Update & Snapshot: The Victorian COVID-19 Commercial Tenancy Relief Schemes

Published: 12 August 2021

Written by: John Momitsas

The Commercial Tenancy Relief Scheme Act 2001 (VIC) (the Legislation) received Royal Assent on Tuesday, 10 August 2021. The Legislation empowers the Governor in Council to make regulations to reintroduce a new Commercial Tenancy Relief Scheme in Victoria, which is to provide rent relief to eligible commercial tenants experiencing financial hardships due to the impact of COVID-19.  

The Legislation

The Legislation stipulates that the regulations to come may have retrospective effect to a day not earlier than 28 July 2021.  

Further, the Legislation will be repealed on 30 April 2022 and any regulations enacted and in force immediately before 30 April 2022 will continue in force until 30 October 2022.  

The foreshadowed regulations  

At this stage, the Legislation only specifies what the foreshadowed regulations may and may not contain however there are no details on what the regulations will contain. The Governor in Council will make the regulations on the recommendation of the Minister for Small Business, for the purpose of responding to the COVID-19 pandemic. 

Clause 7 of the Legislation specifically sets out what the Governor in Council, on the recommendation of the Minister for Small Business, may include in the regulations which we note include:  

• prohibiting the termination of an eligible lease;  
• changing any period under an eligible lease;  
• changing or limiting any other right a person who is a landlord under an eligible lease has under an agreement related to that eligible lease; 
• exempting a landlord or tenant under an eligible lease from having to comply with an eligible lease or an agreement related to an eligible lease;  
• modifying the operation of an eligible lease or an agreement related to the eligible lease;  
• extending the period during which an eligible lease is in effect; 
• deeming a provision of the regulations as forming part of an eligible lease; 
• imposing new obligations on landlords or tenants under an eligible lease, including requiring them to negotiate amendments to an eligible lease; 
• requiring landlords and tenants under an eligible lease who are in dispute about any matter relating to an eligible lease to:
  • participate in mediation arranged by the Small Business Commission; 
  • have a mediation certificate before commencing proceedings in VCAT or a court in relation to the dispute; 
  • commence a proceeding in relation to the dispute in the court; 
• preconditions that must exist or be met before a rent relief application may be made; and 
• the process for dealing with and deciding rent relief applications, including the criteria to be applied in deciding rent relief applications. 

We note that the above is not an exhaustive list of the matters set out in the Legislation, however are the types of matters which will need further explaining in the upcoming regulations.  

The foreshadowed regulations  

We will be monitoring the release of the regulations, as there are a number of key matters requiring clarification and further detail prior to any rent relief negotiations between landlords and tenants.  

In the meantime, if you require any assistance please contact our Real Estate team.  

Relief for commercial tenants – a practical review of the 2021 COVID-19 Regulation

Published: 19 July 2021

Written by: Duane Keighran

Overview  

The Retail and Other Commercial Leases (COVID-19) Regulation 2021 (NSW) (the Regulation) came into effect on 14 July 2021, and will remain in force until 13 January 2022 (covering a period of 6 months).  

The Regulation: 

The Regulation has been enacted to provide relief to impacted retail and commercial tenants who may be affected financially by the current lockdown across areas in New South Wales.  The Regulation repeats a number of concepts that are familiar, which were first set out in the previous regulations enacted in 2020 (the 2020 Regulations). 

What type of tenants will the Regulation apply to? 

As with the 2020 Regulations, a tenant has to first prove that it is qualifies for protection, being a tenant which: 

• qualifies for at least one or more of the Micro-Business COVID-19 Support Grant, the COVD-19 NSW Business Grant, or Job Saver Grant; and 
• has a total turnover in the 2020/21 financial year of less than $50 million (which will include the tenant’s group of companies, if the tenant is a corporation), 

which is defined in the Regulation as an Impacted Lessee. 

An Impacted Lessee must provide evidence to its landlord that it is an Impacted Lessee if it seeks to rely on the relief under the Regulation. There is also a requirement for an Impacted Lessee to provide such information to their landlord within a reasonable time of a landlord’s request for such information.  

What relief is granted? 

Subject to the tenant providing evidence that it is an Impacted Lessee, a landlord must not take any ‘prescribed action’ against the Impacted Lessee for a ‘prescribed breach’ unless the matter has first been referred to the Small Business Commissioner for mediation, and the Small Business Commissioner has first certified that the mediation has not resolved the dispute.  On receipt of that certification, a landlord is then able to take any action it would have otherwise been permitted to take under the lease. 

What is a ‘prescribed breach’ and a ‘prescribed action’? 

Consistent with the 2020 Regulations, a prescribed breach relates to a failure to pay rent, outgoings, or a failure to open the tenant’s business during the hours required under the lease.   

