Leasing in a Post-COVID (Legislation) WA:  Rent reviews, rent relief and deferred rent - some practical issues

It would seem likely that, in the absence of a second wave of COVID in WA, the operation of the Commercial Tenancies (COVID-19 Response) Act 2020 (WA) and its subsidiary legislation (the Commercial Tenancies (COVID-19 Response) Regulations 2020 (WA)) (COVID Legislation) will not be extended beyond the current, extended “emergency period” which expires on 28 March 2021.

This update sets out our observations of a few practical issues that may arise and will require consideration on the part of both landlords and tenants in the lead up to the end of the emergency period and when the COVID Legislation is no longer in force.

Rent Reviews

Under the COVID Legislation, landlords of small commercial leases were prohibited from increasing rent during the initial emergency period (that is, the period ending on 29 September 2020). 

Now, during the extended emergency period (which ends on 28 March 2021) landlords of small commercial leases are only prohibited from increasing rent while the tenant is an “eligible tenant”.

However, this does not necessarily mean that any rent reviews that fell due at any time during the emergency period have been waived, or can no longer be enforced.  That will depend on the terms of the lease itself.  If the lease allows for it (by not stating that the review is to be carried out by a fixed date) these rent reviews will be able to be initiated by a landlord (and, in some cases, by a tenant) from the earlier of:

  • the date the tenant ceases to be an “eligible tenant”; and
  • the end of the extended emergency period.

Rent Relief

The COVID Legislation requires compliance with a Code of Conduct which requires landlords to make an offer of rent relief to a tenant within 14 days of receiving a request from a tenant to do so.  The landlord need only respond where the tenant:

  • is an “eligible tenant”; and
  • complies with the requirements of the Code of Conduct in making its request.

After an offer has been made by the landlord, the parties are required to “negotiate with a view to agreeing on rent relief to apply during the emergency period” in accordance with the Code of Conduct’s overarching principles of cooperation, good faith and reasonableness, openness, honesty and transparency.

It has been our experience that tenants are not necessarily aware of the time imperative of locking away agreements in relation to rent relief.  If an agreement is not reached before the end of the emergency period in relation to a request for rent relief, the tenant should take alternative steps toenforce its rights before the end of the emergency period as the right to referany dispute to the State Administrative Tribunal (SAT) or the Small Business Development Corporation (SBDC) under the COVID Legislationwill be lost atthe expiry of the emergency period.

The SAT has jurisdiction to hear and determine disputes involving both the Code of Conduct and financial hardship.  However, applications to the SAT must be made during the emergency period. 

Alternatively, parties are able to request the SBDC to provide assistance to resolve a dispute.  Again, any such request must be made during the emergency period.
For this reason, before the initial emergency period ended, we did see a rush of tenants applying to the SAT and making requests of the SBDC to ensure that they were “in time” in the event that the emergency period was not extended beyond 29 September 2020.  Having said that. It was certainly the case that not all tenants realised the importance of this time limit.

Tenants unable to reach an agreement with a landlord must be aware that if they fail to apply to the SAT or make a request of the SBDC before the end of the emergency period, their right to do so is extinguished when the emergency period ends.  They should ensure that preparations are underway to make such an application or request well in advance of the 28 March 2021 deadline.

Deferred rent and assignment

Deferrals of rent, in accordance with the provisions of the Code of Conduct, and in the absence of any alternative agreement between the parties, will be repayable from the earlier of the:

  • day on which the emergency period ends; and
  • expiry of the lease.

Payments will be amortised over the greater of:

  • the balance of the term of the lease; and
  • 24 months,

unless an alternative agreement was reached between the parties.

The Code of Conduct requires that these deferral and amortisation arrangements be evidenced by a written variation to the lease or any other written agreement between the landlord and the tenant that gives effect to the rent relief, either directly or indirectly.

While some landlords are formally varying their leases by way of a deed of variation, the majority of these agreements have been evidenced by way of letter agreement.

This, depending on the wording of the lease and the circumstances, will have consequences for all parties if the lease is assigned before the liability to repay the deferred rent has arisen, or at time that the obligation to repay the deferred rent has not been fully discharged.

Is the repayment obligation personal to the tenant?

The threshold question is whether or not the repayment obligation is personal to the current tenant or whether it will automatically be assigned to any assignee of the lease.

Generally speaking (but always subject to the wording of the actual document), in instances where the rent relief arrangements have been prepared as a formal deed of variation, by a solicitor, the obligation to repay the deferred rent should flow, along with the other obligations of the tenant, to the assignee on an assignment.

In this instance:

  • the landlord will be protected as it will be able to recover, or continue to recover, the amortised deferred rent from the assignee post-assignment; and
  • the current tenant will need to, as part of the assignment negotiations, either reach an agreement with the assignee in relation to the payment of the amortised deferred rent (which could involve the current tenant paying the deferred rent to the assignee) or pay out the deferred rent (or the outstanding balance of it) to the landlord, so that it need not be dealt with as part of the assignment process.

Generally speaking (but always subject to the wording of the actual correspondence), in instances where the rent relief arrangements have been prepared as a letter agreement, the obligation to repay the deferred rent may be personal to the tenant and may not automatically flow, along with the other obligations of the tenant, to the assignee on an assignment.

This may prove problematic, particularly for landlords, where it is forgotten or not adequately dealt with, at the time of assignment.  In those instances, the landlord may find it needs to continue to deal with a former tenant who no longer has any involvement in the lease to collect monthly payments of amortised deferred rent.  Obviously, this is not ideal and there could be issues around enforcement, particularly in instances where tenants are wound up, or disappear after leases have been assigned.

Landlords need to be aware of the terms of the rent relief arrangements they have entered into with tenants and to ascertain whether they are personal to the tenant (and indeed, to the landlord) so that if a request for consent to an assignment is received it can be dealt with as part of the consent process and be expressly dealt with (if required) in the assignment documentation.

Tenants also need to be aware of the terms of the rent relief arrangements they have entered into and must consider this, and the costs that may be associated with it, when negotiating assignments.

Further, landlords intending to sell properties that are the subject of rent relief arrangements will need to ensure these arrangements are disclosed and taken into account as part of the sale process.  Adjustments may need to be made and deeds of covenant acknowledging the rent relief arrangements may be required.

Please contact Lavan’s Property and Leasing team if you have any questions about the COVID Legislation and its application – we would be pleased to assist.

Disclaimer – the information contained in this publication does not constitute legal advice and should not be relied upon as such. You should seek legal advice in relation to any particular matter you may have before relying or acting on this information. The Lavan team are here to assist.