Summary

Over the past eight months, the coronavirus pandemic has affected our daily lives. To deal with the adverse effects on businesses, the National Cabinet released a National Code of Conduct which guided each of the States and Territories in implementing their own legislative framework.

However what happens if an agreement cannot be reached between a landlord and tenant? Senior Manager at the Victorian Small Business Commission (VSBC) Mark Schramm speaks with Rohan Ingleton and Nicola Carnevale about the mediation process at the VSBC under COVID-19 and some key issues and questions around the process.

In this episode, Rohan Ingleton and Nicola Carnevale are joined by Mark Schramm from the Victorian Small Business Commission.

We discuss:

  1. COVID-19 Regulations and its amendments
  2. Tenants needing to re-apply for rent relief for extended period
  3. Role of the VSBC and resources available
  4. Success of VSBC mediations – pre-mediation discussions and at mediation
  5. Relief for outgoings
  6. Common issues coming before the VSBC
  7. New binding orders

 

Resources

Transcription

[00:00:00] Nicola: Over the past eight months, the coronavirus pandemic has affected our daily lives. To deal with the adverse effects on businesses, the National Cabinet released a National Code of Conduct which guided each of the States and Territories in implementing their own legislative framework.

In Victoria, the government implemented the COVID-19 Regulations effective from 29 March to 29 September 2020 and on 29 September, it extended the application of the Regulations until the end of the year to deal with Victoria’s protracted lockdown.

I am Nicola Carnevale and today I am joined by Rohan Ingleton, Partner at Madgwicks Lawyers, and Mark Schramm a Senior Manager of Dispute Resolution with the Victorian Small Business Commission (VSBC).

Mark has been a solicitor at the ACCC and has previously acted as director of Small Business Victoria and the Small Business Commissioner at the VSBC. After this distinguished career, he currently manages the VSBC’s dispute resolution process and assists the commissioner in advocating and giving guidance on issues that relate to retail and commercial leasing, farm debt, owner driver and business to business commercial disputes. Thanks for taking the time to join us today, Mark.

[00:01:17] Mark: Thanks for inviting me.

[00:01:19] Nicola: Before we get into the questions, we want to note that the COVID regulations are new law. Ultimately it will be for the courts to determine how to interpret the ambiguities in the legislation. Today's conversation will be anecdotal in nature, and we suggest that you seek the advice of a lawyer should you have any concerns. Rohan, what were the key changes to the code regulations that are effective from 29 September 2020?

[00:01:46] Rohan: Yeah, thanks, Nicola. I think what happened, we waited until 29 September, the government kept us waiting.  So what they did was that they extended all the Regs through to the end of the year, 31 December this year, so rent relief is available until the end of the year. There were a number of changes, which I have highlighted in my COVID updates which some of you may have seen or got hopefully. This also made clear that the rent relief offered to tenants was meant be proportional to the turnover reduction. So, if you're locked down and you could not operate your business like some of our clients who owned restaurants and had zero turnover, which we’ll talk about this more later, but the idea was that rent relief should be proportional and should relate to all rent payable under the lease with a waiver or deferral, which Mark will go into more detail shortly. It also provided that landlords’ financial ability to provide relief was no longer a prerequisite. Previously it had talked about a party’s ability to provide relief. Now the idea of a landlord being able to provide relief was taken out. The other major change was that the VSBC, the Victorian Small Business Commission, could make binding orders, which Mark might talk about further, whether it comes up or not, I don't know, but we'll wait and see. At this stage I’m not aware of any but I’ll let Mark talk about that. Thanks Nicola.

[00:03:20] Nicola: Thanks for that Rohan. Mark, should tenants be reapplying for rent relief for this extended rent relief period?

[00:03:31] Mark: In short, yes, and I'll explain why. From the 29th of September, the regulations in Victoria, as you mentioned, were extended. And under those extended regulations, it's really important that the tenant applies for rent relief to their landlord because the extended regulations basically state that the tenants are entitled to rent relief, but only from the date they apply for rent relief to their landlord. So, if tenants have already applied, that's OK, those negotiations can continue. But it's really important that the tenant jumps on our website, looks at how to apply for rent relief and goes through the requirements which we’ll go through. We can go through those now, if you like?

[00:04:10] Nicola: Yeah, sure. That sounds good.

