Update: Summary of Commercial Tenancy Relief Scheme Regulations and Changes to Turnover Test

The new Commercial Tenancy Relief Scheme Regulations 2021 (the Regulations) were issued yesterday. A copy of the Regulations can be accessed here.

The Regulations give effect to the new Commercial Tenancies Relief Scheme (CTRS) as announced on 28 July 2021. It seems that the delay between the announcement in July and the release of the actual Regulations has been a result of the Victorian Government sensibly reconsidering some of the eligibility criteria they had previously announced.

The Regulations are lengthy and rather complicated and it is intended that this email will serve as a very short summary of the key points of the CTRS, and we have provided the attached more detailed summary for interested parties.

Eligibility

The CTRS will apply to leases that are retail leases, or non-retail commercial leases and licences, that are not agricultural and have been in effect on or before 28 July 2021.

An eligible tenant must have a turnover of less than $50 million, and must not be connected with or affiliated with an aggregate group with a turnover exceeding $50 million.

Turnover decline

To be an eligible tenant under the CTRS, the tenant must have suffered a decline in turnover of 30% or more. For most leases, this is a comparison between the “turnover test period” in 2021 and the equivalent period in 2019.

The turnover test period is now a period of 3 consecutive months between 1 April 2021 and 30 September 2021, starting on the first of a month.  The previous announcement by the State was that the eligibility test was only the 1 April 2021 to 30 June 2021 period – which would have meant many tenants were ineligible – has changed.

The tenant may choose which 3 months to use and they need to think carefully about which 3 months to choose.

The Regulations also discuss alternative tests for business which cannot rely on 2019 trade.

Extent of Rent Relief

The percentage of the decline in turnover demonstrated by the tenant determines the minimum percentage of rent relief the landlord must offer.

At least 50% of the rent relief must be by way of rent waiver – with, presumably, the balance of the rent relief being by way of a rent deferral.

To what period does the CTRS apply

If the tenant makes its request on or before 30 September 2021, then it can claim rent relief for the period from 28 July 2021 to 15 January 2022.

If the tenant makes its request after 30 September 2021, then it can only claim rent relief from the date of its request  to 15 January 2022.

Tenants really should make their request for rent relief to the landlord on or before 30 September 2021 but we reiterate careful consideration needs to be given to what 3 month turnover period the tenant should use.

How to apply

The tenant needs to make sure that it makes a compliant request and includes all of the required statements and evidence.

The required statements and evidence are detailed in the attached memorandum, and include a statutory declaration as to the validity of the financial information relied upon to determine the reduction in turnover.

What happens after a request is made

After a request is made, the tenant must continue to pay rent in accordance with the reduction in turnover pending a final agreement. For example, if the tenant’s decline in turnover is 60% and a valid request is lodged, then the tenant must continue to pay 40% of the rent pending final agreement on the amount of rent relief.

As long as the tenant continues to pay the balance of the reduced rent, the landlord cannot evict the tenant or end the lease or claim on any security. The tenant is also not required to operate for all ordinary trading hours, or at all, until 15 January 2022.

The landlord must provide an offer within 14 days of receipt of all required evidence for a compliant request.

The tenant is deemed to have accepted the offer unless a mutual agreement is made or an application for mediation is lodged by the tenant to the VSBC within 15 days of the landlords offer.

Rent Increases

There cannot be any increase in rent between 28 July 2021 and 15 January 2022 and any provision providing for such an increase is void – unless the parties agree otherwise in writing. This will have an important effect on any scheduled market rent review for the next 6 months.

Extension of Term

For any rent that is deferred under the CTRS, the landlord must offer the tenant an extension of the term of the lease.  The extension offered must be equivalent to the period for which the rent is deferred. 

Deferred Rent

Any deferred rent is not payable until 15 January 2022, and is payable in equal instalments over either 24 months or the balance of the term (as extended), whichever is greater.

Any deferred rent that is unpaid from the last CTRS scheme will be also subject to this provision, and therefore is not payable until 15 January 2022.

Summary comments

The CTRS and the Regulations are complex, and the requirements to make a compliant request are similarly complex.

Clearly, the CTRS will apply very differently to the unique circumstances of each lease.

Landlords and tenants should promptly seek legal advice to discuss whether their leases are affected by the CTRS, and how to navigate the requirements under the Regulations.

And anybody who previously participated in the last ‘version’ of the CTRS, whether as landlord or tenant, should seek advice regarding how the Regulations change those existing obligations (i.e. deferred rent recovery, for instance).

This update does not constitute legal advice and should not be relied upon as such. It is intended only to provide a summary and general overview on matters of interest and it is not intended to be comprehensive. You should seek legal or other professional advice before acting or relying on any of the content.