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

Featured

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.