A message from BDC
At BDC we have a specialised Strategy and Implementation Team that will help you navigate the Mandatory Code of Conduct to ensure you receive the best possible outcome when negotiating. The Code raised many questions for tenants about how the Principles would be applied in practice.
Below you will get insight into how the Code will be applied and some of the key Principles.
Rent Relief under the Regulations
The Regulations govern eligible leases for the “relevant period”.
Interestingly, “relevant period” is the six month period from 29 March 2020 to 29 September 2020 (Relevant Period). This contrasts from the Code which applied for the pandemic period in which the JobKeeper scheme is operational and a subsequent reasonable recovery period. It appears that the recovery period has not been factored into the Regulations. Rent relief includes any form of relief provided to a tenant under an eligible lease to pay rent, including a waiver, reduction, remission or deferral of rent (Rent Relief).
A tenant may request Rent Relief from its landlord in writing accompanied with evidence that the tenant is an eligible tenant under the Act.
The landlord must offer Rent Relief to the tenant within 14 days of the tenant’s request or within a further period agreed by the parties in writing. The landlord’s offer must be based on all of the circumstances of the lease, apply for the Relevant Period and provide a rent waiver of no less than 50% of the Rent Relief (unless the parties agree otherwise). This minimum rent waiver reflects the Code.
The landlord’s offer must also take into account:
- the reduction in the tenant’s turnover during the Relevant Period;
- any rent waiver;
- whether a failure to provide further rent relief will compromise a tenant’s ability to fulfil its ongoing obligations under the lease;
- a landlord’s financial ability to offer rent relief (which includes any relief provided to a landlord by its lenders due to COVID-19); and
- any reduction in outgoings charged in relation to the premises.
In the agreement for rent relief
A portion of rent may be deferred (regulation 16). The landlord cannot request that payment of deferred rent commence until the earlier of 29 September 2019 and the expiry of the term of the lease. Further, the payment of deferred rent will be repaid to the landlord over the balance of the term (including an extension granted in accordance with the Regulations) and a period of no less than 24 months (whichever is greater).
The above largely reflects the principles in the Code save for the deferral proportion of rent. Under the Code, the proportion of rent deferred was directly attributable to the reduction in the tenant’s turnover.
The regulations have also incorporated further certain principles from the Code outlined below
Prohibition on rent increases (regulation 12) – unless agreed otherwise between the parties, rent during the Relevant Period must not be increased. This excludes turnover rent under a retail lease.
Extension of the term (regulation 13) – if payment of rent is deferred, the landlord must offer to extend the lease by the same period for which rent is deferred (which will likely be the Relevant Period). An extension of a lease term is a deemed new lease at law. Parties should be cautious about the implications this may have for leases that are also governed by the Retail Leases Act 2003 (Vic).
Recovery of outgoings or expenses (regulations 14,15) – a landlord must consider waiving recovery of any outgoing or expense under a lease for any part of the Relevant Period that the tenant is not able to operate its business from the premises. If the tenant is not able to operate its business (for example, on account of a government order) the landlord may cease providing a service (e.g. cleaning of the premises) if reasonably requested by the tenant. Further, if an outgoing charged or imposed on the premises is reduced (e.g. government rates and taxes or service charges), the tenant must not pay more than its proportional share once the reduction has been applied. If the tenant has already paid this amount in advance or this is determined to have occurred, the landlord must reimburse the tenant for the excess paid as soon as possible.
Fees, interests and charges (regulation 17)
- A landlord must not require a tenant to pay interest, fee or charge in relation to any payment deferred by variation of the lease.
- Protection for tenants for non-compliance with lease obligations (regulation 9) – the tenant will not be in breach of its lease if it has complied with the protocol outlined in regulation 10(1) – (5) or during the Relevant Period it complies with the variation any other agreement between the parties.
- Prohibition from landlord evictions or re-entry (regulations 9(2), 9(3)) – a landlord to an eligible lease must not (or attempt to) evict or a tenant or re-enter the premises.
- Contravention of these regulations may lead to an offending landlord receiving a penalty up to 20 penalty units (currently $3,304.40).
Prohibition from recourse (regulation 9(4))
- A landlord must not seek recovery under a security for non-payment of rent. This includes any security, deposit, bond, indemnity or guarantee provided under the lease to secure the tenant’s performance of its obligations.
- Contravention of this regulation may lead to an offending landlord receiving a penalty up to 20 penalty units (currently $3,304.40).
Tenant may reduce business hours or cease business trading (regulation 18)
- A tenant will not be in breach of its lease if, during the Relevant Period, it reduces its opening hours or ceases trading from the premises for a period of time.
- Landlords must not (or attempt to) evict, re-enter or seek recourse from a tenant who ceases trading or reduces its operational hours.
- Confidentiality (regulation 19) – parties must not divulge or communicate protected or personal information unless an exemption under the Regulations applies.
This is likely to encourage tenants to share financial records for the purpose of reaching a reasonable agreement on Rent Relief.