By Pablo Fernandez, Partner, James Price, Partner, Tom Dugdale, Special Counsel and Matt Minas, Lawyer

The long-awaited Commercial Tenancy Relief Scheme Regulations 2021 (Vic) (2021 Regulations) were finally gazetted on 24 August 2021, almost a month after they were announced.

The 2021 Regulations are similar, but much more complex, than last year’s COVID-19 Omnibus (Emergency Measures) (Commercial Leases and Licences) Regulations 2020 (Vic) (2020 Regulations).

Given the length and complexity of the 2021 Regulations, we have provided a ‘Key issues’ snapshot, followed by a more detailed analysis of the new regime.

While lengthy, we hope that this note proves a much easier read than the 2021 Regulations, and provides a comprehensive overview to help you navigate the new complicated rent relief process.

Key issues

If you read nothing else, read this:

1. the 2021 Regulations apply from 28 July 2021 to 15 January 2022 (Protection Period);
2. the 2021 Regulations only apply to ‘Eligible Leases’, which must satisfy a new Decline in Turnover test;
3. Eligible Leases must be in effect on 28 July 2021. However, they also include leases that are varied, extended or renewed during the Protection Period;
4. JobKeeper eligibility is no longer a requirement for rent relief. A new, complicated ‘Decline in Turnover’ test (30% or more, or 15% for charities) is the key qualifying criteria;
5. to obtain rent relief, a tenant must provide supporting evidence of its Decline in Turnover within 14 days of its rent relief request. If the supporting evidence is not provided on time, the request for rent relief lapses and the tenant must start over (but may only do so two further times). ;
6. to obtain rent relief from 28 July 2021, a tenant must make its request inclusive of supporting evidence, before 30 September 2021. Otherwise, rent relief will only commence on the date that the tenant makes its request and provides its supporting evidence;
7. rent relief will apply from the relevant date through to the end of the Protection Period;
8. a landlord must make a rent relief offer within 14 days after receiving a request for rent relief and supporting evidence. At a minimum, the offer must include the percentage of Decline in Turnover, provided as 50% rent waiver and 50% rent deferral (but the parties may agree otherwise as to how much of the rent relief is granted as a waiver and deferral);
9. a landlord may be required to grant greater relief depending on ‘other circumstances’. No guidance has been provided as to what these other circumstances may be, or what extra relief may be required to be provided (including whether this will extend to outgoings);
10. a tenant has 14 days to accept the rent relief offer or issue the matter to the Small Business Commission (SBC), and where it fails to do so, it is deemed to have accepted the offer (provided the minimum standards are complied with);
11. where the tenant began trading before 1 April 2021, the compliant rent relief request was made before 30 September 2021 and the parties entered into a rent relief agreement, there is a mandatory reassessment of rent relief based on the tenant’s actual turnover in the 2021 September quarter;
12. in addition, if a rent relief agreement is entered into and subsequently the tenant’s financial circumstances materially change, the tenant can make a further request for rent relief, and the same procedure must be followed;
13. the protections for Eligible Leases against termination, draw down on security etc, as provided for in the 2020 Regulations, apply with some alterations (including that the tenant must continue paying rent as reduced by their stated Decline in Turnover, even where rent relief not been agreed as yet)
14. tenants under Eligible Leases and a limited class of others, are entitled to reduce their trading hours or stop trade altogether during the Protection Period;
15. there is a total ban, rather than a mere postponement, of rent increases during the Protection Period – however there is some scope to contract out of this; and
16. similar to the 2020 Regulations, the 2021 Regulations provide for extensions of the lease term equivalent to the period during which any rent is deferred, and the tenant has at least 24 months within which to repay the deferred amounts – both of these aspects being capable of variation by agreement in writing between the parties.

Our more detailed analysis of the new regime is set out below.

Eligible Leases

The 2021 Regulations only apply to ‘Eligible Leases’.

An Eligible Lease is a retail or non-retail commercial lease or licence:[1]

1. that is ‘in effect’ on 28 July 2021 (but there is no guidance as to what ‘in effect’ means);
2. under which the tenant is an Eligible Tenant (see below);
3. under which the premises are not predominantly used for agricultural purposes; and
4. where the tenant is not a listed corporation, or a subsidiary of a listed corporation.