[00:04:13] Mark: The requirements are that the tenant has to provide evidence that they're in an eligible lease, what's called an eligible lease. And that means basically they have to give the landlord evidence that they are an SME, a small medium enterprise; they have to demonstrate they're entitled to JobKeeper, which everyone's heard about, I'm sure; they have to give the landlord some documents - they have to give the landlord a copy of the receipt number and the most recent notice to the ATO under the JobKeeper rules - that’s there return that they provide to the ATO. Now, we have frequently asked questions and examples of these documents explaining and giving examples of these documents on our website. Actually, yesterday, we put up some examples of the types of information that a tenant can provide to their landlord, the information they provide to the ATO, examples of those documents. And just to finish up on that, they also have to give the landlord evidence of the reduction in turnover. Now, what the regulations provide, this is also explained in our frequently asked questions, they have to provide one of an extract from their accounting record or their BAS statement, or a statement issued from their bank, or it can be a statement from a practising accountant. So that's sort of the requirements. But of course, some landlords and tenants are choosing to sort of be a bit more flexible about these things and go forward on the basis of, say monthly figures rather than a quarterly report, which is technically the requirement, the last quarter's financial information. But that's it in a nutshell. That's the sort of information the tenant has to provide

[00:05:44] Nicola: Those frequently asked questions on the VSBC website are actually really helpful. I know that you also include on it what documents tenants shouldn't be required to provide. And one of those is prospective or projected turnover figures, which is difficult for tenants to ascertain and I think that was more appropriate at the beginning of the rent relief period and obviously less so as we get towards the end of it.

[00:06:15] Mark:  Look, that's right. It’s really those four pieces of information that I referred to which are detailed in those questions that you've referred to. So the extract from the accounting record, the BAS, the statement from the bank or a statement from their accountant, that's really what it comes down to.

[00:06:29] Nicola: Rohan, I might ask this question of you. If a tenant is in overholding, can the landlord still end the lease by giving, for example if they're a month to month tenant, 30 days notice?

[00:06:42] Rohan: The short answer is yes. We've had a couple of scenarios recently which where one we were acting for a tenant and one acting for a landlord, where we have to give notice to quit to tenants and there's no real issue. The Regs themselves state you can't end a lease because the tenant didn't pay rent or outgoings where they've sought relief. So this was not that scenario so we had no issue in serving the notices and have not had an objection as yet. Another one was where we acted for a tenant and in that scenario, the tenants, well, their advice was that landlord couldn't end the lease because their lease ended, it was coming up I think in November, this month. We said, yes, the landlord could because the lease was just going to end. There's nothing in the Regs that says you need to extend the lease. So, yes, you can. You can't terminate because of non-payment of rent or outgoings that are due under the lease if it's an eligible lease, of course. So that's sort of where that fits and that comes up quite regularly. So tenants and landlords need to be aware their rights are still there. If their lease ends, the lease ends except in the circumstances that I've talked about.

[00:07:58] Mark: Just one little point that sometimes comes up is, even before COVID, under the Retail Leases Act, which only applies to retail leases, premises that are leased for retailing, there is a requirement under one of the sections, if anyone wants to know the section, it’s section 64. The requirement is that where the lease has come to an end, the requirement is that the landlord needs to have given the tenant a notice about whether the landlord is going to renew the lease or not. At least, or sorry, no later than six months before the end of the lease. So, when you have a tenant that's sort of been holding over, if they haven't received that notice, what the legislation says is the landlord now has to give that notice and the tenant then gets six months for the end of the lease to come around. So it's a bit of a, can be a bit of a trap if those notice requirements haven't been observed.

[00:08:51] Nicola: So it is clear that landlords should still be, and tenants as well, complying with their obligations under the Retail Leases Act, despite the COVID regulations?

[00:09:01] Mark: That's right. The COVID regulations sit alongside all the other laws that apply to leases in addition to what the tenant and landlord have agreed to in their own lease.

[00:09:10] Nicola: So Rohan are there any other landlord rights that aren't affected by the COVID regulations?

[00:09:16] Rohan: Look, there are certain rights enacted in there, no doubt, and landlords are well aware of it and I think that landlords should get their own advice about that. And if there's any doubt, I think we've mentioned the VSBC website, which is really relevant and I think people should review that. It's got a lot of questions and answers there, which is really useful even for us lawyers, we look at it sometimes to get a bit of guidance about what the answer might be. So I think that's really important, so certainly look at that.  Mark, I agree on Section 64, that’s a really important point, certainly something we look at regularly when a tenant comes in and the landlord says you're out. One of the first sections we look at it, if there's no options, we look at that section. And more often than not, where a landlord is managing the property themselves, not using a professional agent, they invariably don't do it. And we find it over and over again, landlords just don't get the required notice. Therefore, a tenant could stay on and it's a real trap for landlords. But you're right in that these COVID Regs don't override what the Retail Leases Act says. It's very important that people still comply with the Act because these Regs may end well,  we'll talk about it later, but they may end this year at this point, they're ending on 31 December, but even during this period, they're still relevant.

