COVID-19 | Leasing in Western Australia

With many businesses and individuals facing pandemic-caused financial difficulty, leasing has emerged as an important focus area for Government economic and policy responses.

With many businesses and individuals facing pandemic-caused financial difficulty, leasing has emerged as an important focus area for Government economic and policy responses.

Federal Announcements

In late March and early April 2020, it was announced that the National Cabinet had agreed to:

• a moratorium on evictions over the next six months for commercial and residential tenancies in financial distress who are unable to meet their commitments due to the impact of coronavirus; and
• a mandatory code of conduct with governing principles for commercial tenancies.

A common set of principles were agreed, and endorsed by Treasurers, though for constitutional reasons it was for the States and Territories to enact the announcements into law.

WA State Government Response

The WA Government has since passed urgent legislation to implement a range of measures to minimise financial impacts of the COVID-19 pandemic on tenants and landlords of both commercial and residential tenancies.

The Commercial Tenancies (COVID-19 Response) Bill 2020 introduces:

• a moratorium on evictions due to non-payment of rent for small commercial tenancies;
• a freeze on rent increases;
• restrictions on penalties for tenants who do not trade or reduced their trading hours;
• prohibitions on charging interest on rent arrears;
• the introduction of a dispute resolution process under which parties may (amongst other things apply to the State Administrative Tribunal for orders to resolve disputes arising under the new legislation or code); and
• an ability for government to prescribe ‘a code of conduct relating to commercial leasing principles during the COVID-19 pandemic’, for landlords and tenants. (We discuss WA’s code later on).

The Residential Tenancies (COVID-19 Response) Bill 2020 introduces:

• a process whereby a landlord cannot give a rent default notice to a tenant unless the parties have been unable to reach a rent repayment agreement, or a rent repayment agreement has been entered into but not complied with;
• a moratorium on eviction except in limited circumstances including, for example: if a tenant is causing serious damage to the property or injury to the landlord or a person in adjacent premises; the landlord or tenant is experiencing undue hardship; a tenant is experiencing family violence and the perpetrator needs to be evicted; the tenant abandons the premises; or the agreement is frustrated;
• a prohibition on rent increases during the emergency period;
• that any fixed term tenancy agreement due to expire during the emergency period will continue as a periodic agreement;
• relief for lessors of the obligation to conduct ordinary repairs if the reason they cannot do so is COVID-19 related financial hardship or a lawful restriction on movement;
• the ability for a tenant to end a fixed term tenancy on 21 days notice without liability to compensate the landlord on account of that termination (though the tenant would still be liable for other losses such as property damage or rent arrears); and
• an ability for landlords and tenants to seek termination of a tenancy agreement by way of court application in the event of undue hardship.

The commercial and residential protections will apply for a period of 6 months unless extended.

National Cabinet Mandatory Code of Conduct: SME Commercial Leasing Principles During COVID-19, and the Approach in WA

The Code approved by the National Cabinet (“National Code”) was developed for a consistent national approach, to be given effect through relevant state and territory legislation as appropriate. It was intended to complement – rather than supersede – state and territory laws.

It contains a set of good faith leasing principles to guide parties’ conduct when negotiating amendments to existing commercial leases in response to the COVID-19 pandemic. Its stated objective is to ‘share, in a proportionate, measured manner, the financial risk and cashflow impact during the COVID-19 period, whilst seeking to appropriately balance the interests of tenants and landlords’.

Balanced the National Code may be, but the motivator is the protection of tenants. As stated in the National Code:

‘It is intended that landlords will agree tailored, bespoke and appropriate temporary arrangements for each SME tenant, taking into account their particular circumstances on a case-by-case basis’.

Eligibility

The National Code was intended to apply to commercial tenants who are an eligible for the Commonwealth Government’s JobKeeper programme (being businesses with an annual turnover of $50 million or less, who have experienced a 30% or greater loss in revenue). This was criticised by some property industry advocates, who called for a reduction in the $50 million turnover limit as this may not be an appropriate definition of a small to medium enterprise in WA. In an attempt to alleviate such concerns, protections in WA have been limited to ‘small commercial leases’.

As things currently stand, there are no exclusions available to small landlords, who will be vulnerable in their own ways.

To reiterate, the National Code will not apply to residential tenancies.

Principles

Commercial landlords and tenants are to negotiate in good faith, acting in an open, honest and transparent manner when negotiating temporary leasing arrangements. The parties are to work together to ensure business continuity and achieve mutually satisfactory outcomes, considering the impact of COVID-19 and the risks to both parties.

