Schedule 1 of the Commercial Tenancies (COVID-19 Response) Regulations (Code) is now in force in WA. Eligible tenants under small commercial leases can now request rent relief from their landlords, who must then offer rent relief within 14 days of the request. At least 50% of the rent relief offered must be in the form of a rent waiver during the emergency period, and the parties must then commence good faith negotiations to agree on the rent relief to apply.
Landlords should familiarise themselves with their rights and obligations under the Code before responding to rent relief requests from tenants and commencing mandatory negotiations. Landlords who have already entered into agreements with tenants for the emergency period will need to be alive to requests from eligible tenants to re-negotiate rent relief under the Code.
When did the Code come into effect?
The Code commenced on 30 May 2020. The Code is in place for the "emergency period", which runs from 30 March 2020 to 29 September 2020. The WA Government can amend the Regulations to lengthen or shorten the emergency period.
Who does the Code apply to?
The Code applies to "eligible tenants" under a "small commercial lease".
A tenant will be an "eligible tenant" if:
- its (or its group's) turnover in the financial year ending on 30 June 2019 was less than $50 million; and
- the tenant either:
- qualifies for the Commonwealth's JobKeeper Scheme; or
- has at any time during the emergency period satisfied the "decline in turnover test", as outlined in the Coronavirus Economic Response Package (Payments and Benefits) Rules 2020 (Cth) – generally, this test will be satisfied if a tenant has suffered a 30% reduction in turnover during a month or quarter after 30 March 2020 (or a 15% reduction in turnover if the tenant is a charity), compared to the same period in 2019.
A "small commercial lease" is explained here, and generally includes retail shop and small business leases.
What is the process for rent relief negotiations?
A tenant that is an eligible tenant may, at any time during the emergency period, make a written request for rent relief from the landlord under their small commercial lease.
After a landlord receives this request for rent relief, the landlord must offer rent relief within 14 days, or any other period agreed by the parties. Once the landlord provides its rent relief offer to the tenant, the landlord and tenant must negotiate rent relief for the emergency period.
A tenant's request for rent relief must be accompanied by:
- a statement by the tenant that the tenant's lease is a small commercial lease, and the tenant is an eligible tenant;
- sufficient and accurate information evidencing:
- that the tenant is an eligible tenant; and
- the reduction in the tenant's turnover associated with the business conducted at the premises under the small commercial lease during the emergency period.
Any rent relief agreed by the landlord and tenant must be confirmed in a written agreement, such as a variation to the small commercial lease.
What rent relief must a landlord offer?
Rent relief includes a waiver or deferral of payment of some or all of the rent payable during the emergency period. Rent relief offered by a landlord must be proportionate to the reduction in the tenant's turnover during the emergency period. For example, if the tenant has experienced a 60% reduction in turnover compared to the same period in 2019, the landlord must offer rent relief of at least 60% of the rent payable during the emergency period.
1. Rental waiver
The landlord's offer of rent relief must provide that at least 50% of the rent relief is in the form of a waiver of rent, unless the tenant and landlord agree otherwise in writing.
Importantly, more than 50% of the rent relief must be in the form of a rental waiver if:
- failure to provide more than 50% of rent relief in the form of a waiver will compromise the tenant's capacity to fulfil the tenant's obligations under the small commercial lease; and
- the landlord has the financial capacity to provide more than 50% of the rent relief in the form of a waiver of rent.
2. Deferred rent
The landlord and tenant may agree to defer the rent payable under a small commercial lease. In this case, the tenant must pay the deferred rent to the landlord amortised over the greater of either:
- the balance of the term of the small commercial lease; or
- a period of at least 24 months.
In addition, a landlord cannot require payment of any of the deferred rent until the end of the emergency period or expiry of the term of the small commercial lease, whichever is first.
What about outgoings?
If an eligible tenant is unable to conduct their business on the premises for any part of the emergency period, then the landlord must consider waiving recovery of any outgoings or other expense payable by the tenant to the landlord for the period that the tenant was unable to conduct their business.
If the amount of any outgoings relating to the premises are reduced during the emergency period (eg because land tax is reduced), eligible tenants are only required to pay their proportional share of the reduced outgoing amount. Any overpayments made by a tenant must be reimbursed.
What if the landlord and tenant don't agree?
The Code specifies principles that apply to rent relief negotiations between landlords and tenants – eg to cooperate, act honestly, reasonably and in good faith, and not make onerous demands for information from each other. If parties are unable to reach agreement on rent relief under the Code, the dispute resolution processes under the Commercial Tenancies (COVID-19 Response) Act will apply – namely, the landlord or tenant can apply to either the Small Business Commissioner or State Administrative Tribunal to resolve the dispute.
What if a landlord and tenant agreed rent relief previously?
If a tenant and landlord previously agreed rent relief for the emergency period, the agreement will still stand. However, if the tenant believes that the rent relief provided under that agreement is less favourable than rent relief available under the Code, the tenant can make a written request from its landlord for rent relief under the Code in which case the processes outlined above will apply.
What happened to the Early Termination Bill?
The Commercial Tenancies (Covid-19 Response (Early Termination)) Bill was introduced into the WA Parliament in April 2020. The Bill allows tenants to apply to terminate a small commercial lease if they have experienced severe financial hardship as a result of the COVID-19 pandemic. The Bill's debate was adjourned in Parliament's Lower House, and current indications are that the Bill is unlikely to pass through Parliament and therefore will not become law in WA.
Written by Simon Taskunas and Clare Duncanson