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Rent Relief for Commercial Tenants Amidst New Emergency Legislation

Jackson Barret • May 26, 2020

COVID 19 Omnibus (Emergency Measures) (Commercial Leases and Licences) Regulations 2020

Rent Relief Sooner, or Later?


In light of the recent enactment of the COVID 19 Omnibus (Emergency Measures) (Commercial Leases and Licences) Regulations 2020 (“Regulations”), Landlords’ and Tenants’ around Victoria are justifiably asking themselves - what in practice do the Regulations mean?

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It would appear that the rent relief provisions in the Regulations have been drawn in short order and are sometimes less than obvious in their meaning and how they fit into the overall scheme of commercial leases. 

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In so far as rent relief goes, it may be critical for a tenant not to ask for rent relief too soon, and certainly not before a tenant’s business and financial circumstances have settled at their apparent lowest point.

 

Request for Rent Relief

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Reg 10 (1) provides that a tenant may request rent relief from the landlord and reg 10 (2) specifies how that may be done. In short, certain information and statements must be provided to the landlord, as well as a formal request from the tenant.

 

However there is a certain puzzlement about the order of events (or mechanics of the process) from the point in time where a compliant request is made. 

 

Consequences and Practicalities of making a Request for Rent Relief

Rent relief, outgoings relief… or both?

It is noted that rent relief (reg 10) and outgoings relief (reg 14) are separate considerations and distinct matters – we deal with this further below, however, unlike rent relief, there is no positive obligation on a landlord to provide outgoings relief.

 

The landlord’s obligation to offer rent relief

According to reg 10 (3), once a compliant request for rent relief is made, the landlord “must” within 14 days (or within a different time frame as agreed), “offer rent relief” to the tenant - defined as being relief from paying rent under the lease “including a waiver, reduction, remission or deferral”.

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Requirements of Reg 10

Leaving aside the issue the definition of these terms, according to reg 10 (4) the rent relief offered by the landlord must:
 

  • be based on “all the circumstances of .... the lease”; and,
  • relate to up to 100% of the rent payable for the relevant period (between 29 March 2020 and 29 September 2020) (a);
  • provide that no less than 50% of the relief offered be by waiver (b); relief can be by waiver, reduction, remission and deferral.
  • apply to the relevant period (c)

and take into account,


  1. the tenant’s reduction in turnover (not profit) during the relevant period (i);
  2. any waiver of recovery outgoings or other expense under r 14(2) for any part of the relevant period (ii);
  3. whether a failure to offer sufficient rent relief would compromise a tenant’s capacity to fulfil ongoing obligations under the lease including payment of rent (iii);
  4. a landlord’s ability to offer rent relief and any relief provided to a landlord by lenders (iv); and,
  5. any reduction to outgoings charged, imposed or levied on the premises (v).
     

Summary of requirements for a rent relief offer

  1. Thus, the paramount consideration for an offer of rent relief is “all the circumstances of the lease”. What does this mean? It is likely to mean the various aspects of the lease – the term, the use, the rent, the outgoings, the review provisions, etc etc. That is, anything relevant in or relating to the lease which may be relevant to the offer of rent relief in a COVID 19 context during the relevant period, and possibly beyond. 
  2. The compulsory aspects of the actual rent relief offer is that it must
  • relate to 100% of the rent payable during the relevant period; and,
  • provide a waiver of not less than 50% of the rent relief offered; and,
  • apply to the relevant period; and,

 

3. the offer must also take into account the 5 matters specified in sub-para (d)

  •   reduction in tenant’s turnover;
  •   any waiver of outgoings given under Reg 14;
  •   whether a failure to offer “sufficient” rent relief would compromise a tenant’s capacity to fulfil the tenant’s ongoing obligations (including paying rent);
  •   the landlord’s ability to offer rent relief (which includes any relief received by a landlord from its lenders; and,
  •   any reduction in outgoings charged imposed or levied in relation to the premises



Obligation to negotiate – r 10 (5)
 

Once a landlord has made an offer, landlord and tenant must negotiate in good faith with a view to agreeing the rent relief.

 

Meaning of rent relief terms:

It is critical that the relief terminology is understood AND that Landlords and Tenants understands the terminology, or at least fully understands what the agreement reached means.
 

Waiver          as used in the regs seems to mean that an amount is no longer being claimed; that rights to

the sum has been renounced;
 

Reduction       this simply means a rent reduction - in effect, it may have the result that the amount reduced

is waived or suspended/deferred.
 

Remission        strangely this could mean cancellation or suspension;
 

Deferral         appears to mean that rent is suspended – the landlord still claims it but the payment date is

deferred to some date or dates in the future.

The query is how these work, if at all, with the 50% waiver, required by reg 10 (4) (b)?

