Court of Appeal’s judgment

Richmond Football Club had two big wins on Friday – one over Port Adelaide in the preliminary final and the other over a retail landlord in Victoria’s Court of Appeal.

One result gets the Tiges into the 2020 Grand Final; the other should win them lots of new fans among Victoria’s retail tenants.

The Court of Appeal’s decision is Verraty Pty Ltd v Richmond Football Club Ltd [2020] VSCA 267.

In short, it allows Richmond to rely on the Retail Leases Act (‘the Act’) to save a mountain of land tax and prune back some rent increases (the precise monetary consequences are not set out).

The decision confirms that a ‘retail premises lease’ once entered or renewed will not change its legal character during its term by reason of extraneous circumstances (such as rent increases). This is important because the Act gives various protections to tenants of ‘retail premises’ including (at s. 50) voiding any requirement in a lease that the tenant effectively pay its landlord’s land tax. These protections commonly make the question of whether a particular lease relates to ‘retail premises’ within the meaning of s. 4 of the Act financially significant for tenants and landlords.

The Act’s definition of ‘retail premises’ focuses on the retail supply of goods and services but it has several carve-outs. One of the exclusions is that premises with ‘occupancy costs’ of over $1 million per year are not ‘retail premises’. But what happens if the proper categorization of premises as ‘retail premises’ changes during the life of a lease?

This was the issue that arose between Richmond and its landlord, Verraty.

Since (at least) 2004, Richmond had leased a Wantirna pokies venue from Verraty. In 2004 the venue constituted ‘retail premises’ within the meaning of the Act.The written lease included a requirement that the tenant reimburse the landlord its annual land tax but, because the lease was a ‘retail premises lease,’ that requirement was unenforceable by reason of s. 50 of the Retail Leases Act.

Over time the property’s rent and outgoings increased. By May 2016 the tenant’s annual occupancy costs ticked over the $1 million mark. Did the fact that the occupancy costs now exceeded $1 million mean that the premises ceased to be ‘retail premises’ within the meaning of the Act and that the hitherto-void land tax clause hence suddenly became enforceable against Richmond?

The landlord took that argument to VCAT and won – see Verraty v Richmond Football Club [2019] VCAT 1073.

Richmond then appealed to the Supreme Court (Croft J in his final case before retirement from the bench) and won – see Richmond Football Club v Verraty [2019] VSC 597.

Verraty then appealed to the Court of Appeal. There Justices Kyrou, Kaye and Sifris dismissed Varraty’s appeal in a joint judgment. The nub of it is in para 8:

“… if a lease is a ‘retail premises’ lease at the commencement of the lease, it remains subject to the Act even if the premises cease to be retail premises. In short, the text, context and purpose of the Act strongly support the view that it is not possible [for a lease] to jump in and out of the Act from time to time depending on whether the premises continue to fall within the definition of ‘retail premises’.

The judgment is a ringing vindication of Croft J’s final Supreme Court judgment but it is silent on the question of whether leasing relationships can ‘jump’ in or out of the Act when leases are renewed (cf during a lease term). This question did not squarely arise in the Richmond v Verraty matter but Croft J nevertheless ventured an opinion on it in his judgment. He suggested (at paras 74 – 78) that whether premises could change their ‘retail premises’ characterization upon renewal of a lease depended upon the lease provisions regarding such renewals.

The Court of Appeal does not look at this question but it certainly approved of Croft J’s analysis generally.

Conclusions? Three occur to me.

  1. It is now settled that whether a lease is or is not a ‘retail premises lease’ is established on a ‘once and for all’ basis upon its entry or renewal. Its character won’t change during its term.
  2. It is less clear whether a lease can ‘jump’ upon renewal of a lease. For example, ‘retail premises’ under the Act exclude premises whose tenants are listed on the ASX. Despite this, Verraty suggests that the retail premises lease for a ‘Mum and Dad’ business will continue to be a retail premises lease even where the tenants sell their business and assign their lease to an ASX-listed company during the life of that lease. So if that ASX-listed assignee then exercises an option to renew the lease, what is the status of the resulting further term? Croft J implies the answer depends on the terms of the lease involved. The Court of Appeal does not express a view.
  3. Richmond is going into Grand Final Week on a winning streak on and off the field. This might be a bad omen for Geelong.

