In early April 2020 the National Cabinet developed the Coronavirus Commercial Leasing Code (National Code), being a set of principles to apply to certain commercial leases across Australia during the COVID 19 pandemic period. The National Code was introduced as part of the Commonwealth Government’s measures to assist small to medium sized businesses to “hibernate” during the pandemic so they would be better able to return to business when the pandemic is over. However, the National Code in itself is not law and not legally binding.
On 23 April 2020 the Commercial Tenancies (COVID-19 Response) Act 2020 (Act) was enacted in WA to give legal effect to some of the principles arising out of the National Code in Western Australia and to introduce some other measures.
It is critical to note that while the Act provides some much awaited clarity on some aspects on the application of the National Code in WA, it does not deal with all principles in the National Code. For instance, there are no provisions on rent relief, being a key feature of the National Code. It is expected this and other matters will be addressed at a later date in Regulations or a proposed WA Code of Conduct (WA Code).
In addition to the Act, WA Parliament is also considering legislation giving effect to the Coronavirus Eviction Moratorium announced by the Prime Minister on 29 March 2020.
What are the new laws?
In summary, the new laws cover three main areas, being:
- Prohibitions on:
- Termination of leases for certain breaches.
- Rent increases.
- The imposition of landlords charging interest on unpaid rent or other monies penalties for tenants who do not trade or reduce their trading hours.
- Landlords making a claim on any form of security (e.g. bank guarantee or security deposit) for the performance of the tenant’s obligations under the lease.
- Taking action for certain breaches.
- Adoption of the WA Code.
- Dispute resolution procedures.
Further details are provided below.
Who do the new laws apply to?
The new laws apply to landlords and tenants of “small commercial leases”.
A “small commercial lease” is one of the following:
- a retail shops lease under the Commercial Tenancy (Retail Shops) Agreements Act 1985; or
- a lease where the tenant owns or operates a small business and uses the leased premises to carry on that business; or
- a lease where the tenant is an incorporated association; or
- any other lease which is prescribed in the Regulations (there are none currently).
The “lease” can include any agreement which gives the tenant a right of occupation to a premises but does not include: residential leases; long stay tenant leases under the Resident Parks (Long-stay Tenants) Act; pastoral leases; mining tenements; and leases, sub-lease, licences or other agreements specified in the Regulations. Such agreement does not have to written and could include verbal agreements, provided the relevant criteria is met.
A “small business” is defined as a business that is either:
- wholly owned and operated by an individual person, or by individual persons in partnership, or by a proprietary company and features ALL of the following:
- 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;
- declared by the Governor to be a small business for the purposes of the Small Business Development Corporation Act 1983.
While it is not specified in the Act, it is reasonable to expect that the tenant will be responsible to establish that it satisfies the relevant criteria.
When do the new laws start?
Some of the provisions of the Act apply from 30 March 2020, being the prohibition provisions, the definitions provision and the provisions relating to enforcement of the Act.
The other provisions (including adoption of the WA Code and dispute resolution procedures) apply from 24 April 2020.
How long will the new laws apply for?
The prohibition provisions only apply during the “emergency period”, being the period starting on 30 March 2020 and ending on 29 September 2020, or other date determined by the Government as the date the emergency period ends.
There are also restrictions on the time period applications to the Small Business Development Corporation and State Administrative Tribunal for disputes can be made (refer further information below).
The Act has a sunset date of 12 months after the end of the emergency period. That is, it will only remain in force until then.
Can the parties agree that the new laws don’t apply?
No. The new laws may not be excluded, restricted or waived and any agreement or arrangement that attempts to do so will be of effect.
Is a variation of lease required?
Leases for eligible tenants are automatically modified to the extent necessary to give effect to the new laws. That is, no formal agreement to amend the lease is required.
However, where specific changes are agreed, e.g. the parties agree to changes in the rent amount, payment frequency and/or lease term, etc., it is recommended at the very least this be in writing. Ideally a formal Deed of Variation of lease should be prepared to properly record any agreed changes.
What rent relief is a landlord required to provide?
While the National Code provided that landlords are required to provide rent relief (in the form of waivers and deferrals) for tenants suffering financial hardship as a result of the COVID-19 pandemic, the Act does not impose any such obligations on landlords. That is, there is no requirement under the Act for a landlord to reduce, waive or forfeit a tenant’s rent. However, it is likely this will be addressed in the proposed WA Code (refer comments below). In the meantime, small commercial lease tenants are still liable to pay their rent in accordance with the lease. However, a landlord cannot take any action for non-payment of rent if a tenant is unable to pay (see details below).
Even though there is currently no legal obligation in WA for a landlord to provide rent relief under a commercial lease to a tenant, the parties are separately able to negotiate and agree a rent reduction, waiver or forfeiture. Or, at the very least start a dialogue so if and when any rent relief is mandated, the parties are prepared. This may be especially appropriate in circumstances where the tenant’s financial capacity to pay rent has been diminished due to COVID-19, such as when the tenant’s business has been forced to close by the Government.
Can rent be increased during the emergency period?
No. A rent freeze applies to small commercial leases during the emergency period, except for leases based on turnover rent. This means that any rent review or rent increase due under the lease during the emergency period cannot be applied or enforced in the emergency period. However, there is no requirement for the rent review or rent increase be waived or forfeited. Therefore, it is simply delayed.