Notably, the definition of Eligible Lease includes any Eligible Lease that is varied, extended or renewed after 28 July 2021 on substantially the same terms.[2]

Eligible Tenant

To be an Eligible Tenant, the tenant must:[3]

1. be an SME entity with an annual turnover of less than $50m in FY20-21 or if the tenant was not trading for the whole of FY20-21, it must be likely that the tenant’s annual turnover for FY21-22 will be less than $50m[4] (and where the tenant is connected to or affiliated with another entity or group, the aggregated turnover of that group must be less than this amount)[5];
2. satisfy the decline in the Decline in Turnover test (see below); and
3. not be subject to a number of exclusions,[6] (most notably, government bodies or tenants that are bankrupt or have had a liquidator appointed, are not Eligible Tenants).

Decline in Turnover Test

This is the most convoluted part of the 2021 Regulations, by a long way.

The tenant will satisfy the Decline in Turnover Test if their turnover for the Turnover Test Period is:

1. for ACNC-registered charities and education providers, at least 15% less than its Comparison Turnover; or
2. for all other entities, at least 30% less than its Comparison Turnover.

As a welcome change to the 2020 Regulations, turnover is defined for the purposes of the 2021 Regulations and:

1. means GST turnover calculated using principles from the GST law,
2. expressly includes turnover from online sales;[7]
3. is not expressly linked to turnover associated with the premises; and
4. expressly excludes any grant or financial assistance provided by the Commonwealth government (but not the Victorian government).[8]

The definitions of Turnover Test Period[9] and Comparison Turnover[10] are variable, depending on when the tenant began trading (whether or not at the premises):

Date that the tenant began trading (whether or not at the premises)	Turnover Test Period	Comparison Turnover
Before 1 April 2019	At the tenant’s election, a consecutive 3 month period, commencing on the first day of a month, between 1 April 2021 and 30 September 2021[11]	The corresponding 3 month period in 2019[12]
Between 1 April 2019 and 31 March 2020	At the tenant’s election, a consecutive 3 month period, commencing on the first day of a month, between 1 April 2021 and 30 September 2021[13]	*The sum of the tenant’s turnover for each whole month after the tenant commenced trading and before 1 April 2020, divided by the number of whole months of trade multiplied by 3 (i.e. a three month average turnover from when the tenant began trading until March 2020)[14]
Between 1 April 2020 and 31 March 2021	At the tenant’s election, a consecutive 3 month period, commencing on the first day of a month, between 1 April 2021 and 30 September 2021[15]	*The sum of the tenant’s turnover for each whole month after the tenant commenced trading and before 31 July 2021, divided by the number of whole months of trade multiplied by 3 (i.e. a three month average turnover from when the tenant began trading until July 2021)[16]
On or after 1 April 2021	A three month period agreed between the tenant and landlord in good faith[17]	*The tenant’s turnover from the date that the tenant began trading to 31 July 2021, divided by the number of days the tenant was trading and multiplied by 92[18]

* Where the tenant commenced trading after 1 April 2019, there are provisions[19] which allow for months covered by the ATO’s Bushfires and Drought Help concessions to be excluded for the purposes of calculating Comparison Turnover.

Alternative Comparison Turnover

The 2021 Regulations go to great lengths to include a number of alternative Comparison Turnover tests[20] to broaden eligibility for tenants affected by events that have impacted their turnover, including:

1. a business acquisition or disposal;
2. a business restructure;
3. a substantial increase in turnover;
4. drought or natural disaster;
5. a business with irregular turnover;
6. a sole trader or small partnership (with no employees) which has been affected by injury, sickness or leave; and
7. a temporary cessation of trade.

The above tests mirror those used for JobKeeper and for which the ATO has released guidance. In essence, they would be used by tenants where they would not have otherwise shown a 30% reduction in turnover, but for these alternative tests.

