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Application of the Commercial Tenancy Relief Scheme in Victoria

17 February 2021

#Property, Planning & Development, #COVID-19

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Application of the Commercial Tenancy Relief Scheme in Victoria

The Victorian Civil and Administrative Tribunal (Tribunal) has handed down three decisions in recent weeks which look closely at the Victorian Government’s Commercial Tenancy Relief Scheme and various provisions of the COVID-19 Omnibus (Emergency Measures) (Commercial Leases and Licences) Regulations 2020 (Regulations), providing important clarification for landlords and tenants.

In this article, we set out the Tribunal’s key findings in each of the decisions on whether:

1. Is a landlord entitled to lock out a tenant in arrears who holds an ‘eligible lease’ but has not made a compliant request for rent relief?

In Filomeno Nominees Pty Ltd v Crown Group Pty Ltd (Building and Property) [2021] VCAT 81, Crown Group (tenant) leased premises from Filomeno Nominees (landlord) pursuant to a retail premises lease.

The tenant had not paid any rent or outgoings since 1 April 2020. The landlord issued a breach notice on 30 September 2020 regarding unpaid rent and outgoings. The tenant failed to make any payments and the landlord subsequently re-entered the premises on 9 October 2020. Later that day, the tenant broke into the premises and remained in possession, asserting that it was protected from eviction by reg. 9 of the Regulations. The landlord applied to the Tribunal for orders that it was entitled to possession of the premises.

Issues

The Tribunal confirmed that the tenant held an eligible lease as it was an SME entity and a participant in the JobKeeper scheme.

The issue for determination was whether the tenant had complied with the Regulations in making its request for rent relief, such that the Regulations applied to prevent the landlord from taking possession of the premises. The landlord contended that it was entitled to possession of the premises because the tenant had not complied with the Regulations nor paid any rent or outgoings, disentitling it to the protections afforded by the Regulations.

Findings

The Tribunal assessed the tenant’s various requests for rent relief against the version of the Regulations which was introduced on 1 May 2020, and not the amended version introduced in September 2020 (Amending Regulations), because all of the tenant’s requests were made before the introduction of the Amending Regulations. In this regard, Senior Member Forde stated that “it would defeat the purpose of the legislation if tenants who complied with the original regulations were defeated of the protection afforded by the Regulations for not complying with the Amending Regulations. To do so would take away existing rights”.

Reg. 10 of the Regulations sets out steps that a tenant must follow when requesting rent relief from a landlord. The request must be in writing and include a statement that the lease is an eligible lease not excluded from the operation of the Regulations. The request must also include information evidencing the tenant’s status as an SME entity and a qualifying participant in the JobKeeper scheme.

Although the tenant had sent four separate requests for rent relief to the landlord between March 2020 and September 2020, none of the requests contained any reference to the reg. 10 criteria, either in the letters or their enclosures. The landlord put on evidence which demonstrated that its property manager had made repeated requests of the tenant to provide financial documentation. Although the documents were later provided during a mediation or in preparation for the hearing, this did not occur before the landlord’s Notice of Default being issued and the landlord taking possession of the premises. The Tribunal held that the tenant had not made any request for rent relief which complied with reg. 10.

In her concluding remarks, Senior Member Forde referred to the tenant’s allegation that the landlord failed to respond to it with an offer or proposal for rent relief, but noted that there was no obligation on the landlord to do so because the tenant failed to make a request which complied with the Regulations.

Senior Member Forde also clarified that the obligation to act in good faith under reg. 10(5) only arises after a landlord makes a rent relief offer to a tenant. In this case, while the tenant did not cooperate or act reasonably, this did not amount to a lack of good faith because no rent relief offer was made.

The Tribunal ordered that the landlord was entitled to possession of the premises, that the tenant vacate the premises within seven days and that the landlord’s claim for outstanding rent and outgoings be determined separately.

2. Is it unconscionable for a landlord of retail premises to issue a tenant with a breach notice for unpaid rent during COVID-19?

In PS Market Pty Ltd v Brijcam Nominees Pty Ltd (Building and Property) [2020] VCAT 1468, PS Market Pty Ltd (tenant) leased a 1.34 hectare site from Brijcam Nominees Pty Ltd (landlord) pursuant to a lease for an initial term of 20 years commencing in February 2018, from which it was permitted to operate a community market and food and drink premises. The lease provided that the tenant was responsible for obtaining the required town planning permits from the local Council regarding the permitted use.

At the time this matter came before the Tribunal in late 2020, the tenant had not yet obtained the required town planning permits from the Council, its application having been rejected and VCAT proceedings subsequently commenced. While there was an existing retail building on the premises and sealed car parking areas, the tenant had never traded from the premises.

The landlord issued a Notice of Default to the tenant on 23 November 2020 concerning unpaid rent from 1 April 2020 to 1 November 2020. In December 2020, when the matter came on for hearing, the tenant owed the landlord more than $400,000 in unpaid rent.

Issues

The tenant sought an injunction preventing the landlord from terminating the lease, alleging that it was not entitled to act on its breach notice because it was entitled to rent relief under the Regulations. 

In the alternative, it sought an injunction preventing termination, arguing that the landlord’s actions in issuing the breach notice and demanding full payment of rent during the COVID-19 pandemic constituted unconscionable conduct contrary to section 77 of the Retail Leases Act 2003 (Vic) (RLA).

The tenant separately sought relief against forfeiture.

Eligibility for rent relief

In respect of the tenant’s allegation that it was entitled to receive rent relief and consequently, the landlord was not permitted to act on its Notice of Default, the Tribunal held that there was no evidence that the tenant was entitled to receive JobKeeper payments. The tenant did not have any employees, but submitted that as its parent company was entitled to receive JobKeeper payments, the tenant should be regarded as being entitled to receive JobKeeper payments as well.

