This article was written by Kaday Conteh, Emily Bell and Carl Black .
Western Australia has now given effect to the National Cabinet Mandatory Code of Conduct (National Code) through its release of the long-awaited Commercial Tenancies (COVID-19 Response) Regulations 2020 (Regulations), which supplements the provisions of the Commercial Tenancies (COVID-19 Response) Act 2020 (Act).
The Regulations contain the WA Code of Conduct (WA Code) and provide much-needed clarity on how a number of aspects of the National Code are to be implemented in Western Australia. Western Australia’s later release date has meant that it has had the time to consider and address some of the things which have led to uncertainty in other jurisdictions. It also includes some additional elements which have not been seen in any of the Eastern Seaboard jurisdictions and which will undoubtedly provoke strong reactions from industry.
This alert summarises the Regulations and some of the implications for landlords and tenants.
What is the Western Australia Code of Conduct?
The National Cabinet Mandatory Code of Conduct has been implemented in 2 stages in WA.
The 1st stage was the Commercial Tenancies (COVID-19 Response) Act 2020 (Act), which contained prohibitions on certain landlord actions (such as the moratorium on enforcing lease security and the freeze on rent reviews) during the emergency period. We released an alert on the key features of the Act at the time which can be found here.
The Commercial Tenancies (COVID-19 Response) Regulations 2020 (Regulations) represent the 2nd stage in the process and contain the WA Code, as contemplated under the Act. The WA Code sets out the detail as to how rent relief negotiations are to be conducted between landlords and tenants in respect of premises in WA.
At a glance:
- Duration – Although adopted on 29 May 2020, the WA Code is relevant to the period from 30 March 2020 to 29 September 2020 (known as the “emergency period” under the Act).
- Eligibility – It applies to “eligible tenants” of small commercial leases where the tenant is an small to medium enterprise (or “SME”) and has (or is part of a group with) turnover less than $50 million and is either (a) eligible for the Commonwealth’s JobKeeper scheme or (b) can prove a 30% reduction in turnover as result of COVID-19 pandemic compared with the turnover it generated during a similar period in 2019, according to the rules set out under Coronavirus Economic Response Package (Payments and Benefits) Rules 2020 (Cth) (JobKeeper Rules). There is no requirement for the tenant to be an actual participant in the JobKeeper scheme.
- Clear application process – Tenants may make a written application to their landlords, supported by “sufficient and accurate information” that shows the tenant is an eligible tenant and proves there has been a reduction in turnover during the emergency period. All negotiations must be conducted in good faith and in an open, honest and transparent manner.
- Minimum time frame for landlords to make an offer - Landlords must make an offer of rent relief to eligible tenants within 14 days of receiving the tenant’s request (or an agreed longer period).
- Landlords who can do more should do more - At least 50% of the rent relief offered must be provided as a rent waiver. However, landlords must provide more than 50% as a rent waiver if the landlord has the financial capacity to do so and failure to provide more than 50% would compromise the tenant’s ability to fulfil its obligations – this is a bold move on the part of the State government. It is presently unclear how this assessment should be made.
- Existing agreements are subject to review - In another bold move, the WA Code allows tenants to revisit existing rent relief agreements if the tenant believes that rent relief provided under the WA Code will be more favourable to it. This will no doubt cause a headache for landlords who acted early and in good faith and put in place rent relief arrangements.
- Right to request further rent relief – If there is a further future material change to a tenant’s financial position, the tenant may request additional rent relief and the process applies again. Unlike Queensland and Victoria however, the requirement that 50% of the rent relief take the form of a waiver is not excluded on a further application.
- Obligation to extend term – Landlords must offer extensions of the lease term which are equivalent to the rent deferral period except where (i) agreed otherwise (ii) an extension is inconsistent with a head lease or (iii) there are pre-existing third-party rights.
- Payment of deferred rent –The default position is that repayments can only commence on the earlier of (i) the expiry of the emergency period (currently 29 September 2020) or (ii) at the expiry of the lease term (before any extended terms). The parties can agree to opt out of this.
- Outgoings – Landlords must consider waiving the recovery of outgoings from tenants who have been unable to trade during the emergency period. To the extent that outgoings charged to the landlord have been reduced and the benefit of that reduction has not been passed to the tenant, there is an express obligation on landlords to reimburse tenants who have already paid outgoings (without regard to the reduction) for the relevant period.
- Subleases addressed - The WA Code addresses some of the uncertainties surrounding the application of the National Code principles to subleases. If a landlord is itself an eligible SME tenant under a head lease and receives relief from its head landlord, the landlord must pass on the benefit of rent relief it has obtained to its subtenant. This also leaves a non-SME landlord in the position where it is not entitled to relief from its head landlord, but is required to offer relief to its subtenant. In addition, a sublease term cannot be extended as part of the rent relief package if it will be inconsistent with the head lease term.