Time for a second wave of rent relief applications? Meet Victoria’s amended Covid-19 commercial leasing regime

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Victoria’s commercial leasing goalposts moved again last week with new regulations tweaking the Commercial Tenancy Relief Scheme (“CTRS”). As a result, most commercial tenants should probably now be making fresh rent relief applications to their landlords.

By way of background, I blogged about the original CTRS in May (see here). But in short, the CTRS is part of a national scheme to spread the financial pain of the Covid-19 pandemic between commercial landlords and their tenants. The newly updated Covid-19 Omnibus (Emergency Measures) (Commercial Leases and Licences) Regulations 2020 (“the Amended Regulations”) extend the CTRS until 31 December 2020 (see reg. 25 and the definition of ‘relevant period’) but they also do much else.

Here are four key changes I perceive in the Amended Regulations.

1. Fresh rent relief requests might now be necessary.

As in the original version of the CTRS, a commercial tenant will qualify for rent relief only if, first, it has an ‘eligible lease’ (which involves, among other things, participation in the Commonwealth’s ‘JobKeeper’ scheme) (see reg. 10(2)(b)) and, second, it makes a written request for rent relief that complies with reg. 10. The wrinkle is that reg. 10 was changed by last week’s amendments, and the information prescribed for the tenant’s request is now greater than before. One example of the effects of the changes to reg. 10 is that a tenant’s written rent relief request to a landlord could comply with reg. 10 on 28 September 2020 without specifying the tenant’s decline in turnover as “a whole percentage”. On 29 September 2020 that same written request would not have complied with the (newly amended) reg. 10.

This is problematic for several reasons. The Amended Regulations were made on 29 September 2020 but “are taken to have come into operation on 29 March 2020” (reg. 3). Put another way, the Amended Regulations’ commencement pre-dates their very publication by precisely 6 months. So is our hypothetical tenant’s compliant rent relief request of 28 September 2020 still valid today? (Think of all the billable hours likely to be exhausted exploring this question.)

Even assuming this particular absurdity can be safely navigated in our hypothetical tenant’s favour (and I think it can be only partially), what is the status of tenants’ pre-29 September rent relief requests for post-29 September 2020 rent if their earlier rent relief requests do not comply with the 29 September 2020 version of reg. 10? (Reg. 10(4)(a) implies that a landlord is under no obligation to give its tenant rent relief for any period before the landlord receives a written request from the tenant that conforms with the reg. 10(1).)

The Small Business Commission is central to the administration of the CTRS. It has already noticed this complication and sought to deal with it by publishing this template rent relief request for tenants to send to their landlords. It is feasible that some tenants will have already accidentally provided their landlords all the information prescribed by the new reg. 10, but such serendipitous advance compliance is likely to be rare. As the tenant’s compliant written request is both important and free, most tenants will probably be best served by completing the SBC’s template document asap and firing it off to their landlords. Every day they delay is potentially costing them rent relief to which they are otherwise entitled.

Back in April, the National Cabinet published the Mandatory Code of Conduct Contrary on SME Commercial Leasing Principles during Covid 19. That document created an expectation (but no actual legal requirement) that landlords would grant rent relief which was at least proportionate to their commercial tenants’ loss of turnover. That expectation was not reflected in Victoria’s original CTRS regulations. Confusion ensued. This has now changed. The Amended Regulations do have such a proportionality requirement (see reg. 10(4)(ba)). Landlords must offer their tenants within 14 days of a compliant request, rent relief “at a minimum, proportional to the decline in the tenant’s turnover” associated with the rented premises.

2. Proportional rent relief as a minimum is now unambiguous.

Note that the proportional rent relief is a minimum rather than a fixed empirical requirement – a tenant might legitimately and candidly argue for a higher percentage of rent relief than the loss of turnover it has actually experienced.