These JobKeeper tests were drafted broadly in a time of crisis to keep the national economy moving with fixed Commonwealth funds for JobKeeper. However, in the context of variable and privately funded rent relief, where landlords are compelled to wear the cost associated, this is a big imposition on landlords. We see this leading to the basis of many disputes between landlords and tenants.

Tenant’s request for rent relief

A tenant under an Eligible Lease must make a request for rent relief in writing and it must be accompanied by a statement that:[21]

1. the tenant is an Eligible Tenant;
2. the tenant satisfies the Decline in Turnover Test, including setting out:
   1. the tenant’s turnover for the Turnover Test Period and the Turnover Test Period used;
   2. the tenant’s Comparison Turnover and stating whether the relevant Comparison Turnover period or an alternative turnover method was used (and if an alternate turnover method was used, how the Comparison Turnover was calculated);
   3. the tenant’s Decline in Turnover;
   4. the rent reduction required to satisfy the landlord’s minimum offer requirements (see below); and
   5. any other circumstances the tenant would like the landlord to consider in making its offer.

Within 14 days of making its request, the tenant must provide to the landlord:[22]

1. information evidencing its turnover figures, including at least one of the following:
   1. extracts from the tenant’s accounting records;
   2. the tenant’s business activity statements;
   3. statements issued by a bank in respect of the tenant’s account; or
   4. a statement prepared by a practising accountant; and
2. a statutory declaration made by the tenant or its authorised officer, stating that the tenant is an Eligible Tenant and that the information provided is true.

It will only be a compliant request once the tenant has satisfied the preceding.

If the tenant fails to provide the above documents within 14 days of the tenant’s initial rent relief request, that request lapses, and the tenant will be required to make a new request for rent relief.[23] If the tenant allows 3 requests to lapse, they are prohibited from making any further requests for rent relief.[24]

In addition to the requirement for the tenant to provide a statutory declaration, penalties apply for knowingly providing false or misleading information.[25]

Landlord’s offer of rent relief

Within 14 days of receiving the above information (or another timeframe agreed between the parties in writing), the landlord must make a rent relief offer in writing.[26]

The landlord is only required to make a rent relief offer if the tenant makes a request which complies with the above requirements. Note that VCAT has enforced this requirement in a strict fashion in cases[27] regarding the 2020 Regulations.

Disorganised tenants should consider themselves as ‘on notice’ as a consequence.  For instance, if a tenant makes a rent relief request in a piecemeal fashion (e.g. where after making an initial request, a tenant later sends new turnover figures), a landlord may contend that such a request is not compliant on the grounds that it is not complete if the tenant fails to make an entirely new request along with the updated turnover figures. Some landlords may even purposely ignore defective requests and allow the rent relief request to lapse. This could be particularly beneficial where the tenant is making a rent relief request after 30 September 2021, because the tenant’s entitlement to rent relief begins on the day that their request is made (see below). With that said, landlords should tread carefully in this regard and seek legal opinion before doing so, as this obviously remains untested under the 2021 Regulations (despite case law under the 2020 Regulations).

In any event, parties should always be mindful of their obligation to cooperate and act reasonably and in good faith.[28]

What must the landlord offer?

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

1. relate to up to 100% of the rent during the Rent Relief Period[29] (see below) (and where the rent is a gross rent inclusive of outgoings, the rent relief must be offered in respect of the rent inclusive of outgoings)[30];
2. at a minimum, be proportional to the tenant’s Decline in Turnover;[31]
3. provide that no less than 50% of rent relief offered be in the form of a rent waiver (unless the parties agree otherwise in writing);[32] and
4. take into account:[33]
   1. any part payment of rent by the tenant; and
   2. any other circumstances raised by the tenant in their request for rent relief.

In a legal sense, to ‘take into account’ requires a party to have consideration to such matters in making a decision. On this basis, landlords have fairly broad discretion in determining the weight they give to any other circumstances raised by the tenant in their request for rent relief. But again, landlords should be mindful of their overarching obligation to act reasonably and in good faith.[34]

See also “Extension of lease term” below.