How long do the Regulations apply?
The Regulations are effective from 30 May 2020 but are relevant to the period between 30 March 2020 until 29 September 2020 (inclusive) – in close alignment with the other State specific regimes and the anticipated expiry of the Commonwealth’s JobKeeper scheme.
Who is protected by the WA Code?
The WA Code protects “eligible tenants”.
An eligible tenant must be a tenant of a “small commercial lease” where the tenant has (or is part of a corporate group with) a turnover of less than $50 million in respect of the financial year ending 30 June 2019. Where the tenant is a franchisee, the test is applied by reference to the turnover of the business conducted by that tenant on the premises that are the subject of the small commercial lease.
In addition, the tenant must satisfy 1 of the following criteria:
- The tenant must be eligible for the Commonwealth’s JobKeeper scheme under section 7 of the JobKeeper Rules. There is no requirement for the tenant to be a participant in the JobKeeper scheme or receive payments under it; only that the tenant must be eligible for the scheme.
- The tenant, at any time during the emergency period, has satisfied the decline in turnover test set out in section 8 of the JobKeeper Rules.
Both landlords and tenants of small commercial leases must comply with the WA Code.
How does a tenant apply for rent relief under the WA Code?
The WA Code prescribes the process under which an eligible tenant can apply for rent relief during the emergency period.
The process is as follows:
1. Rent Relief Application
An eligible tenant may request rent relief from the landlord. The application must be in writing and must contain a statement that the tenant’s lease is a small commercial lease and the tenant is an eligible tenant.
The tenant must provide with its application “sufficient and accurate” information that supports the required statements and evidence that the reduction in its turnover is associated with the business carried out from the premises and has arisen during the emergency period.
The WA Code does not stipulate what constitutes “sufficient and accurate” information; only that that the information must be reasonable to provide for the purposes of rent relief negotiations. It suggests as an example that information relating to turnover generated from an accounting system can be provided.
At the same time however, the WA Code prohibits parties from making “onerous demands” for information. Although the drafting suggests a common sense approach is required to the information gathering process, it is not clear what constitutes an “onerous demand” for information.
2. Rent Reduction Offer
Within 14 days after receiving an eligible tenant’s application for rent relief, the landlord must offer the tenant a rent relief package. The offer must be in writing and must comply with the principles set out in the clause 7 of the WA Code. The parties may agree an alternative time frame for the offer.
The landlord’s offer:
- must apply to the emergency period;
- can relate to up to 100% of the rent payable under the small commercial lease;
- must be at least proportionate to the reduction in the tenant’s turnover generated from the relevant premises during the emergency period (so if the tenant has experienced 60% reduction, the rent relief must relate to at least 60% of the rent); and
- must provide for no less than 50% of the rent relief to be offered as a waiver of rent.
In a move not seen in any of the Eastern State jurisdictions, the WA Code also provides that landlords must offer more than 50% of the rent relief as a rent waiver if:
- the landlord has the financial capacity to do so; and
- a failure to provide the tenant with more than 50% of the rent relief as a rent waiver would compromise the tenant’s capacity to fulfil its obligations under the small commercial lease.
Although this is consistent with Leasing Principle 4 of the National Code, this express requirement represents a bold move on the part of the WA State government. It may be seen to disproportionately affect larger institutional landlords in respect of certain types of tenants. It also does nothing to describe how the assessment of a landlord having the ability to do more should be assessed. This appears to be a likely circumstance where disputes will arise.
3. Offer Negotiation
After the landlord’s offer is received by the tenant, the landlord and tenant must then cooperate, act reasonably and in good faith, in an open, honest and transparent manner in negotiating appropriate rent relief. The landlord and the tenant must have regard to the principles set out in the WA Code.
If the parties reach agreement on the rent relief package, the changes to the lease can be formalised by way of:
- a written variation to the lease; or
- any other written agreement between the parties that gives effect to the rent relief.
5. Subsequent change in the tenant’s circumstances
If there is a future further material change in the financial circumstances of an eligible tenant, the tenant may make a further application for rent relief using the same procedure described above. Unlike the approach in Queensland and Victoria, the requirement that at least 50% of an additional rent relief must be in the form of a rent waiver continues to apply on further applications.
How does the WA Code affect any existing rent relief arrangements?
The WA Code enables eligible tenants to revisit any existing rent relief arrangements they may have put in place with the landlord, before the WA Code was released.
So long as the tenant believes that the rent relief provided under its existing agreement is less favourable than the rent relief that might be provided under the WA Code, the tenant is entitled to make a request for rent relief and the parties must follow the process under the WA Code.
