Commercial Tenancies (COVID-19 Response) Regulations 2020

The Commercial Tenancies (COVID-19 Response) Regulations 2020 (Regulations) were released on Friday 29 May 2020.  The Regulations adopt a Code of Conduct for Western Australia (WA Code) pursuant to section 13(2) of the Commercial Tenancies (COVID-19 Response) Act 2020 (Act).  The WA Code is effective from Saturday 30 May 2020.

The principles set out in the WA Code largely align with the National Cabinet Mandatory Code of Conduct (National Code) announced by the Federal Government on 7 April 2020.  However, the principles set out in the WA Code have been refined and provide greater clarity to landlords and tenants.

Who does the WA Code apply to?

Relevant small commercial leases

Landlords and tenants will need to comply with the WA Code where they are a party to a “relevant small commercial lease”.

The term “relevant small commercial lease” for the purposes of the WA Code means “a small commercial lease where the tenant is an eligible tenant in relation to the small commercial lease”.

Therefore, the WA Code will apply to a lease which is:

• a retail shop lease as defined in section 3(1) of the Commercial Tenancy (Retail Shops) Agreements Act 1985;
• a lease where the tenant owns or operates a small business;
• a lease where the tenant is an incorporated association; or
• any other lease prescribed by the regulations, and

where the tenant under the lease is an “eligible tenant”.

A “small business” is a business undertaking:

• which is wholly owned and operated by an individual person, by individual persons in partnership or by a proprietary company and which:
  • has a relatively small share of the market in which it competes; and
  • is managed personally by the owner or owners or directors, as the case requires; and
  • is not a subsidiary of, or does not form part of, a larger business or enterprise; or
• which is declared to be a small business under the Small Business Development Corporation Act 1983 (WA).

Eligible tenants

An “eligible tenant” is defined in the WA Code as a tenant who:

• had turnover in the financial year ending 30 June 2019 of less than $50 million; and
• either:
  • qualifies for the JobKeeper Scheme under the Coronavirus Economic Response Package (Payments and Benefits) Rules 2020 (Cth) (JobKeeper Rules); or
  • satisfies the “decline in turnover test” set out in the JobKeeper Rules at any time during the emergency period – i.e. has experienced a 30% decline in turnover (or a 15% decline in turnover for ACNC-registered charities).

What is the relevant turnover?

The WA Code provides clarity around the relevant turnover for the purposes of determining whether a tenant is an eligible tenant:

• where the tenant is a franchisee, the relevant turnover is the turnover of the business conducted by the tenant at the land or premises the subject of the small commercial lease;
• where the tenant is a corporation that is a member of a group, the relevant turnover is the turnover of the group (noting corporations constitute a group if they are related bodies corporate as defined in the Corporations Act 2001 (Cth) (which effectively includes subsidiaries of a parent entity)); and
• in any other case, the relevant turnover is the turnover of the business conducted by the tenant at the land or premises that are the subject of the small commercial lease.

In the case of franchises, where the tenant is not the franchisee, for example in cases where a special purpose vehicle or the franchisor holds the leased premises, the tenant may not be entitled to relief.

What is the process for requesting and negotiating rent relief?

The WA Code sets out a clear process for tenants to make a request to their landlord for rent relief and requires the landlord to provide an offer of rent relief within 14 days of that request.

1. Tenant’s Request

An eligible tenant must make a request in writing to the landlord for rent relief which must be accompanied by:

• a statement by the tenant that the tenant’s lease is a small commercial lease and the tenant is an eligible tenant in relation to the small commercial lease;
• sufficient and accurate information that evidences that the tenant is an eligible tenant; and
• sufficient and accurate information that evidences the reduction in the tenant’s turnover that:
  • is associated with the business conducted at the land or premises that is the subject of the small commercial lease; and
  • the tenant has experienced during the emergency period.

