Lunchtime Briefing | Commercial and Retail Lease Update

By Ron Cohen

12 November 2020

We would like to thank everyone for attending the Lunchtime Briefing on Commercial and Retail Lease Update, Chaired By Ron Cohen, Principal and presented by Rob Oxley, Principal, Nafsika Palbas, Senior Associate and Angela Kordos, Associate.

If you were unable to attend this session, you are welcome to watch the recording at your convenience.

Passcode: fX+0sQYP

 

The slides are also available. Please click on the link below:

TLFC Lunchtime Briefing Commercial and Retail Lease Update

 

We had numerous questions regarding this topic. Please see below the Q&A.

 

COVID-19/ Commercial Tenancy Relief Scheme 

 

  1. Seeking additional rent relief since agreeing on an initial deal prior to stage 4 lockdown

If an agreement for rent relief has already been entered into, a tenant can request further rent relief if: 

  • there has been a ‘material change’ in the tenant’s financial circumstances;
  • The agreement reached does not as a minimum reflect the tenant’s decline in turnover(measured in accordance with the ‘actual decline in turnover test’); 
  • The agreement does not provide for rent relief up to 31 December 2020.

A request for further rent relief must be made in accordance with the Regulations (see Regulation 10(2) and 10(2A). The rent relief offered should apply from the date the request was made. 

 

  1. How should landlords handle tenants who have leases expiring within the next 3 months, who demand and expect rent relief, but don’t want to extend their lease and will vacate at expiry.  Landlords have given rent relief to help the tenant through the pandemic, but landlord doesn’t get the benefit of the rent relief.  How do we handle this?

The Regulations are without question weighed heavily in favour of the tenants. If as part of the rent relief offered, rental payments are to be deferred then term of lease could be extended if agreed between the parties. Otherwise, landlords should use the discussions with the tenant for rent relief as an opportunity to re-negotiate the lease with its tenants, potentially offering the tenant short term incentives on the basis that the tenant agrees to a longer-term lease. 

 

  1. Will the omnibus legislation be extended to 31 March 21 in line with JobKeeper?

The Regulations have been extended to 31 December 2020 but Part 2.2 of the enabling Omnibus legislation (which deals in part with retail and commercial leases) is not repealed until 26 April 2021. This suggests, but does not guarantee, some flexibility. It is certainly possible that the Regulations could be extended beyond 31 December 2020 depending on how the COVID-19 pandemic plays out. This will be a matter for the Government to decide. As at the date of this seminar 19 October 2020, the Regulations themselves have been extended to 31 December 2020]

 

  1. If mediation is currently before SBCV ON 1ST OCT, can the settlement cover the period from 29/3 to 31/12/20 and extend beyond to 26/4/21 if Vic Gov extend the relevant period?  Is Term of Settlement (TOS)at SBCV (- but has not signed yet) legally enforceable before signing? Can parties change the agreement before signing? If TOS was negotiated on 1st Oct, will tenant still require to make formal rent relief application to landlord?

There is a lot to unpack in this question.

In relation to an existing application made before the amendments to the Regulations were made but where no agreement has been reached, it is arguable that agreement could cover the period to 31 December 2020. That said, a landlord would argue that the tenant could only seek rent relief for the full period if that request for rent relief included all the information set out in Regulation 10(2) and 10 (2A) (as amended) at the time the application was made.

A prudent tenant in this situation should make a second application, as soon as possible, in accordance with the Regulations as amended to ensure that not can obtain rent relief for the further period.

If an agreement for rent relief has already been entered into, a tenant can request further rent relief if:

  • there has been a ‘material change’ in the tenant’s financial circumstances;
  • The agreement reached does not as a minimum reflect the tenant’s decline in turnover (measured in accordance with the ‘actual decline in turnover test’);
  • The agreement does not provide for rent relief up to 31 December 2020.
  • A request for further rent relief must be made in accordance with the Regulations (see Regulation 10(2) and 10(2A). The rent relief offered should apply from the date the request was made.

 

  1. Statement: Land Tax Relief is not available if your tenant does not qualify for JobKeeper but is not paying rent or drastically reduced rent.