 

Practical Aspects and Consequences of Request

The practical question in so far as a request for rent relief goes is - how does the landlord make a rent relief offer which complies with reg 10 within 14 days of a request, upon the basis of a simple request by the tenant for rent relief which complies with reg 10 (2)?
 

Presumably a tenant would not want the landlord to make a less than favourable offer based on inadequate information supplied by the tenant. This could, in the immediate term, lead to angst and disputes rather than fulfilling the objects of good faith and cooperation.
 

So a tenant may be well advised to do more than just make a request for rent relief. 

Arguably, the tenant should provide information, submissions and documents relating to the matters to be considered by the landlord under reg 10, so as to put the landlord into a position where it can make a full and proper assessment of the offer it ought to make.
 

Further, the tenant, before a request for rent relief is made, ought to request that the landlord provide all relevant information and documents which it may be necessary to address in the tenant’s submissions.

 

 

Reg 8 (2) requires that both parties:

“cooperate and act reasonably and in good faith in all discussions and actions associated with matters” – concerning these regulations.

Reg 8, is supported by Reg 19 which assumes that a party may gain possession of confidential information belonging to the other, and provides protection for that confidential information. The exchange of relevant information and documents and the requirement for good faith should lead to some benefits:

  • The greater likelihood of a realistic negotiation;
  • flushing out a landlord who has greater financial ability to offer relief (r 10 (4) (d) (iv);
  • push the landlord to waive outgoings or some of them (r 14)      ;
  • a more transparent process for both landlord and tenant;
  • possible avoidance of a later change of heart by a party;
     

Deferred rent

By Reg 16 (2) if any agreed rent relief is to be “deferred”,

  1. the landlord cannot ask that the deferred rent be paid until the earlier of:
  • 29 September 2020; and,
  • expiry of the usual term of the lease; and


  2. the tenant must pay the deferred rent amortised over the greater of:

  • the balance of the term including any COVID term extension under reg 13 and,
  • a period of no less than 24 months     

The parties can reach a contrary agreement in writing.
 

The method of amortisation is to be agreed and it could be one or a combination of:
 

  • Straight line (linear) – even distribution of payments – 100, 100, 100, … :
  • Straight-line alternating – 100, nil, 100, nil, 100;
  • Declining balance – 100, 90, 80, 70, … .:
  • Increasing balance – 70, 80, 90, 100 …;
  • Total deferred to a particular time;
     

The parties can in writing, agree otherwise.

 

Extension of Lease

Under reg 13 if rent is agreed to be deferred, the landlord must offer the tenant an extension of the term (on the same lease terms as existed on 28 March 2020), equivalent to the period of the deferral.

 

 

No Interest payable by tenant– Reg 17

The landlord cannot require the tenant to pay interest or other fees in relation to any deferred rent payment. 

 

Further rent relief – change of financial position – Reg 11

Having reached an agreement for rent relief, a tenant may later request further rent relief if financial circumstances undergo a “material change”.

However, any further rent relief will not oblige the landlord to provide a 50% waiver. So it is critical to get it right so far as foreseeable, the first time. A tenant cannot afford to negotiate poorly at first request, as their bargaining power is significantly less the second time around by operation of reg 11.

 

Outgoings – Reg 14
 

Landlord’s Obligation to Consider Outgoings Waiver

Under reg 14, the landlord is under an obligation to consider waiving recovery of outgoings (or part) where the landlord is not able to operate their business during any part of the relevant period. 

That is where businesses are or have been subject to a prohibition or for some other COVID related reason, and cannot operate.
 

Waiver to be Considered within Rent Relief Negotiation

If an outgoings waiver is given by the landlord, that may be taken into account in terms of the rent relief negotiated – r 10 94) (d) (ii).
 

Limitation of Obligation to Consider Outgoings Waiver

On the other hand, there is no requirements that the landlord provides any relief for outgoings.

 

Agreement for rent relief

An agreement may be made by a variation of the lease, or any other agreement that gives effect to rent relief directly or indirectly.

 

Termination for non-payment of rent

A tenant does not breach the lease (and therefore cannot be evicted) for not paying the rent payable under the lease if:

  • the tenant makes a valid request for rent relief and engages in the negotiation of rent relief (r10 (1) – (5) during the relevant period; or
  • pays rent during the relevant period as per any variation agreement made under r 10 (6)

So a tenant does not breach a lease (meaning any provision of a lease) by not paying rent during the relevant period if they are negotiating rent relief or are paying rent during the relevant period as per a variation agreement.
 

Does this mean that a tenant who has deferred all rent until after 29 September, can be in breach? This is probably an unintended lacuna.

 

Conclusions

Ultimately, it appears that both the tenant and the landlord will be left with a sour taste in their mouths, even after an agreement has been reached. 

The tenant is dissatisfied because they have not been able to operate, and have lost and are continuing to lose money.
 

