What’s next for Landlords and Tenants?

With the COVID-19 Omnibus (Emergency Measures) (Commercial Leases and Licences) Regulations 2020 (‘Regulations’) due to end on 28 March 2021, Landlords and Tenants are faced with interesting issues.

Rent relief agreements

Many Landlords and Tenants have negotiated rent relief agreements in response to Covid-19 and pursuant to the Regulations. Deferred rent agreements run for the greater of the balance of the term, including any extension under Regulation 13 or otherwise and a period of no less than 24 months.  This means that the deferred rent agreement may operate beyond the end of the lease term. So a Tenant may vacate at the end of the term and yet deferred rent obligations may continue.

These arrangements do not automatically extend the lease term unless this was specifically agreed and documented. If rent was deferred pursuant to the Regulations, the Landlord was obliged to offer the tenant an extension of the term of the lease equivalent to the period for which the rent is deferred.  But the extension is not automatic and the Tenant was under no obligation to accept the offer of an extension of the lease term. This presents practical issues as once a Tenant has vacated the premises, the recovery of the deferred rent may become difficult.

Security deposits

So what happens to the security deposit when the lease ends but the Tenant’s obligation to pay the deferred rent continues? Landlords of retail leases are obliged to return the security deposit to the Tenant within 30 days after the lease ends, provided the Tenant has fulfilled its obligations under the Lease (refer to section 24(1)(d) of Retail Leases Act 2003). The Regulations do not consider this issue and Landlords, particularly those of  retail premises, will argue that the Tenant has not fulfilled its obligations under the lease. Therefore Landlords may find themselves without any security for the deferred rent. This could also occur in relation to bank guarantees with expiry dates.

Moving forward

Re-entry by Landlords has been a big issue with many defaulting tenants assuming that they were protected by the Regulations.

Recent VCAT decisions have highlighted that strict compliance with the Regulations is necessary to protect both the Landlord and Tenant. In both PS Market Pty Ltd v Brijcam Nominees Pty Ltd (Building and Property) [2020] VCAT 1468 and Filomeno Nominees Pty Ltd v Crown Group Pty Ltd (Building and Property) [2021] VCAT 81 the Tenants were not entitled to protection from re-entry under Regulation 9 as they had failed to strictly comply with the requirements of Regulation 10(2) regarding requests for rent relief.