Update on the WA coronavirus legislation for commercial leases

Overview

The WA Government has amended the Commercial Tenancies (COVID-19 Response) Regulations 2020 (WA) (Regulations) and, by these amendments, the application of the Commercial Tenancies (COVID-19 Response) Act 2020 (WA) (Act).  

For all practical purposes, the amendments apply as from 26 September 2020.

The key changes to the Regulations are:

• the extension of the “emergency period”;
• changes to the definition of “eligible tenant”;
• changes to when a landlord can exercise a “prohibited action”;
• the provision of guidance as to what constitutes an onerous demand for information; and
• changes to the operation of sections 11 and 12 of the Act in relation to rent increases and the stay on actions and things occurring during the emergency period.

The other changes are, largely, of a clarifying nature.
This update provides a guide as to the key changes that have been made to the Regulations and the application of the Act.

Emergency period

The emergency period is now 30 March 2020 to 28 March 2021.

Changes to the JobKeeper Scheme

While, at first blush, it may appear that the amendments to the Regulations are not significant, they must be read with the changes to the JobKeeper Scheme under the Coronavirus Economic Response Package (Payments and Benefits) Rules 2020 (Cth) (JobKeeper Rules) which come into effect on 1 October 2020.  As a result of these changes, fewer tenants will be eligible for protection under the Act.

Eligible tenant

There are now three categories of eligible tenant:

First, for the period of 30 May 2020 to 27 September 2020, an eligible tenant is a tenant who:

• had a turnover in the financial year ending 30 June 2019 of less than $50 million; and

either:

• qualifies for the JobKeeper Scheme under the JobKeeper Rules; or
• satisfies the “decline in turnover test” set out in the JobKeeper Rules at any time during this period – i.e. has experienced a 30% decline in turnover (or a 15% decline in turnover for ACNC – registered charities).

Second, for the period of 28 September 2020 - 3 January 2021, an eligible tenant is a tenant who:

• had a turnover in the financial year ending 30 June 2020 of less than $50 million; and

either:

• qualifies for the JobKeeper Scheme under the JobKeeper Rules; or
• does not qualify for the JobKeeper Scheme but satisfies any test relating to turnover during July, August and September 2020 by which a person can qualify for the JobKeeper Scheme during this period.

Third, for the period of 4 January 2021 – 28 March 2021, an eligible tenant is a tenant who:

• has a turnover for the financial year ending 30 June 2020 of less than $50 million; and

either:

• qualifies for the JobKeeper Scheme under the JobKeeper Rules; or
• does not qualify for the JobKeeper Scheme but satisfies any test relating to turnover during October, November and December 2020 by which a person can qualify for the JobKeeper Scheme during this period.

This means that whether a tenant is an eligible tenant is reviewed on 28 September 2020 and 4 January 2021.  If a tenant qualifies as an eligible tenant in the period 28 September 2020 – 3 January 2021, that tenant will be an eligible tenant from the date it meets the eligibility criteria until the end of that period.

That process is repeated for the period 4 January – 28 March 2021.

That does not mean that an eligible tenant is entitled to rent relief or to the same level of rent relief for the whole of the emergency period or even the whole of the relevant period as the rent can be adjusted on a monthly basis.  However, the landlord will not be able to take a prohibited action against an eligible tenant during each new relevant period where it qualifies as an eligible tenant.

Prohibited actions

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.

This concept has not changed.  

The circumstances in which a “prohibited action” is permitted have been expanded.

Failure to pay rent or other money due under a lease

A landlord can take a “prohibited action” in respect of a tenant’s failure to pay rent or other monies payable under a “small commercial lease” in two situations:

• the tenant is insolvent; and
• if specified criteria are met.

Tenant insolvent

A tenant is insolvent:

• in the case of an individual, if that person is a bankrupt or if that person’s affairs are under insolvency laws; and
• in the case of a company, if it is subject to Chapter 5 of the Corporations Act 2001 (Cth).

The situation may be complicated by the new insolvency laws currently being considered by the Commonwealth Government.

Specified criteria 

Each of the following criteria are met:

• The tenant is not an eligible tenant when the prohibited action is taken.

AND

• The prohibited action is taken in respect of a tenant breach that occurs during the emergency period (whether before, on or after 30 September 2020).

AND

• The breach is non-payment of rent or other monies under the lease.

AND

• The breach is not the subject of a dispute in relation to the application of the Code (including the waiver or deferral of rent) or a dispute in relation to the financial hardship of the tenant.

AND

• The tenant has not made a request under the Code for rent relief to the landlord in respect of unpaid rent to which the breach relates.