A prescribed action which is not permitted refers to actions that lead to termination of a lease, eviction of a tenant, calling on security or a guarantee under the lease or charging interest on rent, or the landlord recovering any other damages. 

Applying the concepts of a ‘prescribed breach’ and a ‘prescribed action’ together, a landlord is not permitted to take a ‘prescribed action’ for a ‘prescribed breach’ under a captured lease while the Regulation is in effect, except where: 

• mediation has not resolved the dispute (as certified by the Small Business Commissioner); or 
• the parties to the lease have agreed otherwise. 

How are breaches which have occurred prior to commencement of the Regulation treated? 

A landlord is not precluded from taking action against a tenant for any breach that occurred prior to the Regulation commencing.  For example, if a tenant has a history of unpaid rent for the period prior to 14 July 2021, a landlord may still validly terminate that lease. A landlord is also not precluded from taking action for breaches that are not COVID-19 related (for example, if the tenant is subletting/licensing without consent).

What rental reductions or waivers apply? 

Unlike the 2020 Regulations, a landlord is not required to provide any rental waiver, reductions or deferrals for its tenants.  One of the market criticisms from the 2020 Regulations was that landlords were seen to be required to carry the burden of the COVID-19 economic pandemic, without regard to their own economic situation.  

This time around, the New South Wales Government (through the Office of State Revenue) has provided a carrot for landlords by way of providing a reduction in land tax to the value of any rental reduction provided.  This applies to commercial, retail and residential landlords. 

The Office of State Revenue states: 

A landowner providing a reduction in rent to a tenant between 1 July 2021 and 31 December 2021 can receive a reduction in land tax payable for the relevant parcel of land. The land tax reduction will be the lesser of: 

• the amount of rent reduction provided to an eligible tenant for any period between 1 July 2021 and 31 December 2021, or 
• 100 per cent of the land tax attributable to the parcel of land leased to that tenant. 

The reduction in a landlord’s land tax liability will not apply if a landlord requires repayment of rent at a later date.  As applications are not open to landlords at the time of writing, landlords will likely wait for more clarity around this scheme before offering rental reductions to their tenants.  As any rental reduction is not compulsory, this will mean tenants are required to pay full rent to the extent a landlord decides not to offer any reduction.  

What are the likely outcomes from the implementation of the Regulation?  

Tenants who can prove they are Impacted Lessees will not have their leases terminated or security called unless the path of mediation has first been exhausted.  Given the potential backlog of disputes if a large volume of applications are made to the Small Business Commissioner, this could mean that resolution of disputes could take some time.  However, as there is no mandated rental relief, landlords may choose to elect if they apply for land tax relief, and to then subsequently pass on rental relief to tenants. 

 From our experience with the 2020 Regulations, reputable landlords have attempted to resolve most issues with their tenants commercially, as all parties seek to work together to ensure that tenants and landlords remain solvent and are able to trade once the COVID-19 pandemic is over, which is a sensible outcome for all.  We expect the same commercial negotiations to occur across the market this time around.  

Why so technical? Technical Services for Hotel Developments

The Dilemma

Developers develop, and hotel operators operate. So why do operators want to become so involved in the design and development stage of a hotel?  Shouldn’t the operators let the developers build their asset how they want, and worry about operations post the opening of the hotel?

When developers select an operator, they generally make their decision having regard to factors such as:

-Operational expertise;

-A fees vs value of service analysis;

-The ability to access sale distribution networks;

-Participation in corporate travel contracts; and

-The brand suitability for the product being delivered for the location and target market.

To ensure the product being developed aligns with the operator’s brand standards (including size and layout of guest rooms, facilities to be offered, the provision of required standards of fittings, fixtures and equipment (FF&E), façade and materials to be used in construction), the operator must have the ability to have input (and approval) during the design and build process. The relationship between the parties during this phase of design and development is governed by a Technical Services Agreement (TSA), which may be either presented as a separate agreement, or as a schedule to a Hotel Management Agreement.

Key issues arising under a Technical Services Agreement

There are a number of key issues that often arise that must be negotiated and resolved between the parties prior to design commencing. As a number of these issues can lead to disputes between the parties in relation to the design, construction and ultimate opening of the hotel, it is important when negotiating a TSA to carefully consider the terms of the agreement and the long term legal and commercial impacts that they may have.  Although not by any means an exhaustive list, the following items generally arise as issues for negotiation:

Provision of design guidelines and brand standards – With interest costs on financing often driving developers to want to progress design and development as quickly as possible, developers will often ask for early access to design guidelines and brand standards even in the negotiation phase so as to assess the likely cost implications of the operator’s requirements.  However, operators will be reluctant to provide these documents without the owner contractually committed, and with the payment of a fee.  In exceptional circumstances, operators may provide certain technical services in exchange for a fee, and pursuant to the terms of an Interim Technical Services Agreement entered into between the parties, to allow designs to progress whilst negotiations are being finalized.

