Commercial Tenancy Relief Scheme Regulations 2021

In the technology space, this time of year is often linked with the anticipated release of the new models of Apple products including the latest iPhone model.

Well, not to be outdone, this week, saw the release of the ‘CTRS 3’, the latest ‘model’ of the CTRS Regulations.

Like its predecessors, the Regulations set out the current criteria for an ‘eligible lease’ and an ‘eligible tenant’. The Regulations also set out the new requirements for a rent relief request, details of the minimum relief to be provided and how such relief is to be calculated. These matters are explained in more detail below.

The latest version of the Regulations are  more comprehensive than the earlier versions. In this blog, we explore some of the main provisions of the Regulations.

Key aspects of the Regulations

Key aspects of the Regulations include the following:

• If a tenant under an eligible lease makes a request for rent relief on or before 30 September 2021[1], it can seek rent relief retrospectively from 28 July 2021 up to 15 January 2022 (protection period).

• Tenants that request rent relief from 1 October 2021 will only be entitled to rent relief from the date of the application[2] up to 15 January 2022.

• A landlord under an eligible lease cannot take steps to evict a tenant, re-enter premises or have recourse to any security provided by a tenant during the protection period if:
  • before a rent relief agreement is made, the tenant has made a valid request for rent relief[3] and is otherwise paying a proportion of its rent equal to the rent that would be due having regard to the appropriate ‘decline in turnover test’; or
  • the tenant has entered into a rent relief agreement with the landlord and is complying with its payment terms; or
  • irrespective of whether a request for rent relief has been made, if the tenant is unable to trade as a result of:
    • sickness or injury, affecting the tenant, its officers or employees; or
    • a natural disaster affecting the premises.

• If contrary to the Regulations, a landlord under an eligible lease took steps to evict a tenant, re-enter premises or have recourse to any security, it could be fined 20 penalty units ($3,634.80).

• A landlord under an eligible lease cannot evict a tenant, re-enter premises or have recourse to any security provided by a tenant, if, during the protected period the tenant reduce the opening hours of their business or closes the premises.

• Landlords under an eligible lease can evict a tenant, re-enter premises or have recourse to any security if a tenant breaches a lease and the breach is not related to the non-payment of rent or outgoings or reduction in trading hours.

• Rent cannot be increased during the protected period, and any such increase that would have applied during the protected period can never be claimed by the landlord.

• When giving rent relief to a tenant under an eligible lease during the protected period, a landlord must also freeze any deferred rent that would have been payable pursuant to a rent relief agreement under the 2020 CTRS until after 15 January 2022.

• For the tenant to make a valid request for rent relief, the request must be in writing, and provide a statement and evidence that it satisfies the ‘decline in turnover’ test, among other documents, including a statutory declaration that the information provided by the tenant is true to the best of the tenant’s knowledge and belief.

• It is an offence for a tenant or landlord to provide any document or information which contains false or misleading information, with such conduct attracting a penalty of 20 penalty units ($3,634.80).

• If the tenant does not provide the required information and evidence within 14 days after making the request, the request will lapse and the tenant will need to make a new request.

• If the tenant allows three (3) requests to lapse it will not be able to make any further requests for rent relief pursuant to the regulations.

• On the date that is 15 days after the tenant receives the landlord’s compliant offer for rent relief[4], the tenant is deemed to have accepted the landlord’s offer, even if a formal agreement has not been entered into, unless the tenant has referred the matter to the SBC for mediation.

Threshold terms

Which leases meet the definition of an ‘eligible lease’?

An ‘eligible lease’ can be a retail or non-retail commercial lease or licence but:

• will need to have been in place as at 28 July 2021; and

• the tenant will need to meet the criteria of an ‘eligible tenant’ (see below).

Which leases do not meet the definition of an ‘eligible lease’?

Leases or licences where the premises are used wholly or predominantly for farming operations where the tenant is a listed company or a subsidiary of a listed company.

What is an ‘eligible tenant’?

An ‘eligible tenant’ is an entity that, as at 28 July 2021:

• carried on business in Australia (including a non-for profit body);

• is an SME (i.e. satisfies the $50M turnover threshold); and

• satisfies the “decline in turnover test” (see below).

The “decline in turnover” test

A tenant must satisfy the decline in turnover test to qualify for rent relief.

For the purposes of that test, ‘turnover’ means the tenant’s GST turnover during the relevant period (i.e. the sum of all the supplies the tenant made during that period).

Based on the definition of turnover and the wording of the Regulations, the turnover is no longer associated with the turnover of the premises, but rather, the turnover of the tenant’s business.

A tenant will satisfy the decline in turnover test if:

• the tenant’s turnover for the “turnover test period” falls short of the “tenant’s comparison turnover”; and

• the shortfall of the comparison turnover equals or exceeds 30% (or for tenants that are an ACNC-registered charity or school, 15%).

Having regard to the above, the turnover test period is the period in which a tenant will need to demonstrate a minimum of a 30% decline in turnover compared to the ‘tenant’s comparison turnover[5].

The Regulations do not adopt a ‘one size fits all’ approach to determine the dates for the turnover test period or the formulae for determining the comparison turnover.

Determining the turnover test period

The turnover test period will be determined based on the date the tenant began trading (whether or not at the premises).

• If the tenant began trading before 1 April 2021, the turnover test period will be a consecutive three (3) month period between 1 April 2021 and 30 September 2021, with the tenant getting to choose the consecutive three (3) month period; and

• If the tenant began trading on or after 1 April 2021 the landlord and tenant must negotiate in good faith to reach an agreement on the appropriate turnover test period.

