Things you need to know about: The Commercial Tenancies (COVID-19 Response) Act 2020 and The land tax relief package

The legislation was introduced to respond to the impacts of the COVID-19 pandemic on small commercial leases. It provides landlords and tenants in Western Australia affected by the COVID-19 pandemic greater clarity as to the way forward for their commercial tenancy arrangements.  

The Act differs in a number of respects to the Mandatory Code of Conduct (National Code) which was announced by the Commonwealth Government on 7 April 2020.

Key concepts of the Act

The Act has 6 major concepts:

• The emergency period.
• The small commercial lease.
• The small business.
• The prohibited action.
• A code of conduct.
• The resolution of disputes.

What is the Emergency Period?

The Act operates during the emergency period

The emergency period is the period 30 March 2020 until at least 29 September 2020.

The government can extend this period beyond 29 September 2020.

What is a small commercial lease?

The Act applies to small commercial leases

The Act adopts a completely different approach from that set out in the National Code.

In particular:

• There is no reference to turnover (whether to $50 million or any other amount).
• There is no reference to a specified drop in income.
• There is no requirement for participation in JobKeeper.

A small commercial lease is any of the following:

• 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.
• Any other lease prescribed by the regulations.

What is a small business?

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:

1. has a relatively small share of the market in which it competes; and
2. is managed personally by the owner or owners or directors, as the case requires; and
3. 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.

This is the definition contained in the Small Business Development Corporation Act 1983 (WA) (SBDC Act).

What is a prohibited action?

During the emergency period a landlord cannot exercise any prohibited action against a tenant under a small commercial lease that is regulated by this Act.

A prohibited action is any of the following:

• Eviction.
• Re-entry.
• Possession.
• Recovery of land.
• Distraint of goods (taking goods and applying the sale proceeds in reduction of debt). 
• Forfeiture.
• Termination.
• Damages.
• Interest (in respect or rent or other moneys – including operating expenses).
• Calling on a bank guarantee/security bond for performance of tenant obligations.
• Calling on a guarantee (i.e. a third-party guarantee in respect of the lease).
• Any other remedy.

What is the code of conduct?

The National Code is not currently law in WA.  It does not have legal effect in WA.

A code of conduct can be adopted by regulation.

We anticipate a code of conduct will be adopted that will bear resemblance to the National Code.  However, there will be some differences.

We are told the regulations (and, therefore the code) will be released within the next four weeks. 

What is the dispute resolution process?

The Act includes a regime for the resolution of disputes, including “code of conduct disputes” and “financial hardship disputes”.

Landlords and tenants have two options to resolve a dispute:

• apply directly to the State Administrative Tribunal (SAT); or
• apply to the Commissioner for assistance with resolving the dispute under the SBDC Act dispute resolution regime, and if that fails then they can apply to the SAT.

The SAT can make orders including:

• That a party is to pay money to a specified person.
• That a party is to do, or refrain from doing, a specified thing.
• Any order the SAT considers appropriate to give effect to the approved code of conduct (which will be set out in the regulations), including that a specified amount of rent payable be:

1. waived for a specified period, or
2. deferred and paid in a specified timeframe.

• An order terminating the small commercial lease, where the tenant’s breach was not a result of the tenant suffering financial hardship.

If an application is made to the SAT for dispute resolution, the SAT must have regard to:

• the capacity of the tenant;
• the financial capacity of the landlord; and
• principles of proportionality and fairness in making any orders.

What protections are there for tenants?

During the emergency period in respect of small commercial leases:

• The landlord cannot take any prohibited action against a tenant that has:

1. failed to pay rent; or
2. not opened the business at the times specified in the lease.

• Rent (other than turnover rent) cannot be increased.  Rent reviews can be undertaken during the emergency period – but the increases do not apply during the emergency period.
• Acts or omissions of tenants which are required under law in response to the COVID-19 pandemic will not be regarded as a breach, grounds for termination or grounds for taking other prohibited actions. For example, tenants of gyms or bars who were required to cease their operations by government directive are not in breach of their leases because they are not trading as a consequence of this directive.

What protections are there for Landlords?

Landlords can apply to the SAT for an order to terminate a lease where a tenant refuses to pay rent but is not experiencing financial hardship as a result of COVID-19.

If SAT is satisfied that the tenant’s breach was not the result of financial hardship it may make an order for the lease to be terminated.

Will tenants be able to terminate their leases?

The Act does not provide tenants with the ability to terminate their lease.

A separate piece of legislation has been drafted, the Commercial Tenancies (COVID-19 Response (Early Termination)) Bill 2020 (Early Termination Bill), which sets out a regime where a tenant in “severe financial distress” may give a landlord a notice in writing proposing termination of its lease.

The Early Termination Bill has not progressed past the second reading in the Legislative Assembly on 16 April 2020. 

We understand the State Government is holding the Early Termination Bill “in its back pocket” in case the Act does not have the desired effect for tenants.

The Early Termination Bill provides that if a tenant gives a notice to the landlord, the landlord may either:

• agree to terminate the lease: or
• make an application to the SAT to determine whether the tenant is in “severe financial distress” and whether the lease should be terminated.

A tenant is in “severe financial distress” if:

• the tenant is suffering financial hardship as a result of “COVID-19 consequences”;
• the tenant has made reasonable endeavours to negotiate waivers or deferrals of rent, or other concessions, from the landlord; and
• despite those reasonable endeavours and any waiver or deferral of rent or other concessions made by the landlord, it is reasonable to conclude that because of the tenant’s financial hardship, the tenant is not, or will not at some later time be, in a position to perform the tenant’s obligations under the lease.

“COVID-19 consequences” includes:

• a restriction imposed under a written law in response to the COVID-19 pandemic;
• changes in societal behaviour in response to the COVID-19 pandemic; and
• any other consequences.