[00:10:41] Nicola: So if the lease is not an eligible lease within the strict interpretation of the regulations, can a tenant or landlord still apply to the VSBC to have the matter mediated?

[00:10:58] Mark: Yes, they absolutely can. And the reason for that is probably, well there's a couple of points to make there, as you mentioned right at the start, this all started with the national code being announced by the Federal Government. And that code had a number of principles that that were meant to be guiding, well are guiding principles for how each state implemented the commercial tenancy relief schemes. So even where a tenant is not eligible, those principles can still be applied to a mediation setting. And we encourage landlords and tenants to apply those national principles, which are pretty much the same as what's in the in the regulations in Victoria. So, we will accept an application for mediation. The other point to make on that is, that the way we do that, is that the Small Business Commission can mediate disputes not only under just the Commercial Tenancy Relief Scheme, but we also have a well known dispute resolution function to mediate any kind of dispute between a landlord and tenant under the Retail Leases Act. And we also have a general sort of commercial business to business dispute resolution, landlord tenant dispute resolution that's not covered by the Leases Act under what's called the Small Business Commission Act, which allows us to mediate general commercial disputes about any kind of contractual or commercial issue that arises.  So we can receive an application and if it looks and smells like something we can help with, we will.

[00:12:25] Nicola: So the VSBC can help with pretty much anything in that commercial contract space?

[00:12:33] Mark: That’s right. We say no to no one. Well sort of, within reason (laughs).

[00:12:39] Nicola: What is the quantum of rent relief that is recommended at mediation?

[00:12:45] Mark: Well, I think Rohan sort of touched on it when he mentioned this concept of proportional rent relief, which has come in as a result of the extended regulations. So just to be clear, at mediation and even before mediation, when an application comes in, we have one of our dispute resolution officers try and see if they can get a deal done, let's cut to the chase, try and get a deal done between the landlord and tenant. If they can't do that, they set it down for mediation. The mediator doesn't give a ruling, doesn't say, well, you have to do this or you have to do that, you have to apply proportional rent relief. What happens is the mediator’s job is to remind the parties of what the regulations provide. And what the regulations provide is that if a tenant has suffered a fall in turnover, then from the 29th of September, the landlord has to offer the tenant what's called proportional rent relief. In other words, rent relief that's in proportion to the reduction in a tenant’s drop in turnover. I will give an example. Let's say the tenant was getting a thousand dollars a month and they’ve had to shut down like a gymnasium or one of those businesses that unfortunately hasn't been able to trade. Applying that proportional rent relief that the landlord must offer, that means the landlord has to give a thousand dollars worth of rent relief for months.

Now, the mistake that many people think here is that that means the tenant doesn't have to pay rent. That's not the case. It means that the landlord has to offer rent relief equal to the thousand dollars in rent relief. But what the regulations state is that thousand dollar rent relief has to be made up of at least 50 percent in the form of a waiver of rent. That's rent the landlord can’t ask to be paid back. But the other 50 per cent can be in the form of a deferral so that the landlord and tenant can agree on the other 50 percent being deferred to be paid down the track. And the regulations go and talk about when that happens. And I'll mention that in a moment, how that goes, but at the moment we’ll just focus on the rent relief offer. So just to be clear, it's not an absolute waiver. It's at least 50 per cent in the form of a waiver and the rest of it can be deferred.

[00:14:45] Nicola: Are tenants entitled to any rent relief on the payment of outgoings?

[00:14:55] Mark: The regulations touch on this in a couple of places in Victoria.  From the 29th of September, there was a slight change to the regulations, which means that if a tenant's paying rent under what's called a gross lease and some tenants do have what are called gross leases, that means the tenant doesn't pay rent plus the outgoings, all the outgoings in and the rent are rolled into one figure. So, the regulations change slightly to say that if the landlord's offering rent relief, I can't carve out the outgoings. It has to be on that global rent, rent plus outgoings global figure, that gross figure. So that's the first change. And the other part is not a change, but it has always been in the regulations since the 29th of March that the landlord must consider waiving outgoings. They don't have to, but they've got to consider waiving outgoings. But they also must pass on, effectively they have to pass on any reduction in outgoings that are given to them because the regulations state that the landlord can't charge more than the tenants proportional share of any reduced outgoings. So, if there's been a reduction, it basically means the landlord has to sort of let that reduction flow on to the tenant.