Owner’s engagement of consultants – While the owner will engage all consultants for design and construction, the operator will retain approval rights over those professionals.  The operator will require that owner engages only those consultants and contractors that have experience delivering hotel projects.  Ideally, major consultants will be pre-approved and set out in schedule.

Non-performing consultants – if consultants are not performing to standards required by the operator, there may be provision in the TSA for the operator to require their replacement.  As this will have obvious time and cost implications for the hotel, it is important that both owner and operator work together to ensure that duly qualified (and committed) consultants are chosen at the outset.

Submission of items for approval – timelines for submission of design documents, and the operator’s required response times must be carefully adhered to in order to ensure that project timelines are not extended unnecessarily.  Operators should be required to either approve or give feedback (requiring variations to design documents) within a reasonable time.  It is unlikely that operators will agree to ‘deemed consent’ mechanics in the TSA in circumstances where feedback is not provided within the required timeframes.

The mock-up room – before finally fitting out all guest rooms, developers will be required to seek approval of the final fit-out of a test room to ensure it complies with all approved design documents and the operator’s required standards. Once the test room is approved, the developer will be required to ensure that all rooms are fitted out to the required standard of finish.  Given that this process occurs closer to the final stages of construction, any delays in sign-off of the test room has the potential to impact timelines under the construction contract, which could have the potential to trigger extension of time claims.

Defect rectification prior to opening – minor defects may be overlooked in non-hotel development projects, however operators will want to ensure that the hotel does not open before most defects are rectified so that their brand reputation is not impacted by guests visiting after the opening date who may leave poor guest reviews – damaging both the hotel and the operator’s reputation.  It is imperative that the developer and operator agree a stringent regime for swift rectification of defects, and consideration must be given to what item of defect would qualify as requiring rectification before opening.

Payment for services – from the commencement of technical services to opening of the hotel, the operator will require payment for its technical team.  Care should be taken to ensure that payments are made against completion milestones, and not simply against a certain timeline.  As with all construction projects, the originally envisaged timeline for approvals and construction progress may be delayed, and it is therefore sensible to only agree to pay as and when services are actually rendered.

 Overarching concerns

The interests of the developer and operator are aligned – neither receives revenue from the hotel unless it is open and receiving paying guests.  The key priority must be ensuring that, upon completion of the new-build hotel, the brand standards have been complied with and the hotel is operationally efficient to ensure the best chance for operational excellence, while the parties work together amicably throughout the process to ensure timelines are met in the planning, design and construction of the hotel, without compromising on compliance with the operator’s required brand standards.

Why so technical? Technical Services for Hotel Developments

The Mandatory Code in New South Wales + changes in 2021 

A mandatory Code of Conduct for the Short-Term Rental Accommodation Industry in NSW commenced on 18 December 2020 (the Code). The Code did not have any impact on rules around residential tenancies and other traditional forms of short-term accommodation like hotels, targeting solely commercial arrangements where an occupier is given the right to occupy a residential premises for up to three months’ at a time. 

The Code was implemented to regulate the industry and to establish mandatory minimum standards of behaviour and requirements for booking platforms, hosts, guests and letting agents. The Code also establishes dispute resolution and complaint processes and is generally intended to facilitate the oversight of the short-stay industry in by NSW Fair Trading. 

The Code was updated on 28 May 2021 to provide that a premises register is to be commence in November 2021.  In addition to this register, the NSW government has made amendments to the State Environmental Planning Policy (Affordable Rental Housing) 2009 (NSW) and the Environmental Planning and Assessment Regulation 2000 (NSW) by way of the State Environmental Planning Policy (Affordable Rental Housing) Amendment (Short-term Rental Accommodation) 2021 (NSW) which will come into effect on 1 November 2021 (the Policy), unless it relates to the Byron area, which only requires compliance by 31 January 2022. 

The Policy will differentiate between hosted (where the permanent resident remains within the property during any guest stay) and non-hosted accommodation (where the permanent resident does not remain at the property).  The Policy provides for exempt development if a property is developed for the purposes of short term accommodation that is hosted, subject to compliance with the requirements of section 51E of the Policy.  For properties that are contemplating being developed as non-hosted accommodation, in addition to compliance with section 51E, non-hosted development may not be used as such for more than 180 days in any 365 day period (if the accommodation is in a prescribed area, defined by reference to maps).  