The landlord is likewise. They are looking at losing rent both in the immediate term and beyond. Potentially also, they may be considering that commercial rentals are likely to fall, as the economy continues to be impacted and businesses fall over.
 

In conclusion, it is essential that tenants and landlords understand the operation of the Regulations insofar as is possible. The process for a tenant making a request for rent relief needs to be adhered to in order to avoid a landlord relying on non-compliance as the basis upon which it is not required to offer relief. A tenant may well consider going over and above the requirements set out under reg 10, by providing as much information as is possible to the landlord in order to allow them to properly assess the tenants' financial position. Tenants who provide landlords with the bare minimum of information may find that they receive a less than satisfactory offer from the landlord, due to the fact that the landlord was less than sympathetic given its limited means to assess the tenants' position.

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Jackson Barrett

26 May 2020


Liability limited by a scheme approved under Professional Standards Legislation

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By Jackson Barrett • 02 Jun, 2021
On 14 May 2021, the Victorian Supreme Court of Appeal delivered an important decision in the sphere of modern legal practice and verification of identity standards. C & F Nominees Mortgage Securities Ltd v Karbotli [2021] VSCA 134 concerned an appeal of the Victorian Supreme Court decision in C & F Nominees Mortgage Securities Ltd v Karbotli & Ors [2020] VCC 987. At trial, it was found that the lender, C & F Nominees, did not take reasonable steps to verify the identity of the elderly defendant, Ms Issa, whose son had fraudulently signed her name on mortgage documents using her Queensland and Victorian properties as security for home loans. The plaintiffs advanced the argument that it was entitled to rely on a solicitors certificate prepared by a solicitor who said he had interviewed Ms Issa, when he had not. At trial, this argument fell on deaf ears. T he same can be said on appeal, where the Hich Court upheld the Trial Judges reasonings, reaffirming the principle that reliance on a solicitors certificate is not a reasonable step pursuant to section 87A of the Transfer of Land Act. The Court premised their view on the notion that a solicitors certificate is framed for the purpose only of confirming that the mortgagor has been given legal advice as to the nature of documents it is to sign. A solicitors certificate does not turn to the question of whether reasonable steps have been taken to verify a persons identity. Key Lessons Practitioners should refer to the most recent ARNECC model participation rules for clear guidance on how to comply VOI standards. Practitioners would be well advised to ensure that they have well drafted Verification of Identity checklists which they adhere to on each and ever occasion they are required to complete a verification of identity. Practitioners should not rely on a third party, such as a broker, having completed its own verification of identity of a mutual client. Different verification standards apply to different industries and one must not presume a third party will have taken all reasonable steps to comply with VOI standards as prescribed by the Electronic Conveyancing (Adoption of National Law) Act 2013 and the ARNECC model participation rulesl.