The Amended Regulations maintain the original CTRS requirement that, unless otherwise agreed by the tenant, rent relief (whatever the amount) will be granted by landlords permanently waiving one half of the rent relief amount (see reg. 10(4)(b)) with the balance of the rent relief to be dealt with by way of deferral (see reg. 16(2)) or otherwise.

3. Even stony broke landlords are now required to donate blood to their haemorrhaging tenants.

The original CTRS regulations included (at reg. 10(4)(d)(iv)) an effective requirement that rent relief be calculated by reference to factors including “a landlord’s financial ability to offer rent relief”. Regulation 10(4)(d)(iv) has been deleted by the Amended Regulations. The potential effect is that some cash-strapped landlords might now be compelled to provide rent relief to their tenants even where that rent relief is likely to drive those landlords to insolvency.

4. A pseudo fix to jawboning as a delay tactic?

The very foundation of the original CTRS was that a qualifying tenant could not be evicted for non-payment of rent until the revised CTRS rent had been either agreed or fixed by VCAT. In my May blog I perceived a scenario where a cynical tenant might go on an effective rent strike under the pretext that it was negotiating with the landlord while knowing that the growing queue of litigants for a (largely shut-down) VCAT meant that those “negotiations” might drag on inconclusively for years. The Amended Regulations now offer tenants (but not landlords) the near-term possibility of obtaining from the Small Business Commission a binding order for rent relief (see Division 1A of the Amended Regulations). Such binding orders are likely to be relatively quick (at least compared to the VCAT route) and might be useful to some tenants requiring short term certainty (e.g. for business sales, partnership dissolutions, etc) but most tenants are likely to find them very unattractive for several reasons.

The most obvious disincentive to a tenant seeking a binding order is strategic. If a tenant has effectively suspended its landlord’s ability to evict it for non-payment of rent pending a very distant adjudication by VCAT, why would that tenant want to disrupt the status quo by seeking a binding order from the Small Business Commission? It sounds to me a bit like Roadrunner proposing a coin toss to Wyle E Coyote – essentially foolhardy.

And a landlord’s equivalent near-term options if rent relief negotiations reach an impasse? Scant indeed, on my reading of the Amended Regulations.

There are many other oddities in the Amended Regulations. These are surely not the last amendments to the CTRS that we will see.

ADDENDUM – 22 MARCH 2021 UPDATE

See this update for a contrary view from VCAT about the need for fresh rent relief requests after 29 September 2020.

Commercial leasing – rent relief and good faith in a time of Covid-19

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Not the Covid-19 Omnibus (Emergency Measures) Act 2020

Victoria’s Covid-19 emergency measures to assist commercial tenants now have formal legal force with the proclamation of the Covid-19 Omnibus (Emergency Measures) (Commercial Leases and Licences) Regulations 2020.

Some of the new temporary reforms are drastic. For example, paying rent will effectively become optional in the short term for many commercial tenants. And landlords who even attempt to evict such tenants for non-payment will be guilty of an offence.

The new pro-tenant measures will apply to a vast range of retail and non-retail commercial leases for the six months between 29 March 2020 and 29 September 2020.

The changes are effected mainly by the deeming of new terms into commercial leases and licences, but a crucial detail easily overlooked is that the entire scheme is underpinned by the Commonwealth’s JobKeeper scheme. A commercial tenant who is not a qualified participant in the JobKeeper scheme will be effectively excluded from the protections offered by the new rules.

 

The wide focus

First, a quick refresher and backgrounding for recently arrived Martians and/or anyone too overwhelmed by recent events to have maintained focus.

Retail leases (a very broad concept that commonly includes the leases of shops, offices, serviced apartments and the premises of many other small and medium businesses) are governed by Victoria’s Retail Leases Act 2003. (Although note that the “retail” character of any commercial lease is suddenly less important as the new regime temporarily extends parts of the Retail Leases Act to non-retail commercial leases as well.)

Since March 2020, the snowballing Covid-19 crisis has caused Australia’s federal and state governments to order the partial or complete temporary closure of many businesses nationwide. (In Victoria this has been done mainly by orders under the  Public Health and Wellbeing Act 2008.)