Member Kincaid rejected this argument, noting that the Regulations made it clear that the tenant under the lease had to be the entity receiving the payments to be eligible. Accordingly, the Tribunal held that there was no serious question to be tried concerning the tenant’s claim that it was entitled to receive JobKeeper payments, such as to make the lease an “eligible lease”.

Unconscionable conduct

In respect of its unconscionability argument, the tenant submitted that:

  • the breach notice “was served in breach of the standards of behaviour established by the Code of Conduct and the COVID-19 legislation promulgated… in order for parties to all commercial leases to work together in an unprecedented crisis caused by the COVID-19 pandemic, and has thereby engaged in conduct that is unconscionable”
  • the landlord had acted unconscionably “in failing to recognise the damage that will be caused to the tenant and ‘its related group entities’ by re-entry, when ‘the landlord itself will be able to avail itself of relief from statutory charges and mortgage payments”
  • the National Cabinet’s Mandatory Code of Conduct is an “applicable industry code” within the meaning of section 77 of the RLA, “providing a set of principles to which regard should be had when evaluating whether there has been unconscionable conduct” on the landlord’s part.

Member Kincaid held that despite the tenant being in significant arrears of rent from 1 April 2020, and there was no serious question about its eligibility for rent relief under the Regulations, the tenant’s argument that the landlord had acted unconscionably by serving the breach notice could not, without more, be sustained. Based on the evidence, the Tribunal concluded that there was no serious question to be tried regarding the landlord’s conduct in serving the breach notice.

Relief against forfeiture

Having been unsuccessful in its primary submissions to the Tribunal, the tenant sought relief against forfeiture of the lease. Member Kincaid granted relief against forfeiture on the basis that he was not satisfied that there was a reasonable likelihood that rent would not be paid in the future, considering the financial positions of the tenant and its director.

However, the tenant then asked the Tribunal to impose conditions on the relief to the tenant’s benefit, taking into account the Regulations and relying on the NSW Supreme Court decision in the Sneakerboy v Georges Properties Pty Ltd case (Sneakerboy), which our colleagues discussed here.

In Sneakerboy, the NSW Supreme Court made orders that the tenant was entitled to relief against forfeiture on 25 March 2020 and held that the NSW COVID-19 legislation would have applied to the reinstated lease given Sneakerboy, being an “impacted lessee”, qualified for rent relief under the relevant NSW legislation. His Honour Justice Robb held that “the Court has the power to impose conditions that will be expected to have the result that the renewed lease will operate conformably with the proper implementation of the COVID-19 regime”.

In this case, Member Kincaid declined to make the orders sought by the tenant based on his earlier findings that there was no serious question to be tried concerning the tenant’s eligibility for rent relief under the Regulations. He held that the only condition upon which relief against forfeiture would be granted was that which required the tenant to pay all of the outstanding rent to the landlord.

3. Do the Regulations apply to a lease which was terminated just before they commenced? 

In C B Buffet (Burwood) Pty Ltd v Delloyd Pty Ltd (Building and Property) [2020] VCAT 1234, C B Buffet (Burwood) Pty Ltd (tenant) leased premises from Delloyd Pty Ltd (landlord) which it operated as a Chinese buffet restaurant. The tenant closed its business in early February 2020 after its sales became insufficient to meet its payroll liabilities.

On 13 March 2020, the landlord served a breach notice claiming unpaid rent, outgoings and legal costs. The tenant did not pay the outstanding amounts and the landlord re-entered the premises on 27 March 2020.

On 3 April 2020, the National Cabinet released its Mandatory Code of Conduct for leases during COVID-19. The Regulations were subsequently enacted in Victoria and operated on and from 29 March 2020.

Issues

The tenant sought an injunction preventing the landlord from terminating the lease on a number of grounds, including that the breach notice was defective, the landlord was acting unconscionably and such action was prevented by the Regulations.

In the alternative, the tenant sought relief against forfeiture, foreshadowing an intention to seek rent relief under the Regulations.

Findings

In refusing the injunction application, Member Kincaid held that the Regulations did not apply because the tenant did not hold an “eligible lease”. The lease was validly terminated by the landlord on 27 March 2020 – before the commencement of the Regulations – and therefore the tenant was not entitled to the various protections afforded by the Regulations.

In support of its unconscionability argument, the tenant submitted that in 2017, the landlord had informed it of a proposal to construct an apartment building at the premises which would require the tenant to provide exclusive possession to the landlord, and that the parties had reached an agreement that the landlord would compensate the tenant accordingly. The Tribunal referred to the demolition and redevelopment clauses in the tenant’s lease, finding that no notice had been served by the landlord as required by those clauses and the landlord’s plans were at best, tentative. Member Kincaid held that the tenant's submission that the re-entry was unconscionable was not remotely sustainable.

Member Kincaid granted the tenant’s application for relief against forfeiture, having regard to the time remaining on the lease (almost 10 years) and the tenant’s substantial financial investment in the premises. In opposing the tenant’s application, the landlord submitted that the tenant’s capacity to pay future rent depended on its turnover, and that it may not be able to pay rent for months or years given the COVID-19 pandemic. The Tribunal confirmed that the tenant did not hold an “eligible lease” and would not be entitled to any rent relief under the Regulations. Accordingly, it ordered that the application be granted on the condition that all outstanding rent and outgoings be paid by the tenant.

Authors: Chris Brodrick & Alana Giles

Disclaimer
The information in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, we do not guarantee that the information in this article is accurate at the date it is received or that it will continue to be accurate in the future.

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