There is no guidance in the WA Code as to what constitutes sufficient and accurate information. Tenants would need to provide information which is sufficient to demonstrate their position. If landlords seek additional information from tenants, they may need to justify their reasons. 

2. Landlord’s Offer

Once a landlord receives a request in writing with the required supporting information, the landlord must offer rent relief to the eligible tenant within 14 days of receiving the request (unless another period is agreed between the landlord and tenant).

The landlord’s offer of rent relief must also be in writing and be in line with a number of principles in the WA Code which apply to the landlord’s offer and negotiations between the landlord.

The principles are:

• the offer must apply to the emergency period (defined in the Act as 30 March 2020 to 29 September 2020, unless another date is prescribed by regulations);
• the rent relief offered must be at least proportionate to the reduction in the tenant’s turnover that:
  • is associated with the business conducted at the land or premises that is the subject of the small commercial lease; and
  • the tenant has experienced during the emergency period,

for example, if the tenant has experienced a 60% reduction in turnover, the rent relief offered should be at least 60% of rent payable;

• the reduction in the tenant’s turnover is to be calculated using the principles of the “decline in turnover test” in the JobKeeper Rules (unless the landlord and tenant otherwise agree on an alternative method). The decline in turnover test involves comparing the entity’s projected GST turnover for a month or quarter in the period that the JobKeeper scheme applies with the entity’s GST turnover for the corresponding month or quarter in 2019 and determining the percentage decline in turnover;
• an offer may relate to up to 100% of the rent payable;
• an offer must provide that not less than 50% of the rent relief is to be a waiver of rent (unless the landlord and tenant otherwise agree in writing);
• an offer of rent relief must provide more than 50% of the rent relief is to be a waiver of rent if:
  • failure to provide more than 50% of rent relief in the form of a waiver of rent would compromise the tenant’s capacity to fulfil the tenant’s ongoing obligations under the small commercial lease; and
  • the landlord has the financial capacity to provide more than 50% of the rent relief in the form of a waiver of rent.

Whilst in theory, the landlord and the tenant could agree to something less than 50% of the rent relief as a waiver, it is almost impossible to imagine where this is likely to occur. 

The concepts of the tenant’s capacity and the landlord’s financial capacity are not further expanded upon in the WA Code.  It is not clear how the landlord’s financial capacity to provide more than 50% of the rent relief as a waiver is to be determined or how parties would assess whether a tenant’s capacity to fulfil the tenant’s ongoing obligations would be compromised.

3. Parties to negotiate

Following receipt of the landlord’s offer of rent relief, the landlord and tenant must negotiate in good faith with a view to agreeing the rent relief to apply during the emergency period based on the principles set out above.
If the parties are unable to reach an agreement, they may apply for dispute resolution under the Act. Please refer to our earlier article here for further information on this point. 

4. Giving effect to rent relief

When an agreement in relation to rent relief has been reached, the rent relief may be given effect to by the landlord and tenant either making:

• a written variation to the small commercial lease; or
• any other written agreement that gives effect to the rent relief, either directly or indirectly.

What happens after the emergency period ends?

Payment of deferred rent

The WA Code sets out the principles for repayment of deferred rent. Unless the landlord and tenant otherwise agree in writing, the deferred rent repayments:

• must not start until after the:
  • emergency period ends; or
  • term of the small commercial lease expires,

whichever is earlier, and

• be amortised over
  • the balance of the term of the lease; or
  • a period of not less than 24 months,

using a method to be agreed by the landlord and tenant.

This means that the tenant may have repayment obligations in respect of deferred rent that continue past the expiry of the lease. Existing security arrangements may not be sufficient to secure these payment arrangements which presents a risk for landlords. When negotiating these arrangements, consideration needs to be given to appropriate guarantees or security arrangements for these payment arrangements.

Repayment issues may arise for landlords where the balance of the term of the lease is in excess of 2 years.  This will result in it taking more than 2 years for the landlord to repay the deferred component of the rent, unless the landlord and the tenant agree otherwise.  It is difficult to see a tenant agreeing to an alternative position.  