Rent Relief Period

The landlord’s offer of rent relief must be in respect of the ‘Rent Relief Period’, being:[35]

• if the tenant makes a compliant rent relief request (inclusive of evidence of turnover) on or before 30 September 2021, the period commencing on 28 July 2021 and ending on 15 January 2022; or
• if the tenant makes a compliant rent relief request (inclusive of evidence of turnover) after 30 September 2021, the period commencing on the date of the tenant’s request and ending on 15 January 2022.

Following receipt of the landlord’s offer

Following receipt of the landlord’s offer, the parties must negotiate in good faith with a view to agreeing on the rent relief to apply during the Rent Relief Period.[36]

Provided the landlord’s offer complies with the minimum requirements above, if the parties have not agreed on the rent relief within 14 days of the tenant’s receipt of the landlord’s offer and the tenant has not referred the matter to the SBC, the tenant will be deemed to have accepted the landlord’s offer. This deeming provision did not feature in the 2020 Regulations. While this should help to avoid tenant delays, it will likely result in more referrals to the SBC and therefore longer waiting times and higher costs to both parties.

Giving effect to a rent relief agreement

Rent relief may be given effect by the parties entering into a variation of the Eligible Lease or any other agreement.[37] We recommend that affected parties seek advice from leasing lawyers on documenting rent relief agreements. Landlords in particular would be well advised to adopt a strategic position in consultation with their lawyer. We have seen many poorly drafted rent relief agreements entered into under the 2020 Regulations (which are far less complex than the 2021 Regulations) that have caused significant issues for the parties later.

Mandatory reassessment of rent relief

The 2021 Regulations provide for a mandatory reassessment of rent relief where:

1. the tenant made a rent relief request on or before 30 September 2021;
2. the parties made a rent relief agreement; and
3. the tenant began trading before 1 April 2021.[38]

This provision does not allow a tenant to subsequently become eligible for rent relief.

By 31 October 2021, the tenant must provide to the landlord:[39]

1. the tenant’s turnover for the Turnover Test Period, being the quarter ending 30 September 2021;
2. the tenant’s Comparison Turnover, being:[40]
   1. if the tenant began trading before 1 July 2019, the quarter ending on 30 September 2019; or
   2. if the tenant began trading between 1 July 2019 and 31 March 2021, the quarter ending on 30 June 2021;
3. if an alternative Comparison Turnover method was used, information on how the comparison turnover was calculated;
4. the Change in Turnover, being the difference between the tenant’s turnover for the Turnover Test Period and the Comparison Turnover expressed as a percentage of the tenant’s Comparison Turnover; and
5. a statutory declaration made by the tenant or its authorised officer, stating that the tenant is an Eligible Tenant and that the information provided is true.

If the tenant used an alternative Comparison Turnover method in their initial rent relief request, and the criteria for that method continues to apply, the tenant must use the same alternative Comparison Turnover method for the purposes of this reassessment.[41]

If the Change in Turnover differs from the tenant’s original Decline in Turnover, then the quantum of rent relief will be adjusted to match the Change in Turnover from 31 October 2021 to 15 January 2022.[42]

The 2021 Regulations strongly disincentivise tenants from failing to provide the above information for reassessment. Should the tenant fail to do so by 31 October 2021, the tenant’s right to a rent waiver ceases from 31 October 2021. However, the tenant will not lose its rights to a rent waiver if they had been unable to trade due to sickness or injury or a natural disaster or the parties agree that the original rent relief agreement should apply.[43] Any rent deferral from the original rent relief agreement will continue to apply.

Extension of lease term

Where a rent relief offer includes a deferral of rent, the landlord must offer the tenant an extension to the term of their Eligible Lease on the same terms, unless the parties agree otherwise in writing.[44] The extension must be equivalent to the period for which rent is deferred, for instance, if 3 months’ rent is deferred, 3 months must be added to the term of the Eligible Lease. Such an extension will be automatically form part of the Eligible Lease, unless the parties expressly ‘contract out’ of this requirement.

Payment of deferred rent

The following applies in respect of deferred rent – unless the parties agree otherwise in writing.[45]

Rent deferred under the 2021 Regulations

Any deferred rent must not be recovered by the landlord until after 15 January 2022. The deferred rent payable by the tenant must be amortised over the greater of:

1. the balance of the Eligible Lease term (including any extension of the term above); and
2. a period of no less than 24 months.

