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.

 

 

 

 

The Turkish purge fails in VCAT

Image

erdogan 090517Since last year’s failed coup attempt against Turkish president Recep Tayyip Erdogan (pictured), his regime has ousted 4,238 judges and prosecutors, purged 95,000 public servants, jailed at least 81 journalists and sought to remove one sitting member from a VCAT domestic building case.

Yes, all extraordinary numbers but let’s focus here on that last and most local statistic. It made it on to the public record only yesterday via VCAT’s decision in Mackie v Republic of Turkey [2017] VCAT 620.

VCAT is currently 25 hearing days (!) into a domestic building dispute. Another 10 hearing days are anticipated. In it, a builder is claiming payment for constructing a house in Toorak Road, Toorak, for the Turkish government. The Republic of Turkey has  counterclaimed and also joined the project’s architect to the action.

Things cannot be going well for the Turks because, together with the architect, they used a long adjournment last month to seek an order from VCAT’s president to have the VCAT senior member hearing the case removed from it.

That senior member is not identified in yesterday’s decision. His removal was sought  on two alternative grounds.

Member “ill-suited”

The first was that the member concerned was “ill-suited” to this particular building case and accordingly the Tribunal should be reconstituted pursuant to s 108 of the Victorian Civil and Administrative Tribunal Act.

Evidence in support of the reconstitution application was by affidavit derived,  among other things,   from approximately 2,000 pages of transcript. The complaints against the member included,  among much else,  his own statement during the hearing that he had “little experience” in construction law,  his apparent unfamiliarity with some building concepts and terminology (such as the difference between a civil engineer and a structural engineer),  and a comment during the litigation describing it as  “a nightmare”.

Apprehension of bias

The second limb of the reconstitution application was that the member had created a reasonable apprehension that he was biased in favour of the builder.

Evidence in support of this contention was said to include some stern words from the member to the architect’s principal witness about the architect’s repeated failure to give responsive answers in cross-examination,  the poor success rate by the architect and Republic’s respective counsel in making objections to evidence when compared to the builder’s counsel’s equivalent run rate,   and the member’s solicitude for the health and comfort of the builder’s 74 year-old, laryngitis-suffering witness while giving vive voce evidence.

All of these complaints were in support of a contention that a fresh member should replace the incumbent for the remainder of the hearing. It seems that the  architect (who made the formal application) and the Republic (which supported it) were hoping that the current hearing would then trundle on,  with the new VCAT member relying for his/her decision in large part on a truckload of transcript and no direct memory of what was said in evidence during the marathon hearing.

Decision – unsuitability

VCAT President Justice Greg Garde’s decision is unlikely to improve President Erdogan’s view of the rule of law as administered by a securely-tenured and independent judiciary.

Garde J dismissed the argument that the member was ill-suited. Among other things, he stated that cherry-picking certain remarks by the member from 25 days’ worth of transcript was not persuasive about the competency of the member when it was conceded that no single remark was, of itself, demonstrative of the member’s alleged unsuitability.

As to the member’s professed inexperience, Garde  J stated a VCAT member is entitled to be unfamiliar with industry jargon and concepts. Indeed, members in such a situation should not be bashful about it – they are under a duty to speak up and seek assistance from counsel as appropriate.

Decision – apprehended bias

Applying the High Court’s two-step test in Ebner v Official Trustee in Bankruptcy (2000) 205 CLR 337,   Garde J dismissed the bias argument too.

He stated that VCAT members are entitled to take up issues with counsel and the parties “and express robust views and opinions without prejudgment” and that in this case there was not sufficient evidence that the member did not “apply the same standards to all witnesses or act appropriately to progress the hearing and the determination of the proceeding….  I hold that if a fair-minded lay observer were asked whether he or she might reasonably apprehend that the senior member might not bring an impartial mind to the resolution of the issues and the questions which arise in the proceeding, the answer would be ‘no’.”

Garde J dismissed the application and ordered that the hearing resume next Monday before the same senior member who has heard it to date.

Four thoughts occur to me on this:

  1. VCAT members can be removed under s.108 of the VCAT Act during the running of a case but neither professed unfamiliarity with the subject matter nor a robust approach from the bench will of themselves be sufficient grounds for a successful application.
  2. If you are going to make a s.108 application best make it early. An application too far into the hearing is much more likely to expose the applicant to failure (and potentially grave costs consequences too).
  3. Isn’t it cheering to live under the rule of law where humble builders can take on foreign governments secure in the knowledge that the tribunals of law and fact won’t be distracted in their deliberations by the prospect of mass (or even targeted) judicial sackings?
  4. Blogging about a case involving the Republic of Turkey is a tenuous but sufficient excuse to reprint a famous limerick (below) about the censorious President Erdogan. It won its author, Boris Johnson, the prize in The Spectator magazine’s 2016 ‘President Erdogan Offensive Poetry Competition’.  (You will recall that Johnson subsequently became Britain’s  Foreign  Secretary and, as such, today remains in charge of his nation’s diplomatic relations with Turkey.) Enjoy.