[00:16:02] Nicola: For example, if we're talking about a commercial office building in the city, for example, where there's not a lot of people going into the city at the moment due to the lockdown in Victoria, they wouldn't be cleaning the premises as much. So therefore, they're cleaning charges have gone down. A landlord needs to pass on that proportionate reduction to the tenant when they’re apportioning the outgoings?

[00:16:29I Mark: In that scenario, that's probably a charge where the landlord only needs to consider passing on the reduction because it's not a charge of which the landlord has no control, if you like. It's not like some external agency saying, well, this outgoing is going to be reduced and then the landlord must then under the Regs, pass the benefit of that onto the tenant. So I think it's more likely to be something the landlord needs to consider under the regulations as opposed to having to.

[00:17:08] Nicola: You said, Mark, that quite a number of parties have been applying to the VSBC for mediation and that the VSBC engages in pre-mediation discussions, which I'm sure quite a number of matters are resolved in those pre-mediation discussions before it's referred to mediation where everyone gets in a room and nuts out rent relief arrangements. What has been the actual success at the VSBC that you've seen over this period?

[00:17:41] Mark: Well, strangely enough, the success rate of these Commercial Tenancy Relief Scheme applications for mediation have been more successful than our usual non-CTRS disputes that we deal with. So to cut a long story short, when the dispute comes in, the dispute resolution officer moves between the parties on email, phone, maybe Zoom meeting whatever and they've been able to successfully resolve, we're running at about 44 per cent of those being resolved successfully before there's any need to set it down for mediation. And where it is set down for mediation, we’re seeing about an 81 percent success rate at the moment for those. So overall, that's an 87 percent success rate. So the chances of getting a deal done and getting a good outcome are very high. And that's and I should note, too, we only see the disputes, before it even gets to us, there's a lot of landlords and a lot of tenants doing a lot of deals. So overall, you'd have to say that most of the time people are getting deals done and agreeing.

[00:18:47] Nicola: Because if a matter isn't resolved at mediation, the VSBC hands over a certificate that notes that the parties have not reached agreement and they're unlikely to reach agreement at mediation. Is that right?

[00:19:03] Mark: Yeah, the regulations have some requirements, which is that if a landlord and tenant can't agree on rent relief and they can't agree through mediation, then the ultimate body that can determine that dispute is the Victorian Civil and Administrative Tribunal or a court. The landlord and tenant can't, neither of them can go to a Victorian court without a certificate having been issued by us, first by the Victorian Small Business Commission first. And that certificate, basically, it's a key to getting into VCAT or a court which basically says that that mediation failed or is unlikely to resolve the dispute. So that's how the certificate process works. You basically have to come to us and get that certificate.

[00:19:43] Mark: I'll add to that there is a sort of a recent change to this certificate process, which is the Commission can issue a certificate which notes that a party hasn't mediated in good faith. So under these regulations, you’ll see, if you read them, if anybody wants to read the Regs and you can look at these through links on our website, there’s  various requirements for the landlord and tenant to reach an agreement in good faith, to try and negotiate in good faith. And if they don't do that at mediation, then the Commissioner can issue a certificate which says that someone's failed to mediate in good faith.

[00:20:16] Nicola: So you've got a pretty good success rate then if people are heading off to the VSBC to mediate these rent relief disputes?

[00:20:25] Mark: Yeah, that's right. Very good. There's a step, there was a mention of the binding orders and if you'd like me to mention that, I'm happy to talk you through that process?

[00:20:34] Nicola:  Yeah that would be great if you could step us through that process.

[00:20:35] Mark: All right, now this touches on or leads on from this good faith issue that I just talked about, which is that, again, under these Regs that have been put in place, there's a requirement for the landlord and tenant to negotiate in good faith. And what that means is if the landlord doesn't respond to the tenant and just basically there's absolutely no response or if they do come to us, not in good faith, if they respond to an application that's been made by a tenant, we then send that to the landlord to ask them to respond if basically we're dealt with in a way that that could be said to be not in good faith. For example, someone's incredibly rude or aggressive or tells us to get lost using lots of swear words or whatever, or just generally not doing what they should do, which is to negotiate, then the regulations say that the Commission can issue a binding order for rent relief  But there's a process for that, which means we would write to the landlord, give them an opportunity to engage and if they still effectively didn't engage in good faith, we would then have a determiner determine what the rent relief should be. And then if it's fair and reasonable, having regard to the submissions that both parties are given the opportunity to provide, if it's fair and reasonable to make that binding order, then the commissioner can make a binding order for rent relief, which basically does what the what the landlord could have done under the regulations, which is to say how much the rent should be by way of waiver or deferral and repayment and that's it. But so far, we haven't had to use it because it's a) early days and b) most people are engaging.