If the landlord gave notice of an increase in the tenant’s rent in the period from 30 March 2020 to 23 April 2020, the increase is still valid and binding, however, it is suspended until the end of the emergency period. That is, the increased rent amount is not payable until then.
Can a landlord take action for non-payment of rent or other monies by the tenant?
A landlord cannot take the following action in relation to small commercial leases during the emergency period, where the grounds for such action is a breach by the tenant during the emergency period of its obligation to pay rent or other monies under the lease or open for trade:
- eviction of the tenant;
- exercise of a right of re-entry;
- recovery of land;
- distraint of goods;
- payment of interest on unpaid rent or other monies (including operating expenses);
- recovery of whole or part of the tenant’s security;
- enforcement of a guarantee; or
- any other remedy which may be available.
Taking action includes the issue of any formal notices, seeking orders or commencing proceedings in a court or tribunal. Action can still be taken by the landlord for other breaches by the tenant not listed above.
The Act allows for some exemptions to the above, as prescribed in the Regulations. However, as mentioned above, the Regulations have not been drafted so the exemptions are not yet known.
Where the tenant has not paid its rent and other monies due under the lease, but the landlord disputes this is not due to the tenant being in a position of “financial hardship”, the landlord is entitled to commence dispute resolution proceedings (refer comments below).
It should be noted that the prohibitions apply to any small commercial lease regardless of whether there has been any financial impact on the tenant from COVID-19. That is, the tenant’s eligibility for the JobKeeper program is not a factor in respect of the prohibitions.
What if the landlord has already taken action for a breach?
If the landlord took or commenced action in relation to the actions prohibited under the Act in the period from 30 March 2020 to 23 April 2020 such action is still valid and effective. However, to the extent such action is incomplete or ongoing, or has a periodic or ongoing effect, such action is taken to be suspended until the end of the emergency period.
For example, if a landlord gave the tenant a notice of non-payment of rent between 30 March 2020 to 23 April 2020, with the requirement to remedy within 14 days (which is after the stated period) otherwise the landlord will commence action for repossession, such notice is suspended and no further action can be taken until the end of the emergency period.
Suspension will not occur only when the legal steps taken by a landlord and all related actions (such as eviction and re-entry and any action for damages) to formally terminate the lease due to non-payment of rent by the tenant have been fully completed by 30 March 2020.
What happens if there is a dispute?
Under the Act there are two avenues of dispute resolution. However, the avenue will depend on the type of dispute as both options are not available to all disputes.
Where the dispute relates to a small commercial lease, or a landlord of a lease to which the dispute relates owns or operates a small business and the lease is granted in the course of that business, dispute resolution assistance must first be sought through the Small Business Development Corporation. A request can be made to the Small Business Commissioner to provide assistance to resolve the dispute or commence alternative dispute resolution proceedings. If the Small Business Commissioner considers it is not reasonable to commence alternative dispute resolution proceedings, that the dispute cannot be resolved, or if the dispute is not resolved, he may issue a certificate to that effect.
For all other disputes, dispute resolution is available through formal proceedings at the State Administrative Tribunal. Parties who are eligible for the Small Business Development Corporation dispute resolution avenue may only make an application to the State Administrative Tribunal if the Small Business Commissioner has issued a certificate as detailed above, or all parties agree that the application can be made.
Disputes to the State Administrative Tribunal can include a “Financial Hardship Dispute” being a dispute which arises when:
- the tenant has not paid all or part of the rent and other monies due under its lease;
- the landlord claims such breach is not as a result of the tenant suffering financial hardship; and
- the landlord has not granted any waiver, deferral or reduction in relation to the unpaid rent or other monies.
Any dispute resolution action must be commenced in the emergency period, except for a matter the Small Business Commissioner has issued a certificate as detailed above.
The parties who can apply include not only the landlord and tenant, but also a guarantor.
What are the details of the WA Code?
As mentioned earlier the Act provides a mechanism for adoption of a “code of conduct” on commercial leasing principles. No details on the content of the code of conduct, or when it may come into effect, are known at the date of publication of this document.
In its media release the WA Government stated that the WA Code would be developed based on the National Code to provide a framework for negotiations to be carried out in good faith between landlords and tenants to agree on rent relief measures. It is anticipated the WA Code and the rent relief provisions will be dependent on financial hardship, but as with the prohibitions under the Act, the Code will only apply to small commercial leases.
What are the next steps?
It is important that any landlord or tenant of a commercial premises review the position in relation to their lease to identify if the Act applies. This is so the parties are both aware of the provisions which may, or may not, apply.
Where the lease is not a retail shops lease or a lease where the tenant is an incorporated association the tenant should make an assessment as to whether it qualifies as a “small business”. If it does, it should provide notification to the landlord and evidence to support its position.
Tenants who will seek to rely on the prohibition provisions should also make sure they have the sufficient information to demonstrate it is unable to pay or part of its rent due to being a position of financial hardship. Ideally this should be shared with the landlord to minimise the risk of dispute, given the landlord’s right to challenge the position.
If you require any further advice or assistance in relation to the above please contact Anton Conti or Susan Nicholson by telephone on 9389 3999 or by email at AConti@cullenmacleod.com.au or SNicholson@cullenmacleod.com.au