Subject to Finance Contracts - the Purchasers Obligations

By Jackson Barret • 27 May, 2020
Where someone is considering buying property, however, have not received unconditional finance approval, they are often advised by their broker or solicitor to sign the contract of sale with the inclusion of a “subject to finance” condition. ​ Whilst this is common practice, it is equally common that purchasers do not fully understand the meaning of entering into a contract of sale on the basis that it be subject to finance. Often, purchasers act under the misapprehension that they have carte blanche to do as they wish and believe that if their finance is not approved, the contract is automatically brought to an end. ​ Such a misunderstanding can have serious consequences as a purchaser mightn’t proactively notify their solicitor that their finance has not been approved, and in turn their solicitor mightn’t proactively notify the Vendor or their solicitor that the contract is at an end. The result being that a purchaser may be contractually bound to complete the contract of sale, notwithstanding an unsuccessful finance application. In this article, we look at what a purchaser is obliged to do before they can rely on a subject to finance clause for the purpose of bringing a contract of sale to an end. General Condition 20 General Condition 20 (“GC20”) of the Contract of Sale of Land published by the Law Institute of Victoria & the REIV (August 2019) is the standard provision whereby a purchaser can enter into a contract of sale subject to finance. GC20 provides as follows: “ 20. Loan 20.1 If the particulars of sale specify that this contract is subject to a loan being approved, this contract is subject to the lender approving the loan on the security of the property by the approval date or any later date allowed by the vendor. 20.2 The purchaser may end the contract if the loan is not approved by the approval date, but only if the purchaser: ​ (a) immediately applied for the loan; and (b) did everything reasonably required to obtain approval of the loan; and (c) serves written notice ending the contract, together with written evidence of rejection or non-approval of the loan, on the vendor within 2 clear business days after the approval date or any later date allowed by the vendor; and (d) is not in default under any other condition of this contract when the notice is given. 20.3 All money must be immediately refunded to the purchaser if the contract is ended.” Condition 20.1. "If the particulars of sale specify that this contract is subject to a loan being approved, this contract is subject to the lender approving the loan on the security of the property by the approval date or any later date allowed by the vendor.” In order to activate GC20, a purchaser must complete the details of their loan application in the particulars of sale. A purchaser is required to: tick the box marked “the contract is subject to a loan being approved and the following details apply if the box is checked; then, enter the lender they propose to apply to; then enter the maximum loan sum that they will be applying for; then enter the loan approval date. Only if these details are properly completed by the purchaser before the contract is signed will GC20 be enlivened. Condition 20.2 "The purchaser may end the contract if the loan is not approved by the approval date, but only if the purchaser: ​ (a) immediately applied for the loan; and (b) did everything reasonably required to obtain approval of the loan; and (c) serves written notice ending the contract, together with written evidence of rejection or non-approval of the loan, on the vendor within 2 clear business days after the approval date or any later date allowed by the vendor; and (d) is not in default under any other condition of this contract when the notice is given.” The approval date is of critical importance and is the date by which the purchaser may end this contract provided that they have complied with the matters set out at items 20.4(a) – (d). When negotiating the approval date with the vendor, it is important that the date agreed between the vendor and the purchaser provides the purchaser with sufficient time to obtain unconditional loan approval. In some cases, the vendor may agree to extend the loan approval date, however, this should not become an expectation of the purchaser when entering into a contract of sale." (a) immediately applied for the loan ​ The purchaser needs to have immediately applied for the loan. This, in most cases, is handled by their mortgage broker and is therefore in many ways out of the purchaser's control. Therefore, the purchaser needs to remain in constant communication with their broker. ​ If the purchaser is not working with a broker and is handling their own finance application, they need to act immediately and ensure they meet all of the lender's requirements in a timely fashion. If the purchaser does not immediately apply for the loan, they may not be entitled to end the contract. The vendor may request evidence that the loan was immediately applied for. (b) did everything reasonably required to obtain approval of the loan; and Subsection (b) requires a purchaser to go above and beyond the requirement set out in subsection (a). Again, in many instances, a mortgage broker will act for the purchaser taking the control our of the purchaser's hands. In any event, the purchaser or their broker MUST proactively liaise with the bank and provide them with any information that they require in a timely fashion. To do otherwise will expose the purchaser to an argument by the vendor that the purchaser has not complied with subsection (b). ​ A purchase must bear in mind that if they fail to comply with any part of GC 20 due to the conduct of their broker, the purchaser will be deemed to have not complied with GC20 and will be unable to benefit from the condition. “(c) serves written notice ending the contract, together with written evidence of rejection or non-approval of the loan, on the vendor within 2 clear business days after the approval date or any later date allowed by the vendor” ​ If on the approval date, the purchaser has not received unconditional finance approval, they may bring the contract to an end provided that they give to the vendor written evidence of the rejection within 2 clear business days. ​ In practice, it is usually the solicitor who will notify the vendor or their solicitor that the contract is at an end accompanied by the required evidence. ​ The evidentiary requirement is critical and is easily overlooked by a purchaser or their solicitor. The problem with the evidentiary requirement is that the lender will need to provide this evidence which again takes control out of the vendor's hands. Given subsection (c) provides a purchaser with 2 days from the loan approval dates expiry, the purchaser needs to proactively contact their lender to obtain written evidence quickly. If a purchaser does not obtain written evidence of non-approval within 2 days as and from the loan approval date, they will be unable to provide the vendor with written evidence and will have failed to comply with subsection (c). “(d) is not in default under any other condition of this contract when the notice is given.” ​ The final subsection – (d) is a catch-all provision. If a purchaser is in default of any condition in the contract of sale, they will not be able to benefit from the operation of GC20. ​ Therefore, a purchaser needs to understand its contractual obligations so that they can ensure compliance and avoid a default. ​ The approval date is usually a date within 2 weeks of the contract of sale is signed and so falls at the beginning of the conveyancing process. A contractual obligation of the purchaser which usually materializes before the loan approval date is to pay to the vendor the deposit. If the purchaser has failed to pay to the vendor the deposit, they are in default of General Condition 14 and will be unable to rely on GC20 to bring the contract to an end. Conclusions ​ GC20 is of great benefit and allows purchasers to secure a property in circumstances where they otherwise would not be able to – due to the risk that their finance is not approved yet they are contractually bound to complete. ​ However, a purchaser needs to understand the operation of GC20 and in what circumstances it can be relied on to bring a contract to an end. A contract is not automatically brought to an end in the event finance is not approved. It is critical that a purchaser understands and remains in regular communication with their solicitor and broker/lender to ensure that GC20 is complied with. ​ Jackson Barrett 27 May 2020 Liability limited by a scheme approved under Professional Standards Legislation
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