Mandatory Commercial Tenancy Code: Victorian Implementation – Update

Introduction

Just before the Easter Break on 7 April, the National Cabinet agreed for the Mandatory Commercial Tenancy Code (the Code) to be legislated in each state and territory jurisdiction.

The Victorian Government has today introduced the COVID-19 Omnibus (Emergency Measures) Bill 2020 (the Bill). The bill has the support of the Liberal / National opposition and will be passed into law shortly.

Measures set out in the Bill

Structure

The Bill provides the ability for the Governor in Council, on the recommendation of the Minister for Small Business, to make regulations in respect of “eligible leases”. The areas under which the Minister may make regulations are extremely broad, and are set out below. These include regulations which can temporarily amend the terms of a lease, imply terms into a lease, restrain parties to a lease from exercising rights, and extend the term of a lease.

At this stage, the specifics of the measures to be contained in the regulations have not been released, however it can be expected that (at a minimum) the terms of the Code will be given effect.

Eligible Lease

An “eligible lease” will be:

• A retail premises lease covered by the Retail Leases Act 2003; or
• Any other lease or licence:

• whether or not in writing;
• whether express or implied;
• whether or not a sub-lease or sub-licence;
• including any agreement for lease or licence, under which a person has the right to occupy the whole or part of premises for the sole or predominant purpose of carrying on a business at those premises.

To be an eligible lease, the lease must be in place on the date that the regulations come into effect, and the tenant must also be an eligible tenant.

An eligible tenant is one which is both an “SME entity” and an employer who both qualifies for and is a participant in the JobKeeper Scheme.

An “SME entity” is one which:

• Currently carries on a business, or is a non profit body; and
• One or both of the following applies:

• The entity’s annual turnover for the current year is likely to be less than $50 million; or
• The entity carried on a business in the financial year (the previous year) before the current year, or was a non profit body during the previous year, and its annual turnover for the previous year was less than $50 million.

Excluded Tenancies

Despite being an “eligible lease”, the regulations can exclude a tenancy from being covered by the measures. This can be applied to a tenant:

• Which is a member of a group of entities listed in the regulations, and the aggregate turnover of that group exceeds a prescribed amount; or
• Which has a “relationship or connection” to an entity listed in the regulations, and the aggregate turnover exceeds the prescribed amount; or
• Where an entity has a “method of control or influence” listed in the regulations over the management or affairs of a corporate tenant.

There is no detail yet on what the prescribed group of entities will contain, however the intention is to aggregate turnovers of members of a corporate group, so that only small to medium enterprise tenants receive the protection.

The reference though to “relationship or connection” is extremely wide and unless this is clarified by the regulations this will create uncertainty as to whether a tenant is or it not a member of an aggregated group.

Consistent with the Code we would expect the “prescribed amount” of turnover to be $50 million per annum.

What the Regulations can change

As above, the regulations are extremely broad, and can have the following effects for an eligible lease:

• Prohibiting termination of an eligible lease
• Changing the period under the eligible lease, or relevant property legislation, by which someone must or may do something
• Changing or limiting the rights of a landlord under an eligible lease, or relevant property legislation, including under any other agreement relating to that lease
• Exempting a landlord or tenant from having to comply with an eligible lease, or relevant property legislation, including under any other agreement relating to that lease
• Modifying the operation of an eligible lease or an agreement related to the eligible lease
• Modifying the operation of relevant property legislation on an eligible lease
• Extending the term of an eligible lease
• Implying provisions into an eligible lease
• Imposing new obligations on landlords or tenants, including requiring them to negotiate amendments to an eligible lease

In making the regulations, the Minister for Small Business must consider that the regulations are reasonably necessary for responding to the COVID-19 pandemic.

The regulations may impose a penalty of up to 20 Penalty Units (currently $3,304.40) for a contravention of the regulations.

Disputes

If there is a dispute between a landlord and tenant under an eligible lease, then the regulations can require that the landlord and tenant participate in mediation arranged by the Small Business Commission.

If the mediation does not resolve the dispute, then if either the landlord or the tenant wishes to commence proceedings in VCAT (for retail leases) or Court (for other leases), then the regulations can require that they must:

• Obtain a “mediation certificate”; and
• Obtain leave of the Court to commence the proceedings.

There are no details of what the parties will be required to do in order to obtain a “mediation certificate”, or what matters the Court must consider in determining whether to grant leave. We would expect that to obtain a “mediation certificate” the Small Business Commission must be satisfied that the parties have made a genuine attempt to resolve the dispute.

The requirement to participate in mediation will not apply to proceedings commenced prior to 29 March 2020, and will not prevent a party from commencing proceedings at any time (noting that leave of the Court to commence the proceedings may still be required).

Of note is that the principles in the Code required “binding mediation” in respect of any dispute. The Victorian Government has interpreted this to mean that the parties are bound to mediate a dispute, and not that the mediation itself must produce a binding outcome.

Period of the measures

The measures can be applied retrospectively back to 29 March 2020. The Bill, and any regulations made under the Bill, will expire six months after commencement – i.e. we would expect that the measures will apply until late October 2020. This is subject to any further revisions by the Victorian Parliament.

No State compensation

The Bill expressly states that the State is not liable for any losses suffered by a person as a result of any regulations made. This is significant, as the regulations will almost certainly have the effect of temporarily re-writing the commercial deals which have been struck between landlords and tenants, in a manner which will likely be detrimental to landlords.

Small Business Commission

The Small Business Commission will be tasked with:

• Making arrangements to facilitate disputes between landlords and tenants under an eligible lease
• Monitoring compliance with the regulations
• Commencing proceedings for breaches of the regulations
• Any other function given to them under the regulations

The code

A copy of the Code is attached to the statement issued by National Cabinet and is available here.

If you would like to read our previous update on the Code, it is available here.

Next steps

Norton Rose Fulbright are providing advice to both landlords and tenants who are seeking guidance around their present rights and obligations, as well as how best to navigate through the Code and how to approach negotiations. We are also developing a suite of documents to record the types of arrangements that we expect will come into play over the next few months, including rent abatement deeds, variation documents, and checklists.

If you require any assistance with negotiations, including being properly prepared with a tailored checklist for your business needs, please contact us. In the meantime, we will keep you updated on relevant matters, including the details of the regulations once they are made.