The Federal Government has sought to mitigate the widespread financial disruption resulting from these closures with measures including the JobKeeper scheme. The JobKeeper scheme is expected to subsidize the earnings of millions of private sector employees (and some small business principals) for at least six months until September 2020.  But it is primarily concerned with maintaining employment relationships. It offers no direct help to landlords or tenants suffering financial distress as a consequence of the Covid-19 crisis.

On 3 April 2020 the National Cabinet announced a Mandatory Code of Conduct for Small and Business Enterprises to impose  “a good faith set of leasing principles to commercial tenancies” affected by Covid-19 shutdowns and downturns.

As commercial tenancies have never been considered within the Commonwealth’s constitutional powers and the National Cabinet has the same constitutional status as unicorns under the Australian Constitution (namely none),  the Code of Conduct’s claim as of early April to be mandatory was very optimistic in the absence of supporting state statutes and regulations.

The states have accordingly in recent weeks been legislating to give the National Cabinet’s various pronouncements practical legal effect in state-governed areas such as leasing (and much else besides). Victoria’s legislation for this purpose is the evocatively-named Covid-19 Omnibus (Emergency Measures) Act 2020 (“Omnibus Act”) which commenced operation on last Anzac Day , 25 April 2020.

The Omnibus Act is a thumping 299 pages but commercial landlords and tenants need concern themselves with only a slim bite of it. That portion, Part 2.2, sets out parameters for the supporting regulations but, absent those regulations, it has no real practical utility.

However, we now have those regulations. They were promulgated last Friday, 1 May 2020 as the Covid-19 Omnibus (Emergency Measures) (Commercial Leases and Licences) Regulations 2020 (“Omnibus Regs”) but have effect from 29 March 2020 (note the retrospectivity) until 29 September 2020 when they expire (see regs 3 and 25). The regulations aim to give legal force in Victoria to the National Cabinet’s Mandatory Code.

 

The highlights

The first thing to note about the new regime is that a given tenant’s eligibility for and participation in the JobKeeper scheme is a threshold test.

Only tenants with an “eligible lease” will benefit from the new scheme and the chief criteria for any lease’s eligibility is that that the tenant concerned should be a small or medium enterprise and also a qualified participant in the JobKeeper scheme (see Regs 10(2) of the Omnibus Regs).

Tenants under eligible leases who withhold all or part of their rent will in the short term be deemed not to have breached their leases provided they request rent relief from their landlord in writing,  together with prescribed information including showing their eligibility for the JobKeeper scheme (regs 9 and 10).

A landlord receiving such a request from a tenant is then required to offer rent relief to the tenant within 14 days. The Mandatory Code was understood by many to require that landlords  give rent relief in direct proportion to  their tenants’ drop in revenue but this view must be mistaken as no such requirement appears in the Omnibus Act or the Omnibus Regulations. The Act and the Regulations are the enforceable legal instruments (not the Mandatory Code) and neither of them specify any precise amount or formula for calculating rent relief. Whatever the relief arrived at in a given case, the Mandatory Code, the Omnibus Act or the Omnibus Regulations all require the relief must be in the form of a waiver of rent as to half of that relief and deferral of rent as to the balance of the relief (unless the tenant agrees otherwise).

But back to the obvious key question – what  is the amount of the rent relief to be? The answer is that the amount is to be negotiated “in good faith” (per reg 10(5) of the Omnibus Regs) having regard to factors including the reduction in the tenant’s turnover during the six months from 29 March 2020 to 29 September 2020 (which I will call here the “Covid Window”),  the amount of time (if any) that the tenant was unable to operate its business at the leased premises, and the landlord’s “financial ability to offer rent relief” (Reg 10). (This “financial ability” concept is intriguing. It might even become the subject of a future blog — after I have dusted off the writings of Mother Theresa, Karl Marx, Robin Hood and Alan Bond.)

