Australia: Commercial Leasing Covid-19: Australian State Legislation Comparison – New South Wales And Victoria.

Legal News & Analysis - Asia Pacific - Australia - Regulatory & Compliance

2 June 2020
 

Introduction

 

On 7 April 2020, the National Cabinet announced the Mandatory Code of Conduct for small and medium sized commercial tenancies impacted by the COVID-19 pandemic (the Code). We previously wrote an extensive summary of the Code including updates on jurisdictions that have since enacted the Code in a separate article available here.

 

This article will focus on a comparison between New South Wales' Retail and Other Commercial Leases (COVID-19) Regulation 2020 (NSW) passed on 24 April 2020 (NSW Regulations) and Victoria's COVID-19 Omnibus (Emergency Measures) (Commercial Leases and Licences) Regulations 2020 which was passed on 1 May 2020 (Victorian Regulations). While broadly similar, the two Regulations differ in some key areas as examined below with the Victorian Regulations imposing more prescriptive requirements compared to the NSW Regulations.

 

The Code does not apply to larger businesses, with annual turnovers greater than AU$50 million.

 

For completeness, the status of the enactment of regulations adopting the Code in each of the following States and Territories are:

 

  • Queensland has not yet passed regulations enacting the Code. Regulations are expected to be passed shortly.
     

  • South Australia passed the COVID-19 Emergency Response (Commercial Leases No 2) Regulations 2020 (SA) on 15 May 2020 which has retrospective effect from 30 March 2020 until 30 September 2020.
     

  • Western Australia has not yet passed regulations enacting the Code. Regulations are expected to be passed shortly.
     

  • Tasmania passed the COVID-19 Disease Emergency (Commercial Leases) Act 2020 (Tas) on 13 May 2020 which has retrospective effect from 1 April 2020 until 13 May 2020.
     

  • Australian Capital Territory issued the Leases (Commercial and Retail) COVID-19 Emergency Response Declaration 2020 (ACT) on 11 May 2020 which has retrospective effect from 1 April 2020 until the day on which the COVID-19 emergency in the ACT is no longer in force or such later day as notified by the Minister.
     

  • Northern Territory did not enact the Code, but enacted the Business Tenancies (Fair Dealings) Act 2003 (NT) on 25 April 2020 which provides a framework for small and medium sized commercial tenants to negotiate their leases with landlords. The provisions remain in force continue until the Northern Territory government declares an end to the COVID-19 public health emergency.

 

 

NSW Regulations

3Victorian Regulations

Criteria for an eligible tenant (Eligible Tenant)

Tenants who are eligible for JobKeeper program + annual turnover below AU$50 million.

Tenants who are eligible and receiving JobKeeper payments + annual turnover below AU$50 million.

Groups

Includes all entities which are considered 'related body corporates' as defined by the Corporations Act 2001 (Cth) and turnover is assessed on the group level.

In practice, these definitions import similar concepts of 'effective control' and will include the overall turnover of any foreign parent company and/or overseas companies within the same corporate group. 

Includes all entities which are considered 'connected entities' as defined in the Income Tax Assessment Act 1997 (Cth) and turnover is assessed on the group level.

Regulation end dates

The period from 24 April 2020 to 24 October 2020 (NSW Period).

The period from 29 March 2020 to 29 September 2020 (Victorian Period).

Negotiation mechanism

Only a general process outlined.

 

NSW General Process

 

There is a general obligation that the landlords must, if requested by the Eligible Tenant, renegotiate in good faith the terms of the commercial lease having regard to the leasing principles under the Code.

Implements a prescribed process.

Victorian Prescribed Process

  1. The tenant must make a written request for rental relief to the landlord accompanied with:

    (i) a statement by the tenant that the lease is an eligible lease and not excluded from the operation of the Victorian Regulation; and

    (ii) evidence that demonstrates the tenant is an Eligible Tenant (see criteria above).

