WEBINAR: Changes to Commercial Tenancies

Notes from today's Webinar on the changes to commerical tenancies during COVID-19 presented by Catherine Micallef.

Over the last month or so, our firm has been approached by many clients, whether they be landlords or tenants, in relation to their commercial tenancies and what COVID-19 means for them.

As you may be aware, early on in the pandemic, the Federal Government announced a moratorium on evictions during the pandemic period.

On the 7th of April, National Cabinet released a Mandatory Code of Conduct for commercial tenancies which imposed a set of good faith leasing principals which apply to these tenancies.

We then had to wait until the Victorian Government introduced the Commercial Tenancy Relief Scheme legislation on 1 May to see how the Federal Government’s Code of Conduct would apply in Victoria.

The aim of the Scheme is to alleviate financial hardship faced by landlords and tenants as a result of coronavirus (COVID-19).

Despite being enacted later, the regulations are taken to begin on 29 March 2020. The relevant period referred to in the regulations is the period from 29 March 2020 to 29 September 2020. You may note that this runs alongside the JobKeeper payment dates.

Next I will go through who is eligible for the Scheme and what support the Scheme provides.

To be eligible for the Scheme, a tenant must:

• be a small to medium enterprises, with an annual turnover under $50 million;

• have experienced a minimum 30 per cent reduction in turnover due to coronavirus (COVID-19) - this would mean that the tenant would be eligible for the Federal Government JobKeeper payment.

Some of the features of the Scheme are as follows:

• a six month moratorium on commercial tenancy evictions for the non-payment of rent for eligible tenants. This means that a tenant who is eligible for the JobKeeper program would not be able to be evicted from their premises during this period provided the tenant has approached the landlord with a rent relief request;

• a freeze on any rent increases during this relevant period;

• a rental payment waiver or deferral taking into account the tenant’s income reduction due to coronavirus (COVID-19) to be negotiated between the tenant and landlord; and

• a free mediation service specifically for commercial tenants and landlords, offered by the Victorian Small Business Commissioner.

I have set out some steps to follow, if you are a eligible tenant, your business has been affected, and you want to approach your landlord for a rent reduction -

Step 1: Continue to pay what rent you can afford.

Step 2: Approach your landlord in writing with your request for rental relief and provide supporting documents as to your eligibility. This could include evidence of your JobKeeper eligibility, a calculation as to your reduction of turnover, perhaps compared to the previous year (BAS statements may be useful or other relevant information from your accounting software).

Step 3: Once you have made a request, your landlord must offer rent relief within 14 days.

The Scheme states that no less than 50 per cent of the rent relief offered by the landlord should be in the form of a waiver.

For example, a landlord may offer a rent reduction as follows, 25 per cent rent free and 25 per cent rent deferred to be repaid after the specified period.

OR

They could provide just the rent free period - they cannot offer a just a deferral unless the parties agree in writing.

If there is a deferral of rent, the landlord must offer to extend the term of the lease for the same time as the deferral period.

A landlord is required to take into consideration the following factors:

• the tenant’s reduction in turnover;

• any waiver of outgoings or other expenses for the premises;

• any reduction in outgoings for the premises (passed on by third parties);

• the tenant’s capacity to meet the lease obligations; and

• the landlord’s financial ability to offer rent relief - this includes support a landlord may have access to such as mortgage relief or other Victorian Government schemes they might be eligible for such as land tax relief.

Step 4: if agreement is reached, the parties should document the agreement in writing.

Step 5: if agreement cannot be reached then the parties can apply for free mediation from the Victorian Small Business Commissioner. Either party can commence this mediation process.

As a summary, Tenant’s should check that the landlord’s rent relief offer complies with the regulations, including whether at least 50% of the rent relief is in the form of a rent waiver, and in the case of a rent deferral, whether a corresponding extension to the term of the lease is also offered.

For landlords:

Provided the tenant complies with the above obligations, the landlord must not:

• evict the tenant;

• re-enter the premises; or

• enforce any security for non-payment of rent.

Penalties will apply if the landlord breaches any of these statutory prohibitions.

Landlords should also:

• see whether they are entitled to a land tax reduction of 25% if they provide their commercial tenant’s declaration that they meet the eligibility criteria and that rent relief has been agreed to.

• should ask their lender (if any) about mortgage payment deferral. Evidence of mortgage payment deferral may be needed at mediation.

The Brimbank Business association, along with Ferraro & Company P/L and Biggin and Scott Real Estate Sunshine presented a webinar on the changes to commercial and residential tenancies during COVID-19 on 3 June 2020.

Disclaimer: The information provided in this article is general advice only. Should you have any queries, please do not hesitate to contact our office.