This article was written by Carl Black and Kaday Conteh.
The WA government has introduced 2 pieces of legislation designed to provide relief to commercial tenants during the COVID-19 pandemic.
In this article, we will examine the key features of Commercial Tenancies (COVID-19 Response) Act 2020 (WA) (the Act) and comment briefly on the Commercial Tenancies (COVID-19 Response (Early Termination)) Bill 2020 (WA) (the Bill).
What is the Commercial Tenancies (COVID-19 Response) Act 2020 (WA) about?
The Act performs 2 functions:
- It sets out the prohibitions on landlords of small commercial leases during the COVID-19 emergency period (e.g. no lease forfeitures for non-payment of rent and the freeze on rent increases) as outlined in the National Cabinet Mandatory Code of Conduct (National Code); and
- It enables the State government to make regulations to create a WA code of conduct (WA Code) which is intended to implement the principles of the National Code.
Given the reliance on regulations to create a WA Code, the Act lacks much-needed substance as to the parameters in which landlords and tenants in WA can confidently enter into rent relief arrangements that will not fall foul of WA law. For instance, there is currently no guidance as to the composition of rent waiver/deferral packages, the time limits for repayment of rent or other moneys, and the requirement to extend term leases, except for what is outlined in the National Code.
To add to the uncertainty faced by WA landlords and tenants, it has been reported that the WA Code could take up to a month to finalise (following consultation with industry stakeholders).
Who is protected by the Act?
The Act applies to “small commercial leases”.
These include all retail shops leases (as defined by the Commercial Tenancy (Retail Shops) Agreements Act 1985 (WA)), leases granted to incorporated associations as defined by the Associations Incorporation Act 2015 (WA), any lease used for the purpose of carrying on a “small business” as defined in the Small Business Development Corporations Act 1983 (WA), and any other leases that are prescribed by regulations.
A “small business” is a business undertaking which is wholly owned or operated by an individual person, a partnership or a proprietary company and which:
- has a relatively small share of the market in which it competes;
- is managed personally by the owners or directors; and
- is not a subsidiary of a larger business or enterprise.
Unlike the National Code, the Act does not refer to participation in the JobKeeper scheme or the turnover $50 million threshold to identify protected small to medium enterprises (SMEs).During the passage of the legislation in the WA parliament, there was much debate as to whether the power to include additional categories of lease by regulation could lead to a situation where non-SME tenants could also be captured by the Act. The Act and its consistent reference to “small commercial lease” in its drafting (as lobbied for by the Property Council of Australia) indicates that it is intended to apply only to SME tenants. However, there is a technical risk that the power to add categories could lead to non-SME tenants being brought within the Act’s application.
Pastoral leases, residential tenancy agreements, mining tenements, and long stay agreements under the Residential Parks (Long-Stay Tenants) Act 2006 (WA) are excluded together with any class of lease that may be excluded by regulations.
Parties will not be able to exclude or restrict the operation of the Act from their agreements. The Act will also apply to the State in its capacity as landlord.
Does the Act apply retrospectively?
Yes. The substantive provisions of the Act apply from 30 March 2020.
Unfortunately, the Act does not address the status of the relief arrangements that parties may have agreed between 30 March 2020 and 23 April 2020 (the date the Act was passed). Does this now mean that those agreements will have to be revisited once the WA Code has been published?
The government’s position, as indicated during parliamentary debates in respect of the legislation, appears to be that those agreements will continue to hold good as long as they have been negotiated in good faith and are consistent with the principles outlined in the National Code. However, once the WA Code has been published, it is highly probable that landlords and tenants will need to reconsider the terms of their agreements if aspects of them are inconsistent with the WA Code.
How long will the Act apply?
The Act will be automatically repealed 1 year after the “emergency period” ends. The emergency period is the period beginning 30 March 2020 and ending on the day regulations prescribe as being the end of the COVID-19 pandemic (presumed to be 29 September 2020). This means the Act has a provisional sunset date of 28 September 2021.
What are the main terms of the Act?
- Introduction of a code of conduct: As mentioned, there is to be a WA code of conduct setting out the small commercial lease principles to apply during the COVID-19 pandemic, the details of which will be provided through regulations.
- No enforcement action: A landlord cannot take any “prohibited action” against a tenant of a small commercial lease during the emergency period for a failure to pay rent/outgoings, a failure to keep the business open during specified hours or for any breach specified in the regulations. A prohibited action is any enforcement action including exercising a right of re-entry, forfeiture, eviction, termination, claiming on security (including personal guarantors) and payment of interest.
Although regulations may set out the circumstances where prohibited action can be taken, there is equally potential for the landlord’s enforcement rights to be further curtailed in instances of default that do not involve payment of rent (e.g. failure to repair property).
It is also uncertain whether landlords will be allowed to terminate for long standing defaults that predate the COVID-19 pandemic.