[00:22:08] Nicola: That’s great! I just had a question regarding the binding orders. The drafting of the regulations implies that the landlord will be the party that is not acting in good faith. Is this what the experience was at the VSBC pre 29 September that led to this change.

[00:22:28] Mark: That's an excellent question. Look, I think it's fair to say that over the course of these regulations, there have been instances where both landlords and tenants on occasion have probably put their head in the sand a bit and not done what they should do, which is to negotiate. Parliament obviously makes laws and the way laws are made is that consultation is conducted by the various departments that are responsible for the laws that parliament makes, in this case, Business Victoria. And that consultation process led to these regulations being amended in the way they had been. So they saw a need for encouragement of the process to go through to its finality. And so we were but one stakeholder in that consultation. I don't know that we put any particularly strong view about it. But look, that's probably more for others to comment on from a policy point of view about how laws are made, I’ll just say that probably we've given some examples of the spectrum of how disputes have gone. And that's but one aspect of it.

[00:23:29] Nicola: That makes sense. So regarding that, at mediation, what are the common experiences? What are tenants seeking from their landlords for rent relief?

[00:23:40] Mark: Oh, look, it really falls into line with what these new requirements are since the 29th of September, which is tenants want the rent relief they think they're entitled to, which is basically proportional rent relief. They want to defer rent, they want to pay that rent back in a deferred way, which I said I'd talk about. And that means that under those regulations, repayments where rents been deferred don't have to start until the 31st of December. And the regulations provide that where deferrals, where rent deferrals have been agreed on, the rent has to be repaid over the greater of the balance of whatever's left on the lease, so the remainder of the lease term or a minimum of twenty four months. So that's how the deferral works. But yeah, I think they’re basically they’re after sort of getting as much rent relief as they can within the bounds of their evidence and to defer part of the rent.

[00:24:30] Nicola: So I understand that the costs of mediation are to an extent subsidized. What are the costs of engaging a mediator at the VSBC for such a relief dispute?

[00:24:44] Mark: Well, normally it would be $195 per party, which in anyone's books is a reasonably cheap half day out to try and get some expert help in resolving a dispute. But basically it's free. It's free for COVID related disputes.

[00:24:56] Nicola: That’s great.

[00:24:57] Mark: An easy answer.

[00:24:58] Nicola: If the dispute is not settled at mediation and let's say that there's no bad faith and that the parties just can't meet in the middle, what happens next?

[00:25:10] Mark: Well, then, if either party chooses, but probably more so the tenant, I'd imagine, since they're the  applicant in this seeking the rent relief, it's then a matter for the tenant to potentially go to the Victorian Civil and Administrative Tribunal and ask VCAT to make the order that they say should have been effectively made by the landlord to make that order for that rent relief that should have been given by the landlord. Because obviously, at this point, you have a disagreement and the only arbiter, the only person, the only body that can arbitrate on it and give the ruling on it is VCAT or the court.

[00:25:44] Nicola: So we've had, I think, one case in New South Wales that went to the Supreme Court. And we've just had one at VCAT that are trying to untangle or deal with the ambiguities that are in the COVID regulations. So I guess we'll just wait and see what else makes it to help us all understand these regulations a little bit more clearly and deal with those ambiguities that I think we only learn about through practice and through getting unique examples that don't quite fit the standard model.

[00:26:18] Mark:  It will be interesting to see if VCAT make an order. I know they don't have many cases, I don’t know of any at the moment that are with VCAT.  I'm guessing that you'd have to imagine it's possible there'll be at least one during this time. But we will update our website with this information and I'm sure most lawyers are sort of straight across, particularly Madgwicks, are sort of straight across any developments in that area.

[00:26:39] Rohan: In finality, I guess just to say I would encourage everyone to use the VSBC for mediation if you’ve got a retail dispute. I’ve done numerous ones over the years. One ninety five bucks for half a day, but can go a lot longer, I’ve had some that have gone a full day, it is pretty cheap. I would encourage all to use their services. The VA is generally ex-barristers or experienced lawyers so it's very cheap and well worth doing. Most of my matters I’ve had there have settled and some have gone off to VCAT and settled and many, many more that have settled at mediation. So it is well worth doing so I'd encourage all to do it.

[00:27:22] Nicola: Thanks for joining us Mark and for shedding some light on the VSBC’s role in COVID rent disputes. We will be putting a link to the VSBC’s website and their helpful FAQs as well as so other valuable links in the Show Notes. Please subscribe to our Podcast on your podcast platform of choice and subscribe to the Madgwicks Lawyers website for updates affecting the property industry. Stay tuned for our next episode, we have some interesting conversations up ahead with more industry experts.

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