Amendments to the Commercial Tenancy Relief Scheme

In this blog, we have referred to the original regulations[1] as the “Principal Regulations” and the amending regulations[2] as the “Amending Regulations”.

The amendments to the Principal Regulations are significant.

As anticipated, the Amending Regulations extend the period for rent relief to 31 December 2020. The amendments also give the Small Business Commission (SBC) power in certain circumstances to make binding orders for landlords to give rent relief to tenants.

This blog summarises the key amendments and in particular focuses on the powers of the SBC to make a binding order .

Ability for the SBC to make a Binding Order

One of the most significant changes to the Principal Regulations is the introduction of a process by which the SBC can make a binding order for rent relief on an application by a tenant under an eligible lease in certain circumstances. Previously, the SBC could act only to mediate any rent relief dispute.

When can a tenant apply for a Binding Order?

An application for a binding order can be made by a tenant to the SBC if:

1. the tenant has requested rent relief in accordance with regulations;

2. the landlord has either failed to respond to a dispute notice or, in the opinion of the SBC, has not engaged in a mediation process in good faith, resulting in the SBC issuing a “Regulation 20A Certificate” recording such conduct; and

3. there is no VCAT proceeding already on foot between the landlord and tenant in relation to the dispute.

This amendment emphasises the importance for landlords to engage in the rent relief process in good faith. The SBC has the power to issue a certificate that mediation has failed, or is unlikely to resolve the eligible lease dispute, where the SBC is of the opinion that the landlord has not engaged in the mediation process in good faith. Good faith therefore remains a central tenet of the regulations, however the amendments place a higher onus on landlords than was previously the case.

Significantly, there is no corresponding entitlement for the landlord to make application for a binding order.

What is the application process for a Binding Order?

The tenant’s application for a binding order needs to be in writing and in the specified form. It must also include all relevant information and correspondence. On receipt of an application, the SBC must give the landlord written notice of it and allow the landlord five (5) business days to provide the SBC with written submissions and any information that the landlord considers the tenant has failed to provide to the SBC in its application.

The SBC may request further information from either the landlord or the tenant prior to determining the application.

The SBC cannot hold any form of hearing for an application for a binding order. Rather, in response to the material it receives from the landlord and tenant, the SBC will either dismiss the application, or, it can make a binding order if it is satisfied that the application complies with regulations and it is fair and reasonable in all circumstances to make such an order. This decision making ‘on the papers’ will hopefully result in expeditious processing of applications, although it remains to be seen whether or not this will be the case.

If the application is dismissed, the SBC must give the landlord and tenant written notice of its decision within five (5) business days.

What Orders can the SBC make?

If the SBC determines that it is appropriate to make a binding order, it may require the landlord to:

1. waive part of all the rent payable under an eligible lease from the date of the tenant’s request to 31 December 2020; and/or

1. defer payment of part of the rent payable under the lease from the date of the request to 31 December 2020, with the tenant being required to pay the deferred rent over the greater period of either the balance of the term of the lease (including any extensions) or a period of no less than twenty-four (24) months.

When determining the extent of the rent relief, the SBC must have regard to the factors set out in Regulation 10, which by reason of the amending regulations, now require the relief to be, at a minimum, proportional to the decline in the tenant’s turnover associated with the premises. Decline in turnover associated with the premises is now one of the prescriptive factors that a landlord’s offer for rent relief “must be based on”, rather than the previous and more nebulous requirement that it merely be “take[n] into account”.

Is it possible for a landlord and tenant to reach an agreement before a binding order is made?

Yes. The binding order process will cease if the SBC receives a joint notification from the landlord and tenant that they have agreed on rent relief and a binding order is no longer required.

Can a binding order be amended or revoked?

Yes. A binding order can be amended either by the SBC on its own initiative (in limited circumstances) or as a result of an application by a landlord or tenant. A binding order can also be revoked by an application to the SBC.

If an application to amend or revoke the application is made, then a process similar to the initial application process is adopted by the SBC.

Can a landlord or tenant apply to VCAT to review a decision made by the SBC?

Yes. Either a landlord or tenant can apply to VCAT to review a decision made by the SBC (either a decision to make a binding order or a decision to amend or revoke a binding order.

An application to VCAT must be made within fourteen (14) days after the SBC makes its decision. This is quite a brief timeframe and landlords and tenants alike should be cautious to act quickly if they believe an application for review is required.

What can a tenant do if a landlord does not comply with the binding order?

A tenant who considers that its landlord has not complied with a binding order may apply to VCAT and seek an order for VCAT to require the landlord to comply with the binding order or otherwise, vary or amend the binding order.