If your tenant does not qualify for JobKeeper, the commercial tenancy relief scheme does not apply and there is no obligation on a landlord to provide rent relief to this tenant.  However, if the landlord and the tenant have already negotiated an arrangement for the tenant to pay reduced rent, the parties would consider what outgoings the tenant is still be obliged to pay.  In the case where the landlord pays land tax and does not qualify for land tax relief, perhaps the rent payable by the tenant should be increased by agreement to cover the landlord’s additional liability to pay land tax at the full rate as a result.

 

  1. What protection is accorded to a landlord who has a tenant who pays no rent and doesn’t want to engage in any discussion?

Based on the wording of the Regulations, it is arguable that such a tenant should not get the protection offered by the Regulations. A landlord in that situation should obtain legal advice to ascertain the legal options available to it.  

 

  1. What happens in 2021 for businesses still very affected by COVID-19?

The current form of the Regulations are due to expire on 31 December 2020, however it is possible they could be extended into 2021. In terms of rent relief, both landlords and tenants will be looking for certainty moving forward and now could be an opportune time to renegotiate the terms of a lease to mutually benefit both parties. 

 

  1. Are there Covid restrictions related to calling on a guarantee for tenants in default? 

Assuming the lease is an eligible lease, and assuming the tenant has made a request for rent relief in accordance with the Regulations and/or that a rent relief arrangement is in place, under Regulation 18(4) a landlord is not allowed to have recourse to any security relating to the non-payment of rent if their tenant reduces its opening hours or closes the premises. (largely the same as question 10)

 

  1. When will landlords be able to call on bank guarantees? (Not specific to COVID-19 or RLA]

Refer to answer 10.

 

  1. Can landlord get access to security deposit for overdue rents after December 2020?

The answer to this question really depends on several factors, including a) whether your lease is an eligible lease, b) whether a rent relief arrangement is in place, and c) whether the legislation is extended beyond 31 December 2020. Assuming the lease is an eligible lease, and assuming the tenant has made a request for rent relief in accordance with the Regulations and/or that  a rent relief arrangement is in place, under Regulation 18(4) a landlord is not allowed to have recourse to any security relating to the non-payment of rent if their tenant reduces its opening hours or closes the premises. The Regulations expire on 31 December 2020. If the Regulations are not extended, it may be the case that this prohibition is lifted from 1 January 2020. However, it remains to be seen whether the Regulations will be extended. This is a very fluid and fast-moving area of law so landlords would be prudent not to make inflexible decisions based on an assumption that the Regulations will either be extended, or not extended, as this is a matter for the Government to decide depending on the circumstances of the COVID-19 pandemic. Landlords would in any event be prudent to get tailored legal advice before trying to call on any security held, and tenants similarly would be prudent to get tailored legal advice if their landlord attempts to call on such security.

 

  1. To qualify as a SME, can we use 12 month rolling sales to suit, or are their defined times to calculate. I understand NSW is 31/3/2020??

The term SME Entity is defined in the “Guarantee of Lending to Small and Medium Enterprises (Coronavirus Economic Response Package) Rules 2020” That legislation currently refers to the “current year” and “previous year” being the ‘financial year’ 

 

Whilst “financial year” is not defined, it presumably would be the financial year the entity adopts accounting purposes (i.e. generally from 1 July to 30 June). 

 

  1. What if you started but haven’t concluded rent relief negotiations under the original Regulations. Are you excluded from rent relief for the period April – September?

In relation to an existing application made before the amendments to the Regulations were made but where no agreement has been reached, it is arguable that agreement could cover the period to 31 December 2020. That said, a landlord would argue that the tenant could only seek rent relief for the full period if that request for rent relief included all the information set out in Regulation 10(2) and 10 (2A) (as amended) at the time the application was made. 

 

A prudent tenant in this situation should make a second application, as soon as possible, in accordance with the Regulations as amended to ensure that not can obtain rent relief for the further period. 

 

  1. What happened if we had lease option and market rent review last October, before Covid 19 actually started, Can we still request Landlord to reduce rent reduction for the period our business was in Job Keeper, until we could recover to turnover pre-Covid?

The rent relief will apply to the terms of the lease currently in operation. If the rent payable was increased in accordance with a market review prior to the implementation of the Regulations, then any rent relief will be based on that rental amount. That said, as a general rule, under the Regulations, landlords are prohibited from increasing rent under an ‘eligible lease’ whilst the Regulations are in place. 