Collectively, the changes are overwhelmingly pro-tenant. Tenants can waive some or all their new entitlements, but landlords are hamstrung.  A landlord who even attempts to evict a tenant under an eligible lease for non-payment of rent or to call up bank guarantees in response to  non-payment of rent will potentially in each instance be guilty of an offence punishable by a fine of 20 penalty units (being $3304.44) (Reg 9)

Tenants, however, don’t get a perpetual free kick. In the absence of a renegotiated lease (which might include rent deferrals and lease extensions on top of the compulsory rent waiver), the parties are to mediate their dispute through the Small Business Commission (reg 20) and, failing success there, litigate it (reg 22). Reg 22 suggests that VCAT will retain its current exclusive jurisdiction for retail lease disputes and will additionally acquire non-exclusive jurisdiction for non-retail commercial lease disputes. VCAT’s “no costs” presumption is likely to apply to both retail and non-retail lease disputes (see s. 92 of the Retail Leases Act 2003 and s. 109(1) of the Victorian Civil and Administrative Tribunal Act.)

None of this is likely to be good news for landlords.

Commercial tenants large and small are struggling. Cash flows across the economy are faltering. Commercial vacancies are climbing.  Reliable replacement commercial tenants are likely to become very rare birds.  And, to top it all off, the Business and Property List of VCAT (which will hear this type of dispute) is functionally closed for the foreseeable future. When VCAT does eventually reopen, it will inevitably be gummed up by the backlog of cases that have gone unheard during its closure. And that is even before the coming avalanche of Covid-19 rental disputes hits the Tribunal.

This looming traffic jam at VCAT must cast a shadow over rent relief negotiations between tenants and landlords.

The Mandatory Code and the Omnibus Regulations both require landlords and tenants to negotiate their revised arrangements in good faith. As ever in these things, our lawmakers’ attempt to compel good faith seems oxymoronic. Either good faith exists in a given relationship and the formal requirement for it is redundant or bad faith exists and nothing in the Code or the Omnibus Regulations will cure that problem.

A cynical tenant might cut its cloth accordingly. The tenant and landlord who cannot voluntarily agree to a revised rental arrangement will join a long and growing queue to have their squabble determined in VCAT and (assuming the tenant’s compliance with reg 10) the tenant is most unlikely to be evicted at any time before the hearing for its non-payment of Covid Window rent. 

Smart (or desperate) landlords caught in this bind might well prefer the short-term certainty of agreeing to a steeply discounted rental income to the uncertainty of waiting a long time to argue their case in VCAT.

Finally, the disclaimer. The Covid-19 commercial rent regime is new and untested. It is likely to be tweaked in the coming months. My thoughts and summaries above are both general and incomplete. If you are a tenant or a landlord you should not rely upon this blog as a substitute for legal advice tailored to your particular circumstances.

 

 

 

 

Retail tenant ordered to pay its landlord’s costs. Again.

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In May this year I blogged (here) about the retail tenant that won a VCAT claim and received nothing but an adverse costs order for its trouble. Subsequently the tenant appealed the costs order (but, interestingly, not VCAT’s refusal to allow it damages) to the Court of Appeal.
The Court of Appeal (comprising Hansen JA, Ferguson JA and McLeish J) delivered its decision last Thursday. The joint judgment was more bad news for the tenant.The decision is 24 Hour Fitness Pty Ltd v W & B Investment Group Pty Ltd [2015] VSC 8216.
In a nutshell, the Court of Appeal said that VCAT’s Judge Jenkins sitting at first instance had set her reasoning out sufficiently and that it was “only in exceptional cases” that leave to appeal from a costs order would be granted. Leave to appeal was accordingly refused with the further comment that even if leave to appeal had been granted the appeal would still have been dismissed.
My colleagues Robert Hay QC and Sam Hopper have respectively blogged about the appeal decision here and here with Hopper suggesting that the decision might discourage some weaker retail claims in what is usually a ‘no costs’ jurisdiction.
The Court of Appeal, of course, has never been a ‘no costs’ jurisdiction. Although it is not apparent from the judgment, the landlord last Thursday made a Calderbank-based application for costs of the appeal on an indemnity basis. Finally there was a small win for the tenant. It was ordered to pay the landlord’s costs of the appeal but only on the standard basis.

