When Scott Morrison announced on 7 April 2020 that there would be a nationwide rent waiver and deferral system for commercial tenancies, a short Mandatory Code of Conduct outlining the key principles of this program was released by the National Cabinet, which will be legislated and regulated by each of the States and Territories.
On 23 April 2020, the WA State parliament passed the Commercial Tenancies (COVID-19 Response) Act 2020. Now that we have some certainty about how this program will operate in Western Australia, below is a short update about what has been legislated and what is still to be confirmed.
Who Does the Legislation Apply to?
The Act applies to small commercial leases which are defined to mean:
(a) a retail shop lease under the Commercial Tenancy (Retail Shops) Agreements Act 1985; or
(b) a lease where the tenant owns or operates a small business (as defined in the Small Business Development Corporation Act 1983) and uses the land or premises that are the subject of the lease for the purpose of carrying on that business; or
(c) a lease where the tenant is an incorporated association under the Associations Incorporation Act 2015.
For the purposes of small commercial leases, the following leases are expressly excluded from the definition of lease:
(a) a long-stay agreement under the Residential Parks (Long-stay Tenants) Act 2006;
(b) a residential tenancy agreement under the Residential Tenancies Act 1987;
(c) a pastoral lease under the Land Administration Act 1997; and
(d) a mining tenement under the Mining Act 1978;
As you can see, there is no reference to the need to apply or be able to apply for the Jobkeeper payment in the legislation, though we do expect this to be a key aspect of the yet to be released Code of Conduct.
The rent waiver/deferral provisions will be covered in the WA Code of Conduct, though there is confirmation that rent cannot be increased during the time of the COVID-19 emergency (being 30 March 2020 to 29 September 2020, unless regulations provide for a different end date).
Otherwise, the balance of the rent waiver provisions announced by Scott Morrison will need to be clarified by the WA Code of Conduct. For example, the National Cabinet’s Code of Conduct infers that it only applies to commercial tenancies where the tenant is eligible for JobKeeper but this is partly contradicted later in the Code where it states that access to JobKeeper only means that the tenant will be automatically presumed to be in financial stress or hardship.
Until the release of the WA Code of Conduct, our understanding of the operation of the rent waiver/deferral provisions is that:
(a) A tenant ONLY qualifies for rent relief if the tenant qualifies for, and actually applies for, the “Jobkeeper” allowance for its employees, meaning its turnover must be less than $50 million, and its downturn in business must be at least 30% from last year;
(b) During the Emergency, rent will be reduced in proportion to the reduction in the tenant’s turnover and at least half of that reduction must be waived entirely, never to be recovered by the landlord.
(c) The deferred rent is still payable by the tenant, but it can only be recouped by the landlord after the Emergency, and then only in equal amounts over a period of at least 24 months, in a manner to be negotiated between the Landlord and the Tenant, without interest or fees or penalties. For example, a tenant with a 50% reduction in turnover will see 25% of its rent waived altogether during the Emergency, and 25% deferred until after the end of the Emergency. The Landlord will receive only 50% of the usual rental income during the emergency with 25% recouped by an increase in rent over the 24 months following the end of Emergency, or the end of the lease, whichever occurs first, so that period of time can go beyond the end of the lease.
The Code of Conduct
The act states that a WA Code of Conduct relating to small commercial lease principles during the COVID-19 pandemic may be adopted by Regulations. As outlined in Scott Morrison’s statements on 7 April 2020, we expect that the WA Code of Conduct will implement the substance of the National Cabinet’s Code of Conduct and which we summarised in our earlier email.
Unfortunately, the Code of Conduct may take over a month to finalise, after consultations with industry stakeholders, so it could still be another few weeks until it is released and we are able to provide you with more details on the WA Code of Conduct.
The act states that a Landlord may not evict the tenant, re-enter, take possession, terminate the lease, take recovery on security provided by the tenant or require payment of interest on unpaid rent where the breach of the small commercial lease is due to:
(a) a failure to pay rent or other amount payable to the landlord; or
(b) the premises not being open as may be required under a small commercial lease.
We also note that the WA Code of Conduct may detail circumstances in which a Landlord may take such prohibited action or list further breaches by the tenant which the Landlord may not take prohibited action.
We will outline whether there are any changes to the Lease termination situation when the WA Code of Conduct is released.
The act provides mechanisms for dispute resolution, including for:
(a) Financial hardship dispute – where the tenant has breached the lease during the COVID-19 emergency period by failing to pay rent or any other amount payable and the Landlord claims the breach was not due to the tenant suffering financial hardship (defined as financial hardship due to restrictions imposed by law, changes in societal behaviours or any other consequence of the COVID-19 pandemic); and
(b) Code of Conduct Dispute – any dispute arising out of the WA Code of Conduct, once it is released.
The State Administrative Tribunal may make a range of orders, including:
(a) Dismiss the proceedings;
(b) Ordering a party to pay money or do/not do some particular act;
(c) If it is a Financial Hardship Dispute, terminate the lease; and
(d) If it is a Code of Conduct Dispute, any order appropriate to give effect to the WA Code of Conduct, including deferral or waiver of a specified amount of rent payable by the tenant for a period.
In making an order, the State Administrative Tribunal is to have consideration to the financial impact of COVID-19 on the tenant’s business and capacity to meet lease obligations and the Landlord’s financial capacity.
Besides some provisions regarding lease terminations and disputes, the WA legislation lacks much substance and is strongly reliant on the making of a WA Code of Conduct. Even though the National Cabinet’s Code of Conduct outlines the principles regarding rent waiver/deferral, there is a lot of grey area as to what the WA Code of Conduct will incorporate and, unfortunately, still leaves some uncertainty until the WA Code of Conduct is released.
Once the WA Code of Conduct is released, we will provide you with a further update.