Other significant changes to the Principal Regulations

• The definition of ‘’eligible lease” has been tightened to tenants that are an SME (annual turnover of less than $50m) and entitled to a job keeper payment.
• As stated above, the “relevant period” for rent relief has been extended to 31 December 2020;
• A tenant requesting rent relief from a landlord must now at the time it makes its request, must include a written statement that:
  • the lease is an eligible lease;
  • the lease does not fall into one of the exclusions which would mean it is not an eligible lease (eg. if the tenant were a member of group of entities which has an aggregate annual turnover that exceeds $50m);
  • sets out the tenant’s decline in turnover associated with the premises. This must be expressed as a whole percentage and calculated consistently with the actual decline in turnover test as defined in the Coronavirus Economic Response Package (Payments and Benefits) Rules. As noted above, the express reference to decline in turnover ‘associated with the premises’ will be of particular significance where a tenant’s business is across multiple locations.
• The information the tenant must provide to the landlord to evidence the tenant’s state of declining turnover must now include at least one of the following:
  • extracts from the tenant’s accounting records;
  • the tenant’s BAS relating to the relevant turnover test period;
  • statements issued by an ADI in respect to the tenant’s accounts; or
  • a statement prepared by a practising accountant.
• The tenant must now provide to the landlord evidence that the tenant is entitled to a jobkeeper payment, including:
  • the tenant’s jobkeeper scheme receipt number issued by the Commissioner of Taxation; and
  • the tenant’s most recent jobkeeper notice to the Commissioner of Taxation.
• The landlord’s offer of rent relief must:
  • cover the period starting on the day the tenant made the request to the landlord and end on 31 December 2020 (This is a departure from the Principal Regulations which applied to a defined period commencing 29 March 2020 and ending on 29 September 2020);
  • be at a minimum proportionate to the decline in the tenant’s turnover associated with the premises; and
  • include relief for outgoings if the rent payable by a tenant is inclusive of outgoings.

Tenants would be wise to promptly make a new request for rent relief compliant with the Amending Regulations, particularly if their financial circumstances have materially changed and or if they require rent relief to 31 December 2020.

• When determining what rent relief to offer, a landlord’s own financial ability to offer rent relief, including any relief provided to a landlord by any of its lenders as a response to the pandemic, is no longer a matter that should be taken into account.

• The tenant can make a further request for rent relief, even if an agreement had already been entered into that varies the terms of the lease pursuant to the Principal Regulations, if:
  • there has been a material change in the tenant’s financial circumstances; or
  • the variation did not reflect the proportional decline in the tenant’s turnover; or
  • the rent relief does not extend to 31 December 2020 or start on the date the tenant requested the rent relief from the landlord.

• Payments of deferred rent (including payments to be made pursuant to agreements already made) cannot commence until after 31 December 2020..
• Referrals to the SBC must now be in the SBC’s approved form and accompanied with:
  • all the evidence and information previously given by the tenant to the landlord;
  • all relevant correspondence between the landlord and the tenant; and
  • the contact details of the parties.
• Upon receipt of a referral, the SBC is now required to give either the landlord or tenant (as relevant) a “dispute notice” being notice of the referral it has received. It must also provide the landlord or tenant with a timeframe to respond and explain what would happen:
  • once a response is received;
  • if there is a failure to respond within the required time or in compliance with the regulations.

In that regard, if a response is received on time and in accordance with the regulations, the Small Business Commission must arrange for the matter to be subject to a mediation and if there is non-compliance, the Small Business Commission may either arrange for the dispute to be the subject of a mediation or issue a “Regulation 20A Certificate”.

• A “Regulation 20A Certificate” certifies that the mediation has either failed or is unlikely to resolve the dispute. The certificate must confirm whether the landlord has:
  • failed to respond to the dispute notice; or
  • not engaged in a mediation in good faith in the opinion of the SBC.

As stated above, the issuing of such a certificate could trigger an application by the tenant for a binding order.

Landlords and tenants alike can apply to the SBC for dispute resolution and should speak to their legal representatives without delay if a dispute eventuates or seems likely to eventuate.

Please do not hesitate to contact Rob Oxley, Ron Cohen, Angela Kordos or a member of our Expert Team if you or your clients have questions in relation to the Amending Regulations or require assistance in relation to a rent relief application or rent relief dispute.

[1] The full title of the original regulations is the “COVID-19 Omnibus (Emergency Measures) (Commercial Leases and Licences) Regulations 2020”.

[2] The full title of the amending regulations is the “COVID-19 Omnibus (Emergency Measures) (Commercial Leases and Licences) Miscellaneous Amendments Regulations 2020”.