There was a young fellow from Ankara

Who was a terrific wankerer

Till he sowed his wild oats

With the help of a goat

But he didn’t even stop to thankera.

ADDENDUM # 1

VCAT Senior Member Robert Davis delivered his decision in the substantive litigation on 25 August 2017. The decision is Mackie v Republic of Turkey & Tectura [2017] VCAT 129. The Republic of Turkey was ordered to pay the builder $693,824.58 and its counterclaim against the builder was dismissed. The Turks did have a win against the architect. It was ordered to pay the Republic of Turkey $119,664.65.

(Presumably the next issue for the builder will be actually collecting on the judgment. Some successful VCAT litigants find this a problematic exercise against even Victorian residents. Registering and enforcing a VCAT decision against a distant authoritarian sovereign state with an elastic approach to the rule of law is likely to prove a challenge indeed.)

ADDENDUM # 2

Boris Johnson has also survived President Erdogan’s displeasure. The limerick master became the UK’s prime minister in July 2019 and was resoundingly returned as prime minister at the British general election in December 2019.

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.

Retail tenant wins VCAT fight but gets nil damages and an adverse costs order

VCAT’s no costs presumption is more elastic in some parts of the tribunal than in others.

In building cases, the losers commonly pay the winners’ costs. In retail tenancies disputes the losers very rarely do. But the winner paying the loser’s costs? Calderbanks and their equivalents aside, it is almost unheard of  anywhere at VCAT or beyond it.

So imagine the winner’s chagrin in the retail tenancies case of 24 Hour Fitness Pty Ltd v W & B Investment Group Pty Ltd [2015] VCAT 596 when it won the liability stoush, produced an expert report seeking just over $3m in damages and then received nothing but an order to pay the ostensible loser’s costs.

The case is an illustration of one of the hazards of compartmentalising a single business within separate corporate vehicles.

24 Hour Fitness Pty Ltd was the tenant. A gym operated on the premises. Unremarkably, the landlord understood that the tenant owned the gym.

Back in 2013, the tenant claimed the landlord had breached a provision of the lease. VCAT agreed. The matter was eventually relisted three years later for an assessment of damages the tenant had suffered by reason of the landlord’s breach.

But in March this year, on day 1 of what was to have been a five-day hearing, the evidentiary penny dropped.

The tenant had never owned or operated the gym (or even any other business). Instead, a company associated with the tenant, ran the gym business. That associated company was a complete stranger to the lease. It occupied the premises and operated the gym entirely without the landlord’s knowledge or permission. Its business might have suffered by reason of the landlord’s non-compliance with the lease but, being a stranger to the lease, it couldn’t recover from the landlord for that breach.

And because the ostensible tenant had no direct interest in the business which claimed to have suffered the financial loss, it could not show any compensable loss referable to the landlord’s breach either.

In the costs decision published last month, Judge Jenkins took a dim view of the tenant conflating itself, its associated company and the associated company’s business for the purposes of the VCAT litigation.

Necessarily, her starting point was s. 92 of the Retail Leases Act 2003. That section proscribes costs orders in VCAT retail tenancy disputes unless a party has “conducted the proceeding in a vexatious way that unnecessarily disadvantaged the other party to the proceeding”. (The other exception, refusal to participate sufficiently in mediation or ADR, did not arise.)

What does “vexatious” mean? The tribunal’s answer includes a handy survey of authorities dealing with exceptional costs orders in both courts and tribunals and (at para 19) this checklist of matters to be taken into account when considering whether to order indemnity costs:

  1.  Whether a party has been forced to take legal proceedings entirely through the wrongful or inappropriate conduct of the other party;
  2. Whether an action has been commenced or continued in circumstances where the applicant, properly advised, should have known he had no chance of success;
  3. Where a party persists in what should, on proper consideration, be seen to be a hopeless case;
  4. Whether the party against whom indemnity costs are sought has made a false allegation of fraud;
  5. Particular misconduct that causes a loss of time to the Court and the parties;
  6. Commencing or continuing proceedings for an ulterior motive or in wilful disregard of known facts or clearly established law; 
  7. Making allegations which ought never to have been made or undue prolongation of a case by groundless contentions; and
  8. An imprudent refusal of an offer of compromise.

Judge Jenkins found five of the eight matters on that list present in the case before her. She ordered the tenant to pay the landlord’s costs relating to the preparation of the damages hearing dating all the way back to 2013.

The tenant did have one minor win. The landlord had asked for indemnity costs but failed. Judge Jenkins found there was insufficient evidence to justify an inference that the tenant was motivated in its claim by an ulterior motive. She held that indemnity costs were reserved “for the most exceptional circumstances” and that solicitor and client costs (which she suggested were similar if not equivalent to standard basis costs) would suffice.

The lesson? If a lease (or any other type of contract for that matter) has been breached but the resulting loss has been suffered by a stranger to that agreement, any resulting commercial litigation might not be very commercial at all.

POSTSCRIPT: The Court of Appeal subsequently upheld Judge Jenkin’s decision. See my brief blog on the appeal decision here.

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.

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.