Covid-19 and Commercial Leases

Unless you have been living under a rock, you will no doubt be aware that the Federal Government in April this year introduced the National Cabinet Mandatory Code of Conduct in relation to Commercial Leases and Licences and the impact of Covid-19.

The National Cabinet Mandatory Code of Conduct is a Federal Government initiative which provides direction for Landlords and Tenants to assist in negotiating outcomes in rental disputes arising as a result of the impact of the Covid-19 Virus.  

As the Federal Government is limited by the Australian Constitution in relation to the subject matter regarding which it can legislate, the actual task of passing laws to enact these measures has been left to the States.  As a result, the Victorian Government recently passed the Covid-19 Omnibus (Emergency Measures) Act 2020 (Vic) and the Covid-19 Omnibus (Emergency Measures) (Commercial Leases and Licences) Regulations 2020 (Vic).  Hence while the Federal Government has provided direction it is the State Government’s mandate to provide laws under which commerce participants can operate.

What should be noted about the impact of Covid-19 on Leases and Licences is that existing laws are ill-equipped to deal with pandemic situations.  Common law notions such as frustration of contracts, and Force Majeure clauses (ie Acts of God) are unhelpful where the whole of the economy has been affected.  For this reason, Federal and State governments recognize that legislative intervention is required.

The National Cabinet Mandatory Code of Conduct seeks to impose guidelines for negotiation where a business has suffered a downturn in turnover to the effect that it is eligible for the JobKeeper subsidy.  Additionally, it seeks that there be no termination of leases or penalties for tenants for not trading during the Covid-19 Pandemic period.

Further the Landlord is required to make an offer of relief of rent in proportion to a Tenant’s downturn in trade.  Such relief is prescribed to be made up of 50% waiver and 50% deferral of rent with deferred rent to be paid over 24 months or the balance of lease term whichever is longer.  Where parties cannot agree on terms the matter must be referred to compulsory mediation before any litigation is commenced.  However, it is the Covid-19 Omnibus (Emergency Measures) Act 2020 (Vic) and its regulations which facilitate the giving of effect to the code of conduct.  To be eligible for relief the business must qualify for the JobKeeper package.

In terms of process, to take advantage of the emergency measures the Tenant must make a request to the Landlord for rent relief.  The request must be in writing and must be accompanied by a statement to the effect that the lease is eligible under the act and the Tenant qualifies for JobKeeper.

In response the Landlord has 14 days to make an offer of rent relief to the Tenant.  The Landlord must consider all the circumstances of the eligible lease.  The rent relief must relate up to 100% of the rent payable under the eligible lease during the relevant periods.  If the Landlord is prepared to offer rent relief, no less than 50% of the rent relief must be in the form of a waiver of rent.  Any deferral of rent must be repayable over 24 Months.  If a lease has less than 24 months to run the parties should also negotiate an extension to the lease to allow repayment and the Landlord must offer such extension. ANY CHANGE TO A LEASE BY VIRTUE OF THIS APPROACH MUST BY RECORDED IN WRITING IN THE FORM OF A DEED SIGNED BY THE PARTIES.

The real difficulty is knowing what information the Tenant is required to provide to their Landlord. While the regulations dictate that certain information is required in a written request there is uncertainty over the details of financial information which a Tenant should divulge. Cautious approach at this stage is to provide turnover figures only and await for more guidance from the government.

The short coming of the arrangements under the emergency measures is that if dispute resolution is required such dispute resolution will fall under the Retail Leases Act 2003 (Vic) and hence Landlords and Tenants may find themselves in the familiar space of a Small Business Commission mediation and an appeal to VCAT.

What orders VCAT can make in these circumstances are still to be determined.

If you have any further queries in relation to these matters, please contact our office for more detailed and specific advice to meet your particular situation.

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