Extension of lease term

The landlord must offer the tenant an extension of the term of the small commercial lease:

• on the same terms and conditions that applied under the small commercial lease immediately before the emergency period; and
• for a period equivalent to the period for which the rent is deferred, unless the landlord and tenant otherwise agree in writing.

However, a landlord is not required to offer an extension if:

• the landlord is a tenant under a head lease and the extension would be inconsistent with the head lease, or
• an extension would be inconsistent with another agreement already entered into by the landlord and another person which relates to the land or premises the subject of the lease.

Where an extension of lease is provided, landlords will need to consider the expiry of any bank guarantees held as security. Landlords and tenants may need to agree on the tenant providing a replacement guarantee with an expiry date beyond the original term of the lease, and may also need to consider what would occur if the tenant is unable to procure a replacement guarantee.  Provisions should be made in the negotiated agreements for the landlord to call on the bank guarantee if the tenant does not perform its obligations under the lease as varied.

What if tenants and landlords made an agreement before the WA Code became effective?

If the tenant believes the rent relief negotiated under any agreement for relief made before the WA Code came into effect is less favourable than the rent relief that might be provided in accordance with the WA Code, the tenant may make a request to the landlord in accordance with the WA Code.  The landlord would then have to make an offer in accordance with the principles of the WA Code as set out above.

What if the tenant’s circumstances materially change?

If an eligible tenant’s financial circumstances change materially after the variation or agreement has been reached, a tenant may make a further request for rent relief.  The tenant would need to provide new supporting information for the landlord’s consideration.  The landlord would then be required to make a new offer for rent relief within 14 days, in accordance with the principles as set out above.

The WA Code does not provide a mechanism for the reverse situation. That is, for the landlord to seek readjustment if it is clear that the tenant’s circumstances have improved.

Therefore, in negotiating an agreement for rent relief in accordance with the principles set out above, consideration should be given as to whether provision should be made for:

• the tenant’s reduction in turnover to be reviewed on a periodic basis; and
• adjustments to the rent relief to be made where a tenant’s position improves.  

Does the landlord have to waive outgoings?

The WA Code provides that the landlord must consider waiving outgoings for the part of the emergency period that the tenant is not able to conduct their business at the land or premises the subject of the small commercial lease.

There is no guidance as to what “not able to trade” or “not able to conduct their business” means. It is not clear whether this applies if the tenant chooses to close but was not required to close by law.  There is no concept of a proportionate reduction in outgoings payable.

If any outgoings charged, imposed or levied in relation to the land or premises are reduced in respect of the emergency period or part of the emergency period, and the tenant is an eligible tenant, the landlord must pass on the reduction to the tenant. The lease would likely provide for this in any event and ordinarily outgoings paid on an estimated basis would be adjusted at the end of the financial year.

However, the WA Code provides that:

• the landlord must not require the tenant to pay any amount in respect of the outgoing that is greater than the tenant’s proportional share of the reduced outgoing payable under the lease; and
• if the tenant has already paid more than the tenant’s proportional share, the landlord must reimburse the excess amount to the tenant as soon as possible.

Therefore, it may be necessary to undertake adjustment of estimated outgoings against outgoings actually imposed prior to the end of financial year.

Can the landlord reduce services to the land or premises?

The landlord may cease to provide, or reduce the provision of, any service at the land or premises as is reasonable in the circumstances, or in accordance with any reasonable request of the tenant.

Where a landlord seeks to reduce services, careful consideration needs to be given to any flow on impact of performance criteria provisions in the lease or other leases in the building or complex.

Protection of confidential information

The WA Code imposes an obligation of confidentiality on landlords and tenants. A landlord or tenant must not, directly or indirectly, disclose “protected information” obtained under or in connection with the WA Code unless the disclosure is disclosed in good faith in specified circumstances.