Comments on and a summary of the new Regulations extending and amending the CTRS

My last post was a link to the amending Regulations that extend and vary the CTRS.

The new regulations rejoice in the name COVID-19 Omnibus (Emergency Measures) (Commercial Leases and Licences) Miscellaneous Amendments Regulations 2020 (Vic). I’ll just call them the Amending Regulations.

There are a few headline points about the Amending Regulations:

First, as expected, the Amending Regulations extend the CTRS to 31 December 2020. However, any new applications for rent relief apply only to the period between the new request for rent relief and 31 December 2020. The upshot is that if you or your client is a tenant who needs rent relief until 31 December 2020, get your request in ASAP.

Secondly, one of the key issues about the implementation and enforcement of the CTRS in Victoria is the lack of a clear express power for the Courts or VCAT to make orders for the grant of rent relief if the parties cannot come to an agreement. Justice Robb in the NSW Supreme Court recently commented on a similar lack of clear power in the NSW implementation of the Code (see the Sneakerboy case discussed here).

Disappointingly, the Government has not taken the opportunity to expressly clarify those powers in the Victorian CTRS. We may need to wait for more litigation before we understand the true nature and extent of the Courts’ and VCAT’s powers under the CTRS.

Thirdly, as expected, the VSBC now has the power to make a binding determination of the rent relief that a landlord is required to provide. This foreshadowed power has been a source of significant consternation in the legal and leasing communities, as it vests quite an extraordinary power in a non-judicial body (in fact, the power to amend the parties’ contract is extraordinary even for a Court, as highlighted by Robb J in the Sneakerboy case).

The power that has been provided to the VSBC is limited. The Commission can only make an order on the application of a tenant where the Commission is satisfied that the landlord has either not responded to the tenant’s application for rent relief or has not negotiated in good faith and proceedings have not been issued in a Court or VCAT.

Also:

• the Regulations already have a self-enforcement mechanism built into them for tenants – a landlord cannot terminate the lease for non-payment of rent (and now outgoings) during the operation of the Regulations (subject to a few conditions). Consequently, if the landlord is not responding and/or not negotiating in good faith, the tenant can withhold the appropriate amount of rent while being protected from re-entry. That means that the landlord (not the tenant) has an incentive to mediate and negotiate built into the Regulations; and
• the Amending Regulations provide VCAT with the power to review the Commission’s decision to make a binding determination, so the outcome of a binding determination may be the same as issuing proceedings at VCAT in any event.

The result is that we may not see that many applications for a binding order actually being made.

Fourthly, one of the features that distinguished the Victorian CTRS from some other states’ implementation of the Code was Victoria’s ‘de-coupling’ of rent relief from the downturn in the tenant’s trade. This has been addressed in the Regulations by:

• requiring the landlord’s offer of rent relief to now be ‘at a minimum, proportional to the decline in the tenant’s turnover associated with the premises’ (see reg 10(4)(ba)); and
• deleting the requirement that the landlord’s offer of rent relief take into account the landlord’s financial ability to offer rent relief (formerly in reg 10(4)(d)(iv)).

Fifthly, a tenant can make another application for rent relief if an agreement for rent relief has already reached but that agreement does not comply with reg 10(4)(ba) (ie it does not give rent relief proportionate to the tenant’s decline in trade) or does not extend to 31 December 2020.

However, that request and any new agreement for rent relief will only from the date of the new request to 31 December 2020 and will not apply retrospectively.

Sixthly, the landlord’s offer of rent relief in Victoria was required to take into account the reduction in the tenant’s trade ‘associated with the premises’, whereas the NSW model takes into account all of the tenant’s revenue (see discussion here). This has now been amplified because the tenant is required to provide in its request for rent relief a statement ‘setting out the tenant’s decline in turnover that is associated with only the premises’ (see reg 10(2)(a)(iii)).

This causes problems for landlords seeking to take internet sales or sales from interstate stores into account when negotiating rent relief. On the other hand, it also means that a landlord only has to share the pain for losses associated with premises it leases and not for the decline in sale in other stores that may have incurred greater losses.

An excellent summary of and comment on the operation of the amendments is provided by Paul Nunan and Jack Kelly from Eastern Bridge Lawyers here.