Is VCAT a court?

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Is the Victorian Civil and Administrative Tribunal a court?

According to the Court of Appeal decision this week in Subway Systems Australia v Ireland and Ireland [2014] VSCA 142 the answer depends upon the context of the question.

The case was a bunfight about a sandwich-making franchise. The franchise documents included both retail tenancy provisions and an arbitration agreement.

Relying on the retail tenancy aspect, the franchisee commenced a claim in VCAT. But the franchisor then sought a stay relying on the arbitration agreement.

The franchisor’s stay bid failed in VCAT and again on appeal to a single judge of the Supreme Court (Croft J) but was third time lucky in the Court of Appeal.

It all turned on whether VCAT was a “court” for the purposes of s 8(1) of the Commercial Arbitration Act. That section provides;

A court before which an action is brought in a matter which is the subject of an arbitration agreement must, if a party so requests not later than when submitting the party’s first statement on the substance of the dispute, refer the parties to arbitration unless it finds that the agreement is null and void, inoperative or incapable of being performed.

Generally VCAT should not be considered a court. Here (from para 96) is part of Kyrou AJA’s explanation:

In my opinion, VCAT could not be characterised as a court under the common law because it is not bound by the rules of evidence; it cannot enforce its own decisions; some of its members are not legally qualified; it can be required to apply a statement of government policy and it can be required to provide advisory opinions. Further, VCAT and its predecessor … were expressly established to be inexpensive, informal and speedy administrative tribunals rather than courts.

Later, Kyrou AJA observed that this common law position is reflected in the Civil Procedure Act 2010, the Interpretation of Legislation Act 1984 and the Constitution Act 1975. His dissenting judgment favoured a consistent approach. “As VCAT has generally not been regarded as a court, if Parliament had intended that it be treated as a court for the purposes of the [Commercial Arbitration] Act, it could easily have said so.”

The majority, Maxwell P and Beach JA disagreed. In separate judgments they concluded that, at least for the purposes of the Commercial Arbitration Act 2011 (Vic), VCAT is a court even if it is considered to be a tribunal (cf court) for other purposes.

In separate judgments each canvassed the policy objectives associated with the United Nations Commission on International Trade Law’s Model Law on International Commercial Arbitration on which Victoria’s Commercial Arbitration Act is very closely based.

The lesson? Arbitration clauses in private agreements can trump clear statutory conferrals of jurisdiction on VCAT.

Tripping up on the slip rule

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“Since the abolition of capital punishment there is now no mistake by a lawyer in Australia that cannot be effectively reversed.”

Or so I was told long ago after a bad day in the office as an articled clerk.

My supervising partner had in mind the slip rule.

The slip rule is the rule that allows courts to correct minor glitches in their own judgments and orders without the trouble and expense of an appellate court’s intervention.

The slip rule is within courts’ inherent jurisdiction but it is also succinctly expressed in most courts’ own rules — see for example Federal Court rule 39.05 and, in Victoria, Supreme Court rule 36.07; Magistrates’ Court rule 36.08 and VCAT Act s 119.

But the slip rule has its limits.

I was reminded of this over the Christmas break by a Retail Tenancies List decision – Versus (Aus) Pty Ltd v ANH Nominees Pty Ltd [2012] VCAT 1908.

In late 2011 the tenant-applicant won an order totalling almost $245,000 against its landlord – see Versus (Aus) Pty Ltd v ANH Nominees Pty Ltd [2011] VCAT 2273. In that case, after a 10-day hearing and a 62-page judgment, VCAT Vice-President Judge Lacava found that the landlord had failed to take reasonable steps to stop or prevent disruption to the tenant’s trading caused by, inter alia, a neighbour’s renovations.

The landlord duly paid up.

Almost a year later the tenant decided to go back to the well. It applied to VCAT under the slip rule for a further order which would have upped the original award by almost $96,000.

The application had three prongs.

Two were swiftly dealt with. Judge Lacava found both to require a total recalculation of damages in circumstances where the errors complained of and their consequences were “not readily identifiable.”

