Russell Kennedy recently published an insight, Reintroduced Commercial Tenancy Relief Scheme to benefit Victorian tenants in 2021, on 3 August 2021 regarding the introduction of the Commercial Tenancy Relief Scheme (CTRS). Now that the regulations have been published, here is a breakdown of the key changes and aspects commercial landlords/licensors and tenants/licensees will need to consider. While some of these concepts will appear familiar, there are some important differences that parties will need to address.
The CTRS is being implemented in Victoria through the Commercial Tenancy Relief Scheme Act 2021 (Act) and the Commercial Tenancy Relief Scheme Regulations 2021 (Regulations). The Regulations were published on 24 August 2021, and are in effect from 28 July 2021 until 15 January 2022 (protection period).
The CTRS largely mirrors the previous rent relief scheme which applied from 29 March 2020 – 28 March 2021 (2020 Scheme), however there are a number of key changes. We set out a summary of the CTRS below:
1. Overarching obligation
The Regulations again impose an overarching obligation on the landlord and tenant to cooperate, act reasonably and act in good faith when negotiating rent relief pursuant to the Regulations.
2. Eligibility
- a) An eligible lease is a lease or commercial licence which was in effect on 28 July 2021, and where the tenant is an eligible tenant. Agricultural leases, or where the tenant is a listed company or subsidiary of such, are also not eligible. Although the CTRS also applies to eligible licences, the CTRS and this article have referred to lease, landlord and tenant for ease of reference.
- b) An eligible tenant must be an SME entity (with less than $50 million annual turnover) which, on 28 July 2021:
- Carried on a business in Australia (including not-for-profit); and
- Satisfies the decline in turnover test.
3. Turnover calculation
An eligible tenant must have incurred a reduction in turnover of at least 30% or more, during the relevant turnover test period. Importantly, turnover now specifically includes any state government (but not Commonwealth) COVID grants and any turnover from online sales or other premises. This is a new aspect of the Regulations.
The turnover test period and comparison turnover will depend on the date the tenant started trading. A summary of the relevant periods are summarised by the Victorian Small Business Commissioner and can be downloaded here.
There are alternate comparison turnover tests for particular situations (e.g. business restructuring, business acquisitions or disposals which affected the tenant’s comparison turnover, or sole traders). These are largely designed to reflect the JobKeeper qualifications from the 2020 Scheme.
4. Period of rent relief
Tenants who request rent relief, and provide all evidence, on or by 30 September 2021 are entitled to rent relief for the whole of the protection period.
However, tenants requesting rent relief after 30 September 2021 are only entitled to rent relief starting from the date of their application until 15 January 2022.
5. Commencing the process
The process must be commenced by a tenant requesting rent relief from a landlord in accordance with the Regulations. This means:
- a) The tenant must submit an application in writing, and must include a statement that:
- The lease is an eligible lease;
- The tenant satisfies the decline in turnover test, and provide the calculation for that decline in turnover;
- States the decline in turnover; and
- States the reduction in rent.
- b) Importantly, a tenant may also include information about any other circumstance that the tenant would like the landlord to consider when making a rent relief offer, and the landlord is required to consider those factors. This is a new requirement under the Regulations.
The tenant must provide evidence of decline in turnover within 14 days of making the rent relief request, and the requirements are the same as the 2020 Scheme (extracts from accounting records, BAS, statements from a bank or a statement prepared by an accountant).Importantly, a tenant is now required to provide a statutory declaration stating that the tenant is an eligible tenant, and that the information provided is true to the best of the tenant’s knowledge and belief. This is a new requirement under the Regulations.
If a tenant fails to provide that information within 14 days after the initial request, its application will lapse. A tenant may subsequently reapply, however if a compliant application has not been made after three attempts, the tenant will lose its rights to seek any relief under the CTRS.
6. Landlord’s offer
Landlords must again respond to a tenant’s rent relief offer within 14 days of the date that the tenant’s complete application, including financials etc, is received (unless otherwise agreed). An offer must:
- a) relate to up to 100% of the rent payable during the rent relief period;
- b) be at a minimum proportional to the decline in tenant’s turnover associated with the premises;
- c) provide that at least 50% of the rent relief is in the form of rent waiver (unless agreed otherwise by the parties in writing); and
- d) take into account any part-payment of rent and any other circumstance that the tenant would like the landlord to consider as per its application.
7. Deemed acceptance of landlord’s offer
A tenant is deemed to have accepted a landlord’s rent relief offer if the following have not occurred by the end of 14 days after the tenant received the landlord’s compliant:
- a) the parties have not agreed to the relief to be provided; and
- b) the tenant has not referred the matter to the Victorian Small Business Commission for mediation.
This is a key new requirement under the Regulations.
8. Reassessment of rent relief
A tenant must supply the landlord with further turnover information by no later than 31 October 2021, if:
- a) A rent relief agreement has been made;
- b) The tenant requested rent relief on or before 30 September 2021; and
- c) The tenant was trading prior to 1 April 2021.
Tenants who fail to do so may lose the benefit of any waived rent under their rent relief agreement on and from 31 October 2021 (other than for reasons of sickness, injury or natural disaster affecting trade). Any deferred rent must still be repaid by tenants as agreed.
If the reassessed turnover differs from the initial percentage decline, then from 31 October 2021, the rent relief agreement is deemed to have been adjusted to reflect the change in turnover until 15 January 2021.
9. Moratorium on evictions
Landlords are again prohibited from evicting eligible tenants for non-payment of rent or outgoings, or the tenant ceasing trade or changing business hours during the protection period, provided that the tenant has complied with certain Regulations. The Regulations also prohibit evictions if a tenant is unable to trade due to sickness, injury or natural disaster (importantly, this also applies to tenants even if they have not made a rent relief request).
10. Prohibition on rent increase
Any rent increase during the protection period is voided and may never be claimed by the landlord, unless otherwise agreed. This will affect landlords’ ongoing returns given that any increase during that period would simply be waived, rather than deferred to the end of the protection period. There is no additional commentary as to whether the parties are still required to go through the motions of any market review which was to occur during the protection period in case there ends up being a reduction in rent (which would appear to be permitted).
11. Delay on repayment of deferred rent
Any deferred rent under the CTRS and any existing deferred rent under the 2020 Scheme is not required to be paid by an eligible tenant until after the protection period (i.e. 16 January 2022 onwards). Again, the CTRS requires that the landlord must offer the tenant an extension of the lease which is equal to the period for which rent is deferred – e.g. if 3 months’ rent is deferred, then the landlord must offer to extend the term of the lease by 3 months. The tenant need not accept that part of the landlord’s offer.
How we can help
The CTRS is a complex framework and it is important for landlords and tenants to understand the requirements of the Regulations and consider all relevant issues under the Regulations, including timeframes for applications or offers.
Please contact Mark McKinley, Emma Dunlevie, Samantha Taylor or Melanie Young for advice in relation to the CTRS.