- Financial hardship disputes: Although landlords may not take prohibited actions unilaterally, it is possible for landlords to make a request to the Small Business Commissioner (Commissioner) or an application to the State Administrative Tribunal (SAT) in relation to 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 resolving a financial hardship dispute, the SAT has a range of powers including termination of the lease if it is satisfied that the tenant’s breach was not as a result of the tenant suffering financial hardship.
- Stay on enforcement actions that have already commenced: Any prohibited actions that the landlord may have initiated (or which have come into operation based on the terms of the lease) between the period 30 March 2020 and 23 April 2020 (being the date the Act received Royal Assent) will be suspended until the end of the emergency period.
- No rent increases: Rent cannot be increased during the emergency period, except for rents that are determined by reference to turnover.
- Stay on rent increases that have already taken place: If a rent increase has taken place between the period 30 March 2020 and 23 April 2020 the increase will be suspended until the end of the emergency period. This means that in those circumstances, the landlord’s right to that increase at a later date is not forfeited. What is not currently clear is the treatment of rent increases that are scheduled to occur during the emergency period. Are these to be forfeited completely? Or will they similarly be suspended, and then re-activated after the emergency period? It is hoped that the WA Code will shed light on this.
- Compliance with COVID-19 laws does not amount to breach: A tenant that complies with the laws of the State made in response to the COVID-19 pandemic cannot be taken to be in breach of its lease and that action will not be grounds for lease termination or any other prohibited action. For instance, the tenant will not be in breach if the tenant does not open its business because the government orders this type of business must be closed to the public.
- Dispute resolution: Either the landlord or tenant under a small commercial lease may apply to the 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 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.
The SAT must also have regard to the financial impact of the COVID-19 pandemic on the tenant’s business and capacity to meet lease obligations, the landlord financial capacity (if relevant) and principles of proportionality and fairness and any other relevant principles from the WA Code.
Does the Act allow tenants to terminate their leases?
No. The Act does not give tenants the right to terminate their leases.
Are there any restrictions on tenants paying land tax?
Unlike the National Code, there are currently no restrictions in the Act against tenants paying land tax. It remains to be seen whether this position will be revisited via the WA Code although this seems unlikely given the land tax relief for commercial landlords announced by the WA Government.
Commercial landlords will be able to obtain land tax relief equivalent to 25% off the landlord’s land tax bill for the 2019/2020 financial year for the property in which an eligible tenant is provided relief. To be eligible, commercial landlords must provide rent relief that equates to a minimum of 3 months’ rent and freeze outgoings to small businesses that have suffered at least 30% reduction in turnover due to the COVID-19 pandemic.
So, although tenants of small commercial leases will have to pay land tax in WA, it is expected that the land tax relief measures will incentivise landlords to provide their tenants with rent relief packages.
What is the “last resort”?
The Commercial Tenancies (COVID-19 Response (Early Termination)) Bill 2020 (WA) (the Bill), introduced on 16 April 2020, has been touted as both the “last resort” and threatened “hammer” to keep landlords in line. The Bill has attracted harsh criticism from the Property Council of Australia, which has been advocating strongly for the legislation to be abandoned. According to the WA government, this legislation will only be actioned if there is significant industry non-compliance with the WA Code.
If passed, the Bill will give tenants the right to terminate their small commercial lease if they are in “severe financial distress” (as defined in the Bill) and limit the landlord’s right of recovery. A tenant under a small commercial lease is in severe financial distress if:
- the tenant is suffering financial hardship as a result of the COVID-19 consequences; and
- the tenant has made reasonable endeavours to negotiate waivers, deferrals of rent or other concessions from the landlord; and
- despite those reasonable endeavours and any concession provided by the landlord, it is reasonable to conclude that the tenant is not, or will not be, in a position to perform the tenant’s obligations under the commercial lease; and
- all other regulatory requirements under the Act have been met.
The test is a cumulative one and sets a high threshold, which reflects the intention of legislators that the right to terminate is meant to be a last resort.
The Bill has only progressed to its Second Reading in the Legislative Assembly of the WA parliament and no further progress has been made since 16 April 2020. We will continue to monitor developments with the Bill.
Until such time as the WA Code is published, we recommend the following for both landlords and tenants:
- To the extent that rent relief agreements negotiated between 30 March 2020 and 23 April 2020 fall foul of the prohibitions contained in the Act, those agreements should be reviewed and (if necessary) re-drafted for compliance with the Act.
- For any parties seeking to negotiate a rent relief arrangement now (i.e. before the WA Code is published), we recommend that those arrangements should be closely based on the National Code with the following caveats:
- that any arrangements negotiated in this interim period are expressed to be temporary in nature (i.e. month to month); and
- clearly reserve the ability to review those arrangements as and when there is a change in law.
- Landlords of commercial leases with tenants that do not qualify as a “small business” have been left to their own commercial negotiations with those tenants. Despite the absence of regulation around such commercial leases, we encourage careful and balanced negotiations across the needs of both parties, as the unprecedented challenges posed by the COVID-19 pandemic to both landlords and tenants alike will create scope for dispute in the long term if the balance is not struck right.