The third limb of the application was starker.

The landlord conceded that a typographical error (yes – a humble typo) in the original reasons had effectively cost the tenant $16,235. But it would not concede the slip rule application.

Quite right too ruled Judge Lacava.

He cited L Shaddock & Associates v City of Parramatta [1983] 151 CLR 590 to the effect that courts have a discretion when dealing with slip rule applications.

In my view, if there was an error capable of being corrected under s. 119 [of the VCAT Act dealing with slip rule applications], it ought to have been identified by the applicant and its accountants by the end of February 2012 at the latest and an application then made. That was not done. In my judgment, the delay in bringing this application for correction is unexplained and is too long. It is important that litigation be brought to an end. In this case, the respondent having promptly paid the amount of damages, it would be both inexpedient and inequitable for me to make the orders sought by the applicant in its further application dated 20 September 2012.

For these reasons, the applicant’s further application is dismissed.

The lessons?

Three occur to me:

  • Try to get it right the first time;
  • Don’t hang about when you (or the judge’s typist) muck it up; and
  • Don’t believe everything supervising partners tell their underlings.

When a Calderbank offer is likely to be a hundred-to-one outsider

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At the track, bets are customarily not paid until the winning jockeys and their saddles have weighed in and the stewards have declared ‘correct weight’.

Similarly, in commercial litigation (never entirely dissimilar to gambling) the financial outcome of the courtroom contest is often unclear until the final costs orders are made.

But in retail tenancies cases at VCAT successful punters rarely even glimpse the stewards’ scales. This is because of the near-prohibition on costs orders contained in s 92 of the Retail Leases Act 2003 .

The latest illustration of this problem for successful litigants, and boon for unsuccessful litigants, is Complete Pets Pty Ltd v Coles Group Property Developments Pty Ltd [2012] VCAT 361.

A tenant, its guarantor and two investors together sued a landlord. The landlord cross-claimed. The landlord offered in a Calderbank letter and, later, in an open offer, that all claims be settled on the basis that each party walk away from the litigation and bear its own costs.

The tenant’s camp did not bite. They fought on with disastrous consequences. They were awarded zilch. The landlord won $342,901.

The landlord then sought its costs.

The landlord argued firstly that the guarantor and investors had brought their claims under the Fair Trading Act and accordingly were not caught by the savage restriction on costs orders contained in the Retail Leases Act.

Senior Member Riegler was unmoved, stating (at para 16): –

I am of the view that it is of no consequence that the relief is being sought under the Fair Trading Act 1999 …… The critical question is not what relief is being sought but rather whether the parties are parties to a proceeding before the Tribunal under Part 10 of the Retail Leases Act.

He concluded that the parties were involved in such a proceeding and, as a consequence, the landlord could not obtain a costs order against any of the tenant, guarantor or the investors unless it could show that one of the exceptions to s 92 of the Retail Leases Act applied. This required the landlord to satisfy VCAT that its opponents had conducted the proceeding either in a vexatious way that unnecessarily disadvantaged the landlord, or after failing to participate in alternative dispute resolution.

The landlord relied on its spurned settlement offers to make precisely those alternative submissions. It argued that as the ‘walk away’ offers it had made were clearly more favourable to the litigation’s losers than the end result vexatious conduct and/or the failure to participate in alternative dispute resolution should be inferred.

Again Senior Member Riegler was not persuaded. He said –

  • a litigant merely putting its opponent to its proof is not of itself vexatious;
  • neither is a litigant’s failure to accept an advantageous offer of settlement; and
  • the reference in the Retail Leases Act to alternative dispute resolution does not extend to settlement offers.

Conclusion

Is a party with a strong case wasting its time and money making a Calderbank offer (or similar) in VCAT’s Retail Tenancies List?

Probably.

Of course, not every punter who backs himself to pick the four winners necessary for a quadrella comes away disappointed – just the overwhelming majority.

In a retailing leasing dispute your client’s odds of getting a costs order are probably similar. Your punter might do much better taking a form guide to Flemington than a Calderbank offer to a costs application in the Retail Tenancies List.