 

     14. Is it quite legal to negotiate a Surrender of Lease during this Period by Mutual Agreement

The short answer is yes, the parties are at liberty to decide to pull up the proverbial stumps and enter into a surrender of lease. We strongly recommend that a surrender of lease be recorded by way of written deed and of course that tailored legal advice be obtained before the parties sign.

 

  1. My restaurant is closed as per government legislation (> 6 months). I have an office leased in a nearby building leased under the same entity as the restaurant. Am I entitled to the same 100% rent relief (Zero trade), in the office as in my retail space?

If the business is not generating any turnover from the office premises then the short answer is ‘yes’. 

That said, under the amended Regulations, the entitlement for rent relief for the office premises would need to be the subject of a separate request made in accordance with the Regulations (specifically 10(2) and 10(2A)). The rent relief offered would apply from the date of the request to 31 December 2020.   

 

  1. If the tenant made a request for rent relief in April but no agreement has been reached yet, do they still need to make another request for rent relief for the October to December period?

Yes, the Tenant needs to submit a new, compliant request for rent relief for the October to December 2020 period.

 

  1. Do you have to provide more than 50% waiver?

The landlord’s offer for rent relief must be based on all of the circumstances of the eligible lease and must, amongst other things, provide that no less than 50% of the rent relief offered by the landlord must be in the form of a waiver of rent, unless the parties agree otherwise in writing. The landlord is at liberty to offer more than 50% by way of waiver but the appropriate rent relief will depend on the circumstances and should be ascertained on a case by case basis.

 

  1. What if I’ve requested rent relief and just simply been ignored by the landlord? I’ve provided all the relevant info via the property manager and he’s come back to me saying the landlord is flat-out refusing to negotiate. Where do I stand?

As a starting point, you should refer the request for rent relief to the Small Business Commission. The referral must be made in accordance with the Regulations (see Regulation 20), including but not limited to being in the prescribed form.  

 

  1. Just to confirm for a 2ndtime round, will it only be from the date applied not retrospective to 30thSeptember?

Correct, rent relief given pursuant to requests made from 30 September 2020 will generally apply from the date the request was made.  

 

  1. If, after applying to the SBC, the tenant fails to respond to the SBC, and the SBC provide a Certificate stating this lack of response, can the tenant revisit and apply again?

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 a 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. It is also possible to 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.

 

  1. In terms of franchisee where the franchisor holds the head lease, is the franchisee still eligible to obtain rent relief given the additional provision that the turnover needs to be specific to the premise?

This is not a simple question to answer and would need to be considered having regard to the terms of the franchise agreement and the lease. 

 

  1. I had a mediation before commission on 1stOctober. The rent and outgoing relief negotiation cover the period from 29/3 to 31/12. Would tenant require to make formal rent relief application for period from 1/10 to 31/12?

If the request for rent relief did not include all the information set out in Regulation 10(2) and 10 (2A) (as amended) at the time the application was made then a tenant should make a new request for rent relief for the period commencing on the date the request is made up to 31 December 2020.

 

  1. What happens in the situation where the wants to pay back deferred payment payments, after the expiration of the lease?

The tenant doesn’t want to extend the lease term to cover the extended deferred period, which is approx. 18 months.

The landlord view is that the lease will have ended and when tenant vacates, there is no longer any security to enforce the deferral repayments.

– situation – So far, all the proposals I put forward have been declined.

As I mentioned in my previous emails, December and January months under normal circumstances are very quiet months. However, the work that comes throughout the year makes up for that. So again, I would like the landlord to reconsider the 50% rent waiver for the months of December and January.

As for the repayment terms of the deferred rent, please point me in the right direction as to where it says that any deferred rent is not able to be repaid, once your lease has ended.

The requirements for deferred rent arrangements are set out in Regulation 16. This includes an ability for the deferred rental payments to be paid over a period of 24 months if that period id longer than the balance of the term of the lease. 

 

  1. Where there is a rent increase under the lease which fell due during the moratorium period, what happens when the period finishes. Does the increase apply automatically?