A more detailed roadmap to the Amending Regulations follows. I have highlighted the numbered paragraphs below that I think will be of interest to most readers:

1. The definition of an ‘eligible lease’ has been changed. The tenant is still required to be an SME and to be on JobKeeper, but the requirement to be an employer has been removed (see reg 4A).
2. The definition of ‘turnover’ in the Regulations is clarified so that a coronavirus economic response payment (which includes a JobKeeper payment) is not part of the tenant’s turnover (see reg 5(2) and (3)).
3. The moratorium on termination during the operation of the CTRS has been expanded to prevent landlords terminating for non-payment of outgoings (see reg 9).
4. A tenant’s request for rent relief must now be accompanied by additional documents evidencing the tenant’s participation in JobKeeper and evidencing the decline in the tenant’s turnover and other information (see reg 10(2) and 10(2A)).
5. The tenant’s application for rent relief must include a statement setting out the tenant’s decline in turnover ‘that is associated with only the premises’ (see reg 10(2)(a)(iii).
6. A landlord’s offer of rent relief must now apply to the period starting on the date of the tenant’s request for rent relief and ending on 31 December 2020 (see reg 10(4)(a) and (c)).
7. The landlord’s offer of rent relief must be at a minimum proportionate to the decline in a tenant’s turnover associated with the premises (see reg 10(4)(ba)).
8. The requirement that the landlord’s offer of rent relief take into account the landlord’s financial ability to offer rent relief (formerly in reg 10(4)(d)(iv)) has been deleted. However, the offer of rent relief must still be ‘based on all the circumstances of the eligible lease’ (see reg 10(4)).
9. The Regulations clarify that rent relief applies to gross rent and that outgoings are not ‘backed out’ of gross rent before rent relief is applied (see reg 10(4A)).
10. A tenant is entitled to apply for subsequent rent relief if:
    1. the tenant’s financial circumstances materially change (reg 11(1)(a));
    2. an agreement for rent relief was made prior to the commencement of the Amending Regulations that does not allow for, at a minimum, proportionate rent relief (reg 11(1)(b)); or
    3. the agreement does not apply to the period ending 31 December 2020 (reg 11(1)(c)).
11. Landlords cannot request the payment of deferred rent until 31 December 2020 (see reg 16(2)(a) and (5)).
12. The procedures for applying for mediation of an eligible lease dispute under the Regulations have been expanded and new application forms are to be posted on the VSBC’s website (see reg 20).
13. The procedures for the provision of a certificate if mediation has failed or is unlikely to resolve the eligible lease dispute have been expanded (see reg 20). Importantly, the Commission can now record in the certificate that the landlord has failed to respond to the tenant’s application to the VSBC or has not engaged in mediation in good faith (see reg 20A(3)).
14. There are quite lengthy provisions that give to the VSBC the power to make a binding order. In summary, those provisions are as follows:
    1. a ‘binding order’ is defined in the Omnibus Act as an order ‘directing landlords under eligible leases to give or agree to give specified rent relief to tenants under eligible leases’ (s 15(1)(na) of the Omnibus Act);
    2. a tenant can apply to the VSBC for a binding order if the Commission’s certificate shows that the landlord has failed to respond to the application for mediation as required by the Regulations or has not negotiated in good faith, and proceedings have not been issued in Court or VCAT (see reg 21A(1) and (5));
    3. the tenant is required to complete the required form (see reg 21A(2));
    4. the landlord must be notified of the application and both the tenant and the landlord can make written submissions to the VSBC (see reg 21A(3) and 21B);
    5. there is no hearing of the application (see reg 21D), so it must be determined by the VSBC ‘on the papers’;
    6. the VSBC can make a binding order that complies with reg 10(4), discussed above (see reg 21G);
    7. procedures are established for revoking or amending a binding order, although this is generally limited to revoking the order because the parties have reached agreement or amendment under the slip rule (see regs 21H to 21P); and
    8. VCAT is given power to review the VSBC’s decision to make a binding order on application by either the landlord or the tenant (see reg 21Q) and to enforce compliance with a binding order on application by a tenant (see reg 21R).
15. The VSBC has the power to sever, divide or combine matters that are the subject of an eligible lease dispute (see reg 21S).
16. The evidentiary status of statements made during mediation and binding order process are generally not admissible at VCAT, unless the Tribunal otherwise orders (see reg 21T).
17. The matters to which VCAT must have regard in a proceeding relating to an eligible lease dispute have been expanded to facilitate review of a binding order (see reg 22(2)(c) to (f)). It is not clear why some of these items have been included in the Regulations. For example, the Tribunal is required to have regard to the conduct of the landlord since the binding order took effect and it is not clear how or why the parties’ conduct after the binding order took effect is relevant to a review of the binding order.
18. The Amending Regulations address the effect of a tenant ceasing to be on JobKeeper. Generally, if the tenant was on JobKeeper when made its request for rent relief or agreed on rent relief with its landlord, then the lease remains eligible (see regs 24B and 24C).

Thanks to Jamie Bedelis and Alan Wein for their input on this post.

This post originally appeared on samhopperbarrister.com