The standard position under the 2021 Regulations is for deferred rent to be amortised in equal amounts. However, the parties may contract out of this standard requirement and choose to front-end or back-end load repayments.

When negotiating payments of deferred rent for periods after the term of the lease has ended, tenants and landlords alike should consider the impact of the deferral on the return of lease security, bank guarantee expiry dates, the release of guarantors and the tenant’s ability to wind-up.

As was the case in the 2020 Regulations, landlords are prohibited from recovering interest or any other fees or charges in respect of deferred rent.[46]

Rent deferred under the 2020 Regulations

Where rent was deferred under the 2020 Regulations and the tenant makes a new request for rent relief under the 2021 Regulations, payment of the 2020 rent is also deferred until 15 January 2022, unless the parties agree otherwise in writing.[47] This is an example of an issue which should be dealt when documenting any rent relief agreement pursuant to the 2021 Regulations.

Tenant protections

The 2021 Regulations enforce a range of tenant protections, many of which did not feature in the 2020 Regulations. Many of the protections apply during the Protection Period (being 28 July 2021 to 15 January 2022).

Protection against adverse action by landlords

A tenant under an Eligible Lease is not in breach of any requirement to pay rent or outgoings during the Protection Period if:

1. the tenant has made a compliant request for rent relief and that request has not lapsed and the tenant has continued to pay rent as reduced by their stated Decline in Turnover;[48] or
2. if a rent relief agreement has been made, the tenant pays rent and outgoings in accordance with that agreement;[49] or
3. the tenant is unable to trade as a result of sickness or injury or a natural disaster affecting the premises (problematically, ‘natural disaster’ is not defined).[50]

If any of the above apply, the landlord is prohibited from evicting the tenant, re-entering the premises or having recourse to any security because of non-payment of rent or outgoings.

Importantly:

1. these provisions do not prohibit landlords from taking action in respect of any other breaches of an Eligible Lease or payment of rent or outgoings outside the Protection Period (noting that VCAT upheld this principle in a case concerning similar provisions in the 2020 Regulations)[51]; and
2. in a rare win for landlords, tenants can no longer hold out and refuse to pay all rent during the Protection Period (unless their decline in turnover is 100%), as they could under the 2020 Regulations.

Reassessment of rent relief

The 2021 Regulations allow a tenant to make a new request for rent relief if the financial circumstances of the tenant materially change.[52] The rent relief process explained above applies to this new request and any new rent relief agreement replaces the existing rent relief agreement. There is no corresponding right for a landlord to review an existing rent relief agreement should a tenant’s turnover materially improve (although a landlord is somewhat protected by the mandatory reassessment process above).

Prohibition on rent increases

In our view, the most draconian provision of the 2021 Regulations relates to rent increases during the Protection Period.[53] The 2021 Regulations go a step further than the 2020 Regulations by voiding any rent increase during the Protection Period, rather than merely postponing any such rent increase. This applies irrespective of whether the tenant has made a compliant request for rent relief, but not in relation to changes to turnover rent.[54]

Critically, the parties may agree otherwise in writing to allow a rent increase (but not a rent review) during the Protection Period. Careful consideration must be given in drafting any such clauses to ensure this regulation is not inadvertently breached.

Changes in trading hours

A tenant under an Eligible Lease may reduce its trading hours, or not trade at all, during the Protection Period. Landlords must not evict, re-enter or have recourse to any security, where a tenant takes such action (and penalties apply if a landlord does so).[55] This provision can also apply in limited circumstances where the lease is not an Eligible Lease[56]

Outgoings

The 2021 Regulations deal with outgoings under Eligible Leases in much the same way as the 2020 Regulations.

Where the tenant is not able to trade at the premises

If a tenant is not able to operate its business from the premises, landlords must ‘consider’ waiving payment by the tenant of any outgoing or other expense payable during that period.[57] This only requires landlords to ‘consider’ waivers, however landlords are required to do this acting reasonably and in good faith (or otherwise be in breach of the lease). Interestingly, this does not appear to apply to Eligible Leases where the tenant can operate its business, albeit in a significantly diminished capacity (e.g. a restaurant with takeaway service only).

