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.
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:
where the tenant under the lease is an “eligible tenant”.
A “small business” is a business undertaking:
An “eligible tenant” is defined in the WA Code as a tenant who:
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:
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.
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:
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:
for example, if the tenant has experienced a 60% reduction in turnover, the rent relief offered should be at least 60% of rent payable;
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:
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:
whichever is earlier, and
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:
However, a landlord is not required to offer an extension if:
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.
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.
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 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:
Therefore, it may be necessary to undertake adjustment of estimated outgoings against outgoings actually imposed prior to the end of financial year.
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.
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.