AND

• The landlord has not granted the tenant relief in respect of rent or other monies payable by the tenant to which the breach relates.

These criteria mean that the circumstances in which a prohibited action can be taken are quite limited.  This is especially the case in relation to the criterion that the tenant has not made a request under the Code for rent relief in respect of unpaid rent to which the breach relates.  On the face of it, the mere fact that such a request has been made by the tenant would prevent the landlord taking the prohibited action (though, we presume that the request must be a valid request which would give rise to an obligation on the landlord to respond).

Failure to keep premises open for specified hours

A landlord can take a “prohibited action” where:

• The tenant fails to keep the premises open and trading during the hours required under the lease.

AND

• The tenant is not an eligible tenant when the prohibited action is taken and when the breach occurs.

AND

• The breach occurs during the emergency period but after 30 September 2020.

This change does not affect retail shop leases that are subject to the Commercial Tenancy (Retail Shops) Agreements Act 1985 (WA), as tenants in such shops cannot be compelled to be open for hours specified by the landlord.

Adjustment of relief 

Regulation 7(4) has been amended to provide that (unless agreed otherwise between the landlord and the tenant) rent relief provided to a tenant during the emergency period must be adjusted from time to time to take account of changes in the tenant’s turnover during the emergency period.

Such adjustments must be made not more frequently than monthly.

This clarifies an area of uncertainty that has existed between landlords and tenants with respect to the level of rent relief to be provided during the emergency period.  A number of tenants and their advisers were of the view that if a tenant was an eligible tenant, the tenant was entitled to rent relief for the entire emergency period, regardless of positive changes in the tenant’s turnover position during the emergency period.

The amended regulation is consistent with the overarching obligations of reasonableness, good faith, openness, honesty and transparency imposed by section 4 of the Act.

The stay on prohibited actions and other things occurring during the period 30 March – 24 April 2020

Section 12 relates to incomplete/ongoing actions taken by the landlord during the original emergency period before the Act came into force (i.e. from 30 March 2020 to 24 April 2020).

Section 12 of the Act has been amended so that the stay on actions by a landlord during this period, cease to apply when:

1. if the tenant is insolvent:

• as from 30 September 2020, if the tenant is insolvent on that day; or
• the day the tenant becomes insolvent if this occurs in the period 1 October 2020 – 28 March 2021; or

2. the tenant is not an eligible tenant, on the date where, if any such action or enforcement of the lease terms was effected, that action/enforcement would not be prohibited by the Act.

The Commonwealth Government’s proposed changes to the insolvency laws may have an impact on the application of the amended section 12 of the Act.

Previously, rent could not be increased during the emergency period (section 11 of the Act) for any tenant under a “small commercial lease”. However, the rent may now be increased during the extended emergency period, if the tenant is not an eligible tenant when the rent is increased.

If a lease provides that a rent review may be implemented at any time, or that the landlord does not waive its right to review the rent if it does not do so by the relevant date, landlords should be entitled to implement a previous rent review when the tenant is no longer an eligible tenant or at the end of the emergency period. Despite this, the increased rent cannot apply to any period prior to the original emergency period or when the tenant is an eligible tenant.

Additionally, the stay or suspension of any rent increases implemented between 30 March 2020 to 24 April 2020 cease to apply, as and from:

• 30 September 2020, if the tenant is not an eligible tenant on that date; or
• after 30 September 2020 but before the end of the emergency period, on date the tenant is no longer an eligible tenant.

Extension of lease 

Subject to limited exceptions, the Regulations previously provided that (unless agreed otherwise) in instances where rent was being deferred, landlords had to provide an extension of the tenant’s lease equivalent to the period for which the rent was deferred (Regulation 9(7)).  This Regulation now provides that the period of the extension must (unless agreed otherwise) be “at least equivalent” to the period for which the rent is deferred.

Further requests for relief

If rent relief provided to a tenant ends before the expiration of the emergency period, the tenant can make a further request to the landlord for rent relief during the emergency period.

This is designed to deal with those rent relief arrangements that would specifically end by 29 September 2020.

Onerous demands for information from landlords and tenants

Regulation 49(e) has been amended to provide examples of what will constitute onerous demands for information.  The examples are:

• A demand to provide future cashflow projections.
• A demand to provide balance sheets, profit and loss or year to date financials.
• A demand to provide bank balance details or statements.
• A demand that financial information be verified, examined, assured, audited or provided by a third party such as an accountant.

The issue of what constitutes an onerous demand for information has been a contentious issue to date, the addition of these examples will assist in providing some guidance and clarity.

Please contact Lavan’s Property and Leasing team if you have any questions about the WA coronavirus legislation for commercial leases.