One year on from our first COVID-19 Leasing FAQ article, the issues may be different, however, ongoing questions regarding what tenants and landlords should do in certain circumstances still remain. With the COVID-19 Omnibus (Emergency Measures) (Leases and Licences) Regulations 2020 (Vic) (Regulations) set to expire on 28 March 2021, landlords and tenants are looking forward and considering their next steps and options in respect of their lease and licence arrangements.
We have outlined the key issues below.
Agreements for rent relief
1. What should tenants do to ensure that they are compliant with the Regulations?
Tenants must ensure that they have applied each time for each extension of the rent relief period (once for each of the following periods: from 29 March 2020 to 29 September 2020, then for 30 September 2020 to 31 December 2020 and again for 1 January 2021 to 28 March 2021).
It is important for tenants to ensure that they have provided their landlord with all of the necessary information, documents and evidence to satisfy the requirements under the Regulations. Tenants should bear in mind that this is not what their landlord has requested from them but what is required of them under the Regulations.
If tenants have not applied for rent relief for each of these periods, or are unsure if their applications have been compliant with the Regulations, then the tenant should seek legal advice in respect of formally applying for rent relief for these periods.
If you are unsure if an application for rent relief is compliant with the Regulations, see here.
2. What rights are available for tenants that cannot comply with their obligations under their lease arrangements?
Many landlords and tenants reached agreements in respect of rent relief for the rent relief period (29 March 2020 to 28 March 2021, for those eligible tenants) or part of that relevant period.
Certain tenants have re-negotiated the rent at the time of the Regulations being extended (29 September 2020 and 22 December 2020). Whilst certain other tenants have taken the opportunity to re-open negotiations with their landlords where their financial circumstances and ability to comply with the agreement or the lease have been impacted (under regulations 11).
If you are a tenant whose business circumstances have substantially changed since the agreement for rent relief was reached, then you should seek advice from a lawyer in respect of your rights to re-open those negotiations before 28 March 2021 (or otherwise as soon as possible).
3. What happens if the landlord and tenant have not reached an agreement for rent relief?
As of late, we have seen that certain parties (both landlords and tenants) have been dragging their feet in respect of reaching an agreement for rent relief.
Landlords and tenants who are in the position where they cannot reach agreement with the other party should lodge an Application with the Victorian Small Business Commission (VSBC) to have the matter mediated.
If the landlord does not continue to act in good faith and cooperate with the mediation process, there is a provision for the VSBC to provide binding orders (in certain circumstances) or issue a certificate allowing the tenant to initiate proceedings in the Victorian Civil and Administrative Tribunal (VCAT).
Landlords and tenants in this circumstance should seek legal advice in order to determine how best to proceed.
4. We have reached agreement on rent relief, what now?
Parties must ensure that they are clearly documenting the agreement between the parties for rent relief. The changes to the lease effectively vary the terms of the lease and the agreement reached will likely affect each parties’ rights moving forward for the balance of the term of the lease.
In most circumstances a lease is a five or more-year relationship between the parties. Even in circumstances where the tenant plans to sell its business in the future, the terms of the lease and the rent relief agreement will impact on any sale of the business.
Especially where the rent relief agreement extends the current term of the lease or requires repayment of any deferred rent beyond the expiry date (which is less common), the parties should be sure to have sought legal advice to ensure compliance with the Retail Leases Act 2003 (Vic) (if applicable) and any issues with default.
Security under the lease
5. What happens if the lease comes to an end before the repayment of deferred rent has been completed?
In many circumstances, the term of the lease may have been extended so that the obligation to pay deferred rent ends at the same time as the term of the lease. However, certain parties that wish to end the lease earlier due to the economic impact of the COVID-19 pandemic on the tenant’s business have agreed to end the lease earlier (or at the time of its natural expiry). In these circumstances the obligation to pay deferred rent will not have been completed at the end of the lease.
In these circumstances, the landlord will want to hold onto the security under the lease, so that it can draw on the security deposit, or bank guarantee if the tenant does not comply with its obligation to pay the balance of the deferred rent.
Both tenants and landlords should also be aware of the recent amendment to the Retail Leases Act 2003 (Vic), where landlords must return any security to the tenant within 30 days of the expiration of the lease, if the tenant has complied with its obligations under the lease.
The Regulations do not specifically deal with this issue. Parties should be sure to carefully consider the drafting the variation to the lease, or the rent relief agreement.
Tenants should be aware that the funds provided by way of the security deposit or bank guarantee may not be released, until it has paid all of the deferred rent to the landlord. Where the security amount is greater than the balance of the deferred rent, tenants may consider paying the balance of the deferred rent more promptly in order for the security amount to be released earlier.
Landlords should ensure that the lease and / or any variation to the lease that documents the rent relief agreement allows for the landlord to maintain the security until the tenant has complied with its obligations under the lease.
Landlord re-entry and defaults under the lease
6.The Landlord has re-entered the premises or provided a default notice, what next?
If the tenant has not complied with its obligations under the lease or the agreement for rent relief, the landlord may issue a default notice (or in the case of non-payment of rent, in certain circumstances) re-enter the premises.
We expect that defaults will increase substantially following the end of the moratorium on evictions (currently ending 28 March 2021).
Tenants should seek advice from a lawyer in order to determine if the landlord has validly exercised its rights of re-entry.
Landlords should also take care in exercising re-entry rights, as tenants may pursue landlords for loss and damage caused by unlawful re-entry.
Landlords should engage a lawyer to draft the re-entry or default notice to ensure compliance with the lease and the legislation.
VCAT has recently heard a number of cases dealing with parties that have been unable to reach agreement on rent relief. In most instances, VCAT has found in favour of the landlord, stating that tenants should not be afforded the protections of the Regulations if it has not validly applied for rent relief.
That being said there has not yet been a Supreme Court case in Victoria and a number of matters at VCAT and other Courts have not yet been decided.
Landlords and tenants should seek legal advice in order to assist with balancing the fact that this legislation is still being tested by the Courts and the fact that parties need to reach agreement now in order to get back to business.