This provision is a distinctive feature of the WA Code (in contrast to the Eastern States jurisdictions). In many cases, there may not be an impact as landlords may have taken the National Code as their guide to the level and type of relief to be granted in the absence of State legislation. However, in some cases, this may require a renegotiation of COVID-related rent relief agreements entered into prior to 30 May 2020.
What are the provisions relating to deferred rent?
The WA Code provides a default position for payments of deferred rent, which landlords and tenants are free to agree to deviate from.
Generally, if the rent relief comprises a rent deferral, the deferred rent must be amortised over the greater of:
- the balance of the term of the small commercial lease; or
- a period not less than 2 years.
Landlords must not request payment of any part of the deferred rent until the earlier of:
- the day on which the emergency period ends; and
- the expiry of the small commercial lease (i.e. its natural contractual expiry date, before any extension to the lease terms).
Are tenants entitled to lease extensions?
Where a rent waiver or deferral is agreed, the landlord must (subject to limited exceptions) offer the tenant an extension of its lease for a period equivalent to the deferral or waiver period, on the same terms and conditions as the existing lease.
The exceptions are:
- the landlord is itself a tenant under a head lease and extending a term for an eligible tenant would be inconsistent with landlord’s head lease;
- the extension would be inconsistent with any pre-existing third-party rights over the premises (e.g. an agreement to lease the land to another person).
What does the WA Code say about subleases?
There are 2 express references to subleases in the WA Code, which confirm the intention that the WA Code applies equally to subleases:
- The WA Code says that if a landlord is itself an eligible SME tenant under a head lease and receives relief from its head landlord, the landlord must pass on the benefit of rent relief it has obtained to its subtenant.
- It also states that a sublease term cannot be extended as part of the rent relief package if it will be inconsistent with the head lease term.
Where the landlord is not an eligible tenant for the purposes of its head lease, but has a subtenant who is, the landlord faces a “benefit gap” in that they are required to comply with the WA Code in respect of their subtenant but have no entitlement to relief from their head landlord.
What does the WA Code say about outgoings?
If an eligible tenant is unable to conduct their business from the premises during the emergency period, landlords must consider waiving recovery of any outgoings attributable to periods in which the tenant is unable to trade.
If landlords’ outgoings are reduced during the emergency period, landlords must pass on the benefit to their tenants and cannot charge tenants more than their proportionate share of the outgoings as reduced.
To the extent that any eligible tenant has paid more than their proportionate share of outgoings (calculated on a reduced basis), landlords must repay the excess amount to the tenants as soon as possible. This obligation to repay the excess is another distinctive feature of the WA Code.
To reduce the cost of outgoings, the WA Code also permits landlords to cease or reduce providing services at the premises as is reasonable and subject to any reasonable request from the tenant. This is consistent with the National Code.
Mediation and dispute resolution
Either the landlord or tenant under a small commercial lease may apply to the State Administrative Tribunal (SAT) to resolve a dispute involving the application of the Act, the WA Code or financial hardship dispute.
The Act requires parties to seek mediation via the Small Business Commissioner in the first instance before proceeding to the SAT although a direct application can be made to the SAT in some instances.
The SAT will have power to make a wide range of orders under the Act including ordering the payment of monies, ordering rent waivers and rent deferrals, and possibly terminating the lease in a “financial hardship dispute”.
A “financial hardship dispute” is a dispute between the parties to a small commercial lease where:
- the tenant has breached the small commercial lease by failing to pay rent or other moneys (including operating expenses) during the emergency period; and
- the landlord claims the breach was not a result of the tenant suffering financial hardship (as defined in the Act); and
- the landlord has not granted the tenant a waiver, deferral or reduction in respect of the unpaid rent or other unpaid amount of money.
In cases where the claim relates to a “financial hardship dispute” and the SAT is satisfied that the tenant’s breach is in fact due to COVID-related financial hardship, the Regulations confirm that the SAT is not restricted to merely dismissing the proceedings. Instead, the SAT may make any type of order that is to the tenant’s advantage in order to resolve the dispute.
Despite the delay in the release of the Regulations, we have been seeing many examples in the interim of careful negotiations and information sharing between landlord and tenant parties to retail and commercial leases to support the viability of office, industrial and retail operations – and expect the release of the WA Code (on principles which generally align with what was contemplated by the National Code) to enable those arrangements to now be finalised.
For those who have engaged in the negotiation process and have already put in place rent relief arrangements, the WA Code may require a reconsideration of those arrangements to assess whether they fall short of the benefits provided under the WA Code.
For those who have not yet engaged in the negotiation process, the WA Code prescribes a relatively robust process to guide parties through the application process.
We are continuing to advise landlords and tenants as they work through and beyond COVID-19 – and are on hand to assist them in navigating the WA’s Code requirements and a compliance review process for any existing rent relief arrangements.