The principles specified in the National Code can be summarised as follows:

1. Landlords must not terminate the lease for the non-payment of rent during the COVID-19 period (the duration of the JobKeeper scheme).
2. Tenants are still expected to honour their lease obligations.
3. Landlords must offer tenants proportionate reductions in rent in the form of a rent waiver and deferral of up to 100% of the amount ordinarily payable, on a case by case basis.
4. At least 50% of this relief must be in the form of a rent waiver.
5. Rental deferrals must be repaid over the term of the lease or within a minimum of 24 months, whichever is greater (unless other arrangements are agreed).
6. Any reduction in statutory charges or insurance will be passed on to the tenant proportionately.
7. A landlord should seek to share any benefit it receives due to deferral of loan payments, with the tenant in a proportionate manner.
8. Landlords should where appropriate seek to waive recovery of outgoings payable by a tenant (reserving the right to reduce services accordingly).
9. If negotiated arrangements necessitate repayment, this should occur over an extended period in order to avoid undue financial burden.
10. No fees, interest or other charges should be applied with respect to rental waived or deferred.
11. Landlords cannot draw on a tenant’s security for the non-payment of rent during the pandemic period or a reasonable subsequent recovery period.
12. Landlords should offer the opportunity to extend the lease for an equivalent period of the rent waiver and/or deferral period.
13. Rental increases are frozen for the duration of the pandemic period and a reasonable subsequent recovery period, notwithstanding any arrangements between the parties.
14. Landlords may not apply any prohibition or levy any penalties if tenants reduce opening hours or cease trade.

Disputes

Where the landlord and tenant cannot reach an agreement of leasing arrangements, then the matter should be referred to the applicable state dispute resolution processes for binding mediation.

These mediation processes cannot be used to prolong or frustrate the facilitation of amicable resolution outcomes.

Consequences of non-compliance

The National Code itself does not mention any penalties for non-compliance. These are matters for State and Territory legislation.

WA will not adopt the National Code

WA will adopt a state-specific code in place of the National Code. Although at the time of writing the WA code has not been drafted, indications are that it will draw on the general principles of the National Code.

A known differentiator between the National Code and the WA code at this time, is that whilst the National Code was intended to apply to small and medium sized enterprises, the WA code will apply to ‘small commercial leases’ (as defined in the new legislation) only, unless additional classes of persons or leases are prescribed by regulation.

Whilst there have been some suggestions from the State Government that aspects of the WA code could be broader than the National Code, there have been calls from the property industry to ensure that the WA code appropriately balances both tenant and landlord needs.

Rental subsidies – watch this space

To date, the WA Government has not announced any subsidies for commercial or residential rental relief. However, other States have announced schemes to support residential tenants.

For example, QLD has introduced rental grants for eligible tenants for up to 4 weeks of rent (a maximum of $2,000). The ACT has also announced residential rebates for landlords who reduce rent payments for tenants by at least 25%. They will also provide tax relief to landlords equating to $100 per week for the next six months.

Comment

• The leasing measures we have discussed are an aid, but not a free pass.
• Consumer Protection has confirmed that WA tenants must continue to pay their rent unless they are genuinely experiencing severe financial hardship as a result of COVID-19.
• The moratorium on evictions for non-payment of rent should not be interpreted as being wider than it really is. We are aware of landlords who have been successful in terminating leases for non-coronavirus-related reasons since the COVID-19 leasing measures have been announced.
• We are closely observing how landlords and tenants respond at this time. Of particular interest to our health clients are reports that Bupa (Australia’s second largest health fund, which also owns Australia and New Zealand’s largest dental group), is seeking four-months rent relief across its dental outlets, saying it cannot afford to pay rent to landlords during the coronavirus pandemic. Based on Bupa’s turnover, the Code will not apply; so, any changes to existing lease arrangements will necessarily be by mutual agreement only. In a similar vein, the owner of Hungry Jacks has reportedly announced that the business will defer rental payments across Australia, due to reduced cash flows. Situations like these illustrate the need for protection of smaller landlords.
• We will be following development of the new WA commercial leasing code of conduct, and any further leasing laws as they pass through parliament.
• A draft Bill – namely the Commercial Tenancies (COVID-19 Response) (Early Termination) Bill 2020 – has been prepared which would give commercial tenants unilateral lease termination rights. This Bill has been introduced to parliament but has not been passed into law. It is not expected to progress unless the newly passed legislation fails to achieve its objects. The commercial property sector is strongly opposing the Early Termination Bill.

Please contact David McMullen on (08) 9321 0522 should you require any advice on commercial or residential leases or other property related matters during COVID-19 and beyond.