  2. Within 14 days after receiving the request (or an agreed longer period), the landlord must offer rental relief which has regard to all circumstances of the relevant lease.

  3. The landlord's offer must include:

    (i) rental relief of up to 100% of the rent payable and may consist of waivers, reductions, remissions or deferrals of rent (or a combination thereof);

    (ii) no less than 50% of the rental relief offered by the landlord must be in the form of a waiver (unless otherwise agreed by the landlord and the tenant);

    (iii) apply for the duration of the Victorian Period (this will have practical implications – discussed in the next section).

  4. The parties must then negotiate in good faith with a view of agreeing on the rental relief to apply during the Victorian Period.

Rental relief

Determination of relief amount


Under the NSW Regulations, parties are required to renegotiate the rent payable under the commercial lease having regard to:

(i) the economic impacts of the COVID-19 pandemic; and

(ii) the leasing principles set out in the Code.

The notes to that section reference specific leasing principles including the proportionate reduction of rent based on the reduction in the Eligible Tenant's turnover due to the COVID-19 pandemic. Further information on calculating the proportionate reduction under the Code is available here.

 

Duration of the relief


The NSW Regulations do not prescribe a specific end date for negotiated rental relief agreements. The only guidance comes from the Code, which states that landlords are to offer the rental reduction for "the [duration] of the COVID-19 pandemic period and a subsequent reasonable recovery period".

We wrote about the difficulties of this in practical negotiations in a separate article available here.

Determination of relief amount


Under the Victorian Regulations, landlords are not limited to only the proportionate reduction of the Eligible Tenant's turnover as the basis for assessing rental relief.

Instead landlords are to consider a wide range of factors in determining the relief amount, including:

  • the reduction in the Eligible Tenant's turnover during the Victorian Period;

  • any waivers of outgoings or expenses;

  • the Eligible Tenant's current financial position; and

  • the landlord's financial ability to offer rental relief.

The last factor is an important distinction as (unlike in NSW) it allows consideration of the landlord's financial position in the overall rental relief being offered.

 

Duration of the relief


As referenced above, the Victorian Regulations specify that any rental relief is to apply for the Victorian Period (i.e. an end date of 29 September 2020).

Contrasted with the open-ended wording of the NSW Regulations, rental reliefs negotiated under the Victorian Regulation will likely be significantly shorter in duration compared to their counterparts in NSW.

 

Restrictions on landlord enforcement actions

Broadly, both the NSW and Victorian Regulations impose wide-ranging prohibitions on landlord enforcement actions for tenant breaches during each State's respective Periods. These tenant protections include against terminations, evictions, re-entering, recovering damages and/or charging interest, fees or charges on the unpaid rent.

 

Automatic protection


Under the NSW Regulations, all Eligible Tenants are automatically entitled to the protections under the NSW Regulations – irrespective of whether they attempted to renegotiate with the landlord.

Prescribed process for protection


In contrast, the Victorian Regulations impose more stringent requirements. Tenants will only be entitled to the protections against landlord enforcement actions if, and only if, they have complied with the Victorian Prescribed Process (see above).

This is an important distinction as it means that unless the tenant has submitted a formal request to the landlords they do not receive the protections under the Victorian Regulations.

"Turnover" definition

The NSW Regulations do not define the 'turnover' of other than that it includes any turnover derived from internet sales of goods and services.

Notably, unlike the Victorian Regulations, it is unclear whether government subsidies received by the SME Tenant such as payments from the JobKeeper program should be included in their calculation of annual turnover.

The Victorian Regulation includes an expansive and prescriptive definition of what is included in the calculations of the SME Tenant's 'annual turnover' which includes:

  • the proceeds of sales of goods and/or services;

  • commission income;

  • repair and service income;

  • rent, leasing and hiring income;

  • interest, royalties and dividends;

  • other operating income; and

  • (notably) government bounties and subsidies.

 

 
For further information, please contact:
 
Dino Permadi, Partner, Bird & Bird