The Victorian landscape 

The holiday rental/short stay accommodation industry in Victoria is less strictly regulated than in NSW. Holiday and short-term accommodation landlords are instead guided by a Code of Conduct which sets out their management and maintenance responsibilities. The only government intervention seen so far is the implementation of a complaints process, which is administered through changes introduced in February 2019 to the Owners Corporations Act 2006 (Vic). 

The changes enable the Victorian Civil and Administrative Tribunal (VCAT) to impose fines, award compensation and prohibit apartments from being rented out for short-stay accommodation. Owners Corporations are also able to issue breach notices to guests. This additional form of regulation certainly imposes some accountability for ‘Airbnb’ hosts which is no doubt welcomed by the hotel industry. 

Recent amendments to the Owners Corporations Act 

On 23 February 2021 The Owners Corporations and Other Acts Amendment Act 2019 (Vic) was assented to and will be operative on 21 December 2021 (if not proclaimed earlier) (Act). 

Initially, the Act proposed to limit certain contracts for hotel, resort and serviced apartment complexes to three years in duration, as it does with other service and management contracts entered into in relation to the Owners Corporations Act 2006 (Vic). After lobbying from the hotel and serviced apartment industry, this proposal to limit the term of hotel management agreements (and the like) was thankfully deleted. 

However, the power remains to pass regulations that may have an impact on some management or service-related contracts for services provided by hotel and resort operators in mixed use schemes.  Until these regulations are tabled for discussion, the market will be no clearer on the potential for short term accommodation regulation in this context.  However, it is possible that regulations may be made prescribing requirements for hotel and resort management contracts that may restrict the term of those contracts, increase, limit or place parameters on fees and charges under those contracts and prohibit or regulate the inclusion of specific terms and conditions in those contracts. 

Know your options – cooling-off periods under option deeds

Option deeds and developers 

Option deeds are a tool of choice for developers seeking to amalgamate sites for development.   Ultimate flexibility for a developer is obtained by entry into a call option only, however where a vendor requires an ultimate sale, often both a put and call option will be required.  

Where put options are related to residential properties, the NSW Supreme Court has recently examined whether a purchaser’s right to rescind pursuant to a cooling off period permitted at law is lost by virtue of the contract for sale having resulted from a put option.  

The relevance of the case  

BP7 Pty Ltd v Gavancorp Pty Ltd (2021) NSWSC 265 is of relevance to parties who enter into a binding agreement for the sale of residential property by way of put and/or call option. The key issue decided was whether a put option fell within the meaning of option to purchase. If so, the exemption to a cooling-off period applies.  

In the circumstances where a grantee of an option chooses to not exercise its call option (for example, where a developer has amalgamated a site by way of option however has not had a suitable development consent issued, or is otherwise unsatisfied with its due diligence enquiries and therefore does not see a project as ultimately feasible), and the grantor subsequently exercises its put option during the permitted put option period, the exemption under s 66T(d) of the Conveyancing Act 1919 (NSW) (the Act), which waives the right for a cooling- off period under a contract made in consequence of the exercise of an option (other than an option which is void), does not apply to a contract resulting from a put option.

What happened? 

BP7 (as grantee and subsequent purchaser under the resulting contracts) sought to rescind 14 contracts of sale, in reliance on its ability to cool off under s66U the Act.  In addition, BP7 sought declarations to the effect of the contract being rescinded to require a refund the call option fees, (less 0.25% cooling off fee payable under the Act).  

The defendants argued in pursuant to s66T(d) of the Act, which relevantly states that there is no cooling-off period if the contract is made in consequence of the exercise of an option to purchase property.  

Is a put option really an option to purchase?  

The primary issue before the court was to construe the meaning of option to purchase pursuant to s66T(d), and whether put options fell within this construction. 

Justice Darke interpreted the meaning of option to purchase property, by its natural and ordinary meaning.  That is, an option is something that provides a choice – a put option requires a party to purchase (and is therefore not a choice to do so).  By extension, it was held that only an option to purchase property (being a call option) fell within the usual and ordinary meaning of option.  

The court rejected the defendant’s contentions that the word option should be interpreted as an “option to compel a purchase”, “option leading to a purchase” or “option pertaining to a purchase”.  Ultimately, the court held that a cooling off period does apply, and affirmed the BP7’s right to rescind, and ordered a refund of the call option fees paid (less the statutory 0.25% cooling off fee). 

Can grantors mitigate the risk of rescission? 

Given this clear decision, it is important that grantors carefully review their options on entry with their legal advisor to ensure that the risk of rescission is mitigated.  Although any advice may be dependent upon the circumstances existing between the parties, a grantor could require certificates of waiver of any cooling off rights pursuant to s66W of the Act, in addition to a certificate waiving cooling off rights under an option pursuant to s66ZF of the Act.