It is likely that it would apply automatically, however a landlord and tenant should try to reach an agreement on when the rent increase would be triggered so there is certainty for both parties on this issue.

  

  1. We note that the CTRS incorporates a “Freeze” on rental reviews during the period of the regulations. 

Our question is in relation to how these scheduled rental reviews are to be handled once the regulations are no longer active. 

May these be implemented at a later date or must the review be waived?

In most instances, this shall not be of a major concern and the vast majority of owners shall be pleased to waive the review. 

The specific reason for the query is in relation to a tenancy that incorporates a Market Review scheduled to take place during the regulations. 

The landlord shall be pleased to forego the review with rental to remain at the existing rate. 

The tenant is seeking to have the review deferred to 2021 at which time a market rental reduction shall be sought. The owner is obviously displeased with this prospect. 

It may not be appropriate for the current circumstances to determine a rental rate for a significant period of the lease (5 years) until the next market review. 

It would be suggested that the CTRS compensates the tenant throughout the relevant period and that a market rental would align with comparable leasing evidence on either side of the pandemic.

The landlord is wishing to finalise extended rental relief terms, however, both parties require the matter of the deferred Market Review to be clarified before proceeding further. 

What would be the opinion of FLFC in relation to the deferment of a scheduled Market Review during the period of the regulations? Must a landlord defer the review or is it to be waived? 

The Regulations only prohibit rent increases during the relevant period, not rent reviews.

 

It is likely that the rent review would be deferred until after the Regulations cease to apply however it would be necessary to review the terms of a specific lease to provide definitive advice.  

 

  1. I know there can be no rent increase during COVID (for example if there is an annual % increase) but what if the rent is to increase under a renewal of the lease with new rental starting 1 May 2020 (during the COVID period)?  Is this considered a rent increase (that is prohibited under the Regulations) or is it just new rent that was agreed between the parties?

The rent on renewal was agreed prior to COVID Regulations and there was no option to renew in the original lease, the landlord agreed to grant a further option. 

As a general rule, the rent could not increase whilst the Regulations are in force (see Regulation 12).

 

  1. If I have not claimed a rent reduction while on Jobseeker in the months April to September, can I still claim, or is it too late?

A landlord is no longer required to provide rent relief retrospectively. It would be up to the landlord to agree to providing such rent relief if a request is made out of time.

 

  1. I’ve provided all the relevant information via the property manager and he’s come back to me saying that the landlord is flat-out refusing to negotiate. Where do I stand?

As a starting point, you should refer the request for rent relief to the Small Business Commission. The referral must be made in accordance with the Regulations (see Regulation 20), including but not limited to being in the prescribed form.

 

Amendments to the Retail Leases Act  

 

  1. RLA, can you ask the tenant pay for an early market review.

If the tenant requests an early market review, it is carried out in the same way market reviews are done now under s 37 of the Act. The valuation costs are payable by landlord and tenant equally. The intention of the amendment is to give tenants more information before they exercise their option. The downside for landlords is that they will bear 50% of the valuation costs without certainty that the tenant will exercise its option.

 

  1. What are your views on taking up rent options during these uncertain times

Understandably the COVID-19 pandemic has landlords and tenants feeling uncertain as to whether or not to renew their leases. This is a commercial matter beyond the scope of a lawyer’s role, but the new cooling off rights available to retail tenants on a renewal of lease may give some comfort. If you are a tenant, it is imperative to get legal advice to make sure you exercise those cooling off rights validly. It might also be worthwhile to speak to your financial advisor to get some commercial advice about renewing your lease in what is quite an uncertain market.

 

  1. How the amendments will take effect on current Leases, renewals etc

The changes apply to all new leases. For existing leases that are being renewed, the changes apply to most renewals. To determine the applicability of the changes to current or upcoming renewals, it is important to review the status of each lease as at 30 September 2020 and keep in mind the two transitional cut-off dates being:

  • In the case of the new disclosure statement requirements on renewal, if as at 30 September 2020 (the day before the amendments came into operation) there are less than 21 days before the end of the current term of the lease it would appear that the amendments do not apply; and
  • in the case of information to be given to a tenant in the landlord’s written notice, the amendments do not apply if as at 30 September 2020 there are less than 3 months before the last date that the option may be exercised.

