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

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.

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?

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

“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

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.

Paul Duggan

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Paul Duggan is a commercial litigation barrister based in Melbourne, Australia.

Since 1996 he has advised and appeared in most types of business-to-business and business-to-customer disputes – commercial and domestic building matters, commercial and retail leasing disputes, insolvencies, franchises, partnerships, insurance, professional negligence, sales of land, Corporation Act matters and trade practices disputes to name a few. Although Paul has represented governments, major public companies, insurers, Lloyds syndicates and private individuals his clients are predominantly small and medium enterprises contemplating or engaged in litigation in the Victorian Supreme Court, County Court or VCAT.

Paul also practises in the federal jurisdictions and interstate.

Paul’s clerk is Gordon & Jackson.

Liability limited by a scheme approved under the Professional Standards Act 2003.