The Commercial Tenancies (Covid-19 Response) Act (CTA) is now in force and the Western Australian Parliament has also introduced the Commercial Tenancies (Covid-19 Response (Early Termination)) Bill (Early Termination Bill).
The CTA imposes a six-month moratorium commencing on 30 March 2020 for evictions and a freeze on rent increases.
The Early Termination Bill, if passed by Parliament, will give tenants a right to terminate a lease if they are in severe financial hardship as a result of the COVID-19 pandemic.
In addition, Regulations are expected to be introduced in the next month to implement in WA the Federal Government’s Mandatory Code of Conduct for commercial tenancies (Code).
Landlords affected by these unprecedented changes in law will need to carefully consider how they will be managing their rent books. They will also need to understand their obligations ahead of commencing compulsory rent relief negotiations with tenants under the Code.
Who do the new laws apply to?
The CTA and Early Termination Bill apply to a "Small Commercial Lease", which is:
- a retail shop lease, as defined in the Commercial Tenancy (Retail Shops) Agreements Act 1985 (WA);
- a lease where the tenant owns or operates a small business, as defined in the Small Business Development Corporation Act 1983 (WA), and uses the premises for the purpose of carrying out that business;
- a lease to an incorporated association, as defined in the Association Incorporation Act 2015 (WA); and
- any other type of lease that is prescribed by the Regulations.
What are the start and end dates?
The CTA commenced on 23 April 2020, when Royal Assent was given. The Act will be in place for the "Emergency Period" which is backdated to commence on 30 March 2020 and will end on the date prescribed by the Regulations or, if no end date is prescribed, 29 September 2020.
Any "Prohibited Actions" (see below) completed by a landlord between 30 March 2020 and 23 April 2020 (both dates inclusive) will still be valid and effective. However, if the prohibited action was not fully completed by 23 April 2020, then the action that the landlord was taking will be suspended until the end of the Emergency Period.
The Early Termination Bill, which will remain in place for 12 months, still needs to be passed by Parliament.
Prohibited Actions – CTA
If, during the Emergency Period, a tenant under a Small Commercial Lease:
- fails to pay their rent or outgoings;
- does not open their business during the times specified in the lease; or
- otherwise breaches the lease in a manner set out in the Regulations,
then, unless the landlord is permitted to do so by the Regulations or the State Administrative Tribunal (Tribunal), the landlord cannot do any of these things during the Emergency Period:
- terminate the lease or re-enter the premises;
- charge interest on rent in arrears;
- claim on any form of security (e.g. bank guarantee or security deposit); or
- exercise any other remedy.
Landlords also cannot increase the rent (apart from turnover rent) under a Small Commercial Lease during the Emergency Period.
What if tenants can pay, but don't pay?
The CTA allows landlords to apply to the Tribunal to terminate a Small Commercial Lease if the tenant has not paid their rent or outgoings during the Emergency Period, the landlord claims that the tenant is not suffering financial hardship as a result of COVID-19, and the landlord has not granted the tenant a waiver, deferral or reduction in respect of the unpaid rent or outgoings.
Code of Conduct
The Code of Conduct is expected to impose additional obligations on landlords where they have a tenant with an annual turnover of less than $50 million and the tenant is eligible for the Federal Government's JobKeeper program. The Code is likely to be introduced in WA by Regulations within the next month.
We expect the Code to adopt key aspects of the National Cabinet Mandatory Code of Conduct released on 7 April 2020. This will include landlords and tenants having to engage in compulsory good faith negotiations for rental waivers and deferrals, and negotiation/mediation provisions.
Land tax relief for landlords
On 23 April 2020 the WA Government announced a $100 million land tax relief package for commercial landlords. To be eligible for the relief, landlords must:
- provide rent relief to tenants of at least 3 months' rent (starting 1 March 2020); and
- freeze outgoings for small businesses that have suffered at least a 30% reduction in turnover due to COVID-19.
In addition, landlords must agree not to seek to recover this rent relief from tenants at the end of the rent relief period. If this criterion is satisfied, landlords are entitled to a grant of 25% of their land tax bill for 2019/20, for the property on which an eligible tenant is provided relief.
The grants will be administered through the Small Business Development Corporation. Applications for the grants open on 1 May 2020.
More information on the land tax assistance scheme is available on the Small Business Development Corporation website under "Land Tax Assistance for Landlords."
And finally…the Early Termination Bill
The WA Parliament is currently debating an additional Bill – the Early Termination Bill. Assuming this passes Parliament and receives Royal Assent, a tenant under a Small Commercial Lease (and any other lease prescribed by the Regulations) who is in severe financial distress will be able to, at any time during the Emergency Period, give the landlord written notice proposing that the lease be terminated 21 days after the notice is given.
A tenant will be in "severe financial distress" if the tenant:
- is suffering financial hardship as a result of COVID-19;
- has made reasonable endeavours to negotiate waivers or deferrals of rent;
- despite those reasonable endeavours and any agreed waiver or deferral of rent or other concessions, the tenant is not in a position to perform their obligations; and
- any other requirements that are prescribed by the Regulations are met.
Within 14 days of receiving the tenant's notice to terminate, the landlord may either agree to terminate the lease, or state that the landlord intends to make an application to the Tribunal to determine whether the lease is to be terminated.
If the lease is terminated in this manner, then the landlord and tenant will be released from all liability arising under the lease.
If the landlord does not respond to the tenant's notice to terminate within the 14 day period, the lease will automatically terminate 21 days after the notice is given.
We will continue to monitor the passage of the Early Termination Bill through the WA Parliament.
Written by Simon Taskunas and Clare Duncanson