Essentially this change does not appear to apply if the last date to exercise the option is earlier than 1 January 2021.

 

  1. Should there be any suggested changes to the format of Agents Heads of Agreement documents to reflect new RLA changes.

It would be prudent to include in your heads of agreement/offer to lease for retail leases a note that the proposed lease and disclosure statement must be given to the retail tenant at least fourteen days before the lease commencement date. Practically speaking, you will also want to ensure that your negotiated commencement date fits in with this quite restrictive 14 day timeline as the lease to be provided is not just the skeleton pro forma, but the actual form of lease which would logically include all special conditions and commercial terms.

 

  1. Can you please clarify the notice to renew time period? Previously there was a time period of 6 to 12 months, but what does 3 months mean? Does the notice have to provided within 3 months on 3 month date.

You are quite right that previously, where a retail tenant had an option to renew the lease for a further term, the landlord was required notify the tenant in writing of the date after which the option is no longer exercisable, at least 6 months and no more than 12 months before that date. This has now been amended so that the landlord must give written notice at least 3 months prior to the last date to exercise.  

 

  1. Will there be a new disclosure statement format/template provided by the government for renewals of lease. We already have schedule 2, will it be amended?

The Victorian Small Business Commissioner (VSBC) has advised that it anticipates publishing a new Disclosure Statement template for Renewals, however there is no ETA on when this may occur. This is not particularly helpful, and until such time as a template is published, it is prudent that landlords seek advice to ensure that the new disclosure requirements are addressed in the Statement given to the tenant.

 

  1. Deleting of the word ‘substantially’ from sub-section 17(7) of the RLA. By removing the world ‘substantially’ what affect does this have?  Seeking clarification 

The removal of the word ‘substantially’ from section 17(7) effectively requires that a new disclosure statement will need to be provided to the tenant where a retail lease follows an agreement for lease if the retail lease is on any different terms to the agreement for lease.

 

  1. Is the most effective way of getting around the issues of Exercises of Options / Market reviews to provide a mid-term market review instead and then rely on a mechanical increase upon exercise of option?

The parties cannot contract out of the legislative requirements. Having said that, an early rent review is only available in the event a market review of rent is anticipated on renewal of lease. The matter of selecting the most appropriate rent review mechanisms and the timing for those rent reviews is a matter for the parties’ own commercial consideration.

 

  1. In relation to the amendments to the retail lease act and now have the ability for ESM recovery by the LL from tenants, how is the addressed in our Leases (or how would it need to be addressed). 

You need to look at each lease individually as to what outgoings are recoverable from the tenant to see if ESM services are recoverable. If necessary, we can arrange to draft a specific lease clause for ESM recovery from tenants

 

General questions 

 

  1. Dealing with the complexities as a commercial property manager – translating the extension and practically managing landlord and tenant expectations – and how to be paid for the additional work.

This can be a difficult situation.  Often, a commercial property manager is paid a management fee by the landlord based upon the rent actually paid and collected and not based upon the work undertaken.  Ultimately the answer may depend upon the terms of the management agreement between the parties and, how the agent is remunerated and what work the agent can charge for.  It may also be subject to further discussion between the manager and the landlord regarding any additional work undertaken by the manager outside the scope of such agreement.

 

  1. What should landlords be aware of when selling commercial properties with retail (or commercial) leases? Likewise, what should prospective purchasers be aware of?

From a landlord perspective now more than ever it is essential that full disclosure is given to prospective purchasers in relation to the lease and all matters relating thereto (including any COVID-19 arrangements). This disclosure will include by way of in the Vendor Statement and depending on the circumstances additional special conditions may need to be drafted in the Contract of Sale to deal with, for example, repayment of COVID-19 rent deferrals, to ensure a smooth exit for the Vendor. On the flipside, from a purchaser perspective now more than ever it is essential that it carries out thorough and complete lease due diligence and make enquiries of the Vendor and its solicitor to understand the true current leasing situation as there is likely to be greater risks of arrears, breaches and disputes.

 

Disclaimer: The information contained in this post is of a general nature and for information purposes only.  It is not intended to address individual circumstances and is therefore not intended to be relied upon as binding legal advice.