To further assist in reducing outgoings if a tenant is not able to operate its business at the premises, the landlord may cease or reduce services at the premises as is reasonable in the circumstances, and in accordance with any reasonable request of the tenant.[58]

Landlords must pass on savings

If any outgoing is reduced, the tenant is only liable to pay the tenant’s proportionate share of the reduced outgoing. In addition, if the tenant has already paid an instalment in excess of the reduced amount, the landlord must reimburse the excess as soon as possible.[59]

Confidentiality

The 2021 Regulations govern that parties must keep information obtained under or in connection with the 2021 Regulations confidential, subject to usual exclusions (e.g. disclosure with consent, to advisers or financiers on a confidential basis, as required by law or in connection with any court or tribunal proceedings).[60]

Dispute resolution

The dispute resolution provisions are very similar to those found in the 2020 Regulations. Either party may refer a dispute in relation to an Eligible Lease to the SBC.[61] If mediation fails, the SBC may give a certificate to that effect[62] and then either party may refer the matter for determination by VCAT or the Supreme Court.[63] There are also a number of provisions empowering the SBC to make binding orders requiring a landlord to provide relief to a tenant.

[1] Regulations r 5(1). Note that a retail or non-retail commercial lease or licence, must be for the sole or predominant purpose of carrying on a business at the Premises, see Commercial Tenancy Relief Scheme Act 2021 (Vic) ss 5, 6.

[2] Regulations r 5(2).

[3] Regulations r 9(1).

[4] Regulations r 10.

[5] Regulations r 9(3)(h),(i).

[6] Regulations r 9(3).

[7] Regulations r 11(2).

[8] Regulations r 11(3).

[9] Regulations r 13.

[10] Regulations r 14.

[11] Regulations r 13(1)(a).

[12] Regulations r 15(1).

[13] Regulations r 13(1)(a).

[14] Regulations r 16(3).

[15] Regulations r 13(1)(a).

[16] Regulations r 16(4).

[17] Regulations r 13(2).

[18] Regulations r 16(5).

[19] Regulations r 16(6).

[20] Regulations rr 17-23.

[21] Regulations r 27(2).

[22] Regulations r 27(3).

[23] Regulations r 27(4),(5).

[24] Regulations r 27(6).

[25] Regulations r 25.

[26] Regulations r 27(7).

[27] Filomeno Nominees Pty Ltd v Crown Group Pty Ltd (Building and Property) [2021] VCAT 71; Zeini v Inner Metropolis Holdings Pty Ltd (Building and Property) [2021] VCAT 243.

[28] Regulations r 24.

[29] Regulations r 27(8)(a).

[30] Regulations r 27(9).

[31] Regulations r 27(8)(b).

[32] Regulations r 27(8)(c).

[33] Regulations r 27(8)(d).

[34] Regulations r 24.

[35] Regulations r 28.

[36] Regulations r 27(10).

[37] Regulations r 27(12).

[38] Regulations r 29(1).

[39] Regulations r 29(2).

[40] Regulations r 15(2).

[41] Regulations r 29 (3).

[42] Regulations r 29(5).

[43] Regulations r 29(6).

[44] Regulations r 31.

[45] Regulations r 32.

[46] Regulations r 34.

[47] Regulations r 33.

[48] Regulations r 26(a).

[49] Regulations r 26(1)(b).

[50] Regulations r 26(1)(c).

[51] Karting Madness Pty Ltd v Daniel Terrence Pty Ltd (Building and Property) [2021] VCAT 159.

[52] Regulations r 30.

[53] Regulations r 35.

[54] Regulations r 35(4).

[55] Regulations r 38.

[56] Regulations r 6.

[57] Regulations r 36(2).

[58] Regulations r 36(3).

[59] Regulations r 37.

[60] Regulations r 39.

[61] Regulations r 40.

[62] Regulations r 41.

[63] Regulations r 65(1).