Determining turnover comparison

The tenant can choose whether to base the comparison turnover on:

• the tenant’s turnover for the relevant three (3) month period in 2019 corresponding to the three month period elected by the tenant to be the turnover test period[6]; or

• one of the applicable alternative comparison turnover methods.

A tenant may meet the criteria for more than one alternative comparison turnover methods. If that occurs, the tenant may choose which method to apply and calculate its comparison turnover based on the applicable formulae set out in that alternative comparison turnover method.

The Regulations provide for alternative comparison turnover methods for the following circumstances:

• the tenant’s business began trading on or after 1 April 2019;

• the tenant’s business was acquired or disposed of on or after the start of the relevant comparison period and before the applicable turnover test period and the acquisition or disposal changed the tenant’s comparison turnover;

• the tenant’s business was restructured on or after the start of the relevant comparison period and before the applicable turnover test period and the restructure changed the tenant’s turnover;

• the tenant had a substantial increase in turnover before the applicable turnover test period[7];

• the tenant’s business was affected by drought or natural disaster which changed the tenant’s turnover;

• the tenant’s business has irregular turnover[8];

• the tenant is a sole trader or small partnership that has no employees, and the tenant did not work during part of the relevant comparison period due to sickness, injury or leave which affected the tenant’s turnover; and

• the tenant’s business temporarily ceased trading during the relevant comparison period due to an event outside of the ordinary course of the business[9].

Tenant’s requests for rent relief

The Regulations provide that the rent relief request must be in writing and accompanied by a statement from the tenant confirming that:

• the tenant is an ‘eligible tenant’;

• the tenant satisfies the decline in turnover test.

The tenant must also set out in writing:

• The tenant’s turnover for the turnover test period (and details of the turnover test period used);

• The tenant’s comparison turnover (including stating whether the relevant comparison period or which alternative turnover method was used and how it was calculated);

• The tenant’s decline in turnover;

• The reduction in rent the tenant considers would satisfy the minimum requirements for a rent relief offer to be made by the landlord in accordance with the Regulations; and

• any other circumstances that it would like the landlord to consider in making an offer for rent relief.

Within fourteen (14) days of making a request for rent relief, the tenant must provide to the landlord:

• information that evidences turnover figures provided to the landlord, with such evidence being in the form of at least one of the following:
  • an extract from the tenant’s accounting records;
  • the tenant’s business activity statements;
  • a statement issued by an ADI in respect of the tenant’s account; and
  • a statement prepared by a practising accountant.

• a statutory declaration stating that the tenant is an eligible tenant and the information provided is true to the best of the tenant’s knowledge and belief.

As stated above, if a tenant fails to provide all of the requested information to the landlord within fourteen (14) days after making the request, the tenant’s request for rent relief lapses.

If the tenant allows three (3) requests for rent relief to lapse, it cannot make any further requests for rent relief.

Landlord’s offer of rent relief

The landlord must make an offer of rent relief to the tenant:

• within fourteen (14) days from the date the landlord has received a compliant request for rent relief together with all of the required and relevant documents and evidence; or

• a different time frame as agreed between the landlord and tenant in writing.

The landlord’s offer for rent relief must be in writing and:

• relate up to 100% of the rent payable under the lease during the applicable rent relief period; and

• at a minimum, be proportional to the tenant’s decline in turnover with no less than 50% of the rent relief offered being in the form of a waiver of rent unless the landlord and tenant agree otherwise in writing.

As with the previous version of the Regulations, if the rent charged under a lease is inclusive of outgoings, the rent relief offered must also be inclusive of outgoings.

Mandatory reassessment of rent relief agreement

A rent relief agreement made in accordance with the Regulations must be reassessed by 31 October 2021 if:

• rent relief was retrospectively given from 28 July 2021; and

• the tenant began trading before 1 April 2021.

Upon reassessment of the rent relief agreement, the tenant must provide the landlord with various information, including:

• evidence of its turnover for the relevant turnover test period and comparison turnover;

• details of the change in turnover; and

• a statutory declaration stating that the tenant is an eligible tenant and the information provided is true to the best of the tenant’s knowledge and belief.

Small Business Commission – Mediation

As with the previous versions, the Regulations set out the criteria and process for a landlord or tenant under an eligible lease to refer a dispute to the Small Business Commission for mediation.

If either the landlord or tenant does not engage in the process, the Small Business Commission can issue a ‘regulation 41 certificate’ and include a statement to identify that either the landlord or tenant has either failed to engage in the process in good faith or failed to respond to a dispute notice.

The Small Business Commission’s power to make binding orders that were contained in the previous version of the Regulations has been reintroduced, with the process of how an application to the SBC for such an order being set out in the Regulations.

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

We are holding a complimentary Lunchtime Briefing on Monday 20 September 2021 at 1:00pm AEST on Zoom on the New 2021 COVID-19 Commercial Tenancy Relief Scheme. If you are a commercial or retail landlord, tenant, property manager or real estate agent, this is a must attend event. Register Now.

[1] Which complies with Regulation 27 of the CTRS Regulations.

[2] Refer to [1] above.

[3] Refer to [1] above.

[4] Which complies with Regulation 27(8) of the CTRS Regulations.

[5] Or 15% for an ACNC registered charity or school.

[6] Assuming the tenant began trading before 1 April 2021.

[7] 50% or more in the 12 months immediately before the applicable turnover test period; or 25% or more in the 6 months immediately before the applicable turnover test period; or 12.5% or more in the 3 months immediately before the applicable turnover test period.

[8] Refer to the specific formulae at Regulation 21 of the CTRS Regulations.

[9] This alternative comparison method will only apply if the tenant’s business resumed trading before 28 July 2021.