The Commercial Tenancies (COVID-19 Response) Regulations 2020 (the Regulations) came into effect on 29 May 2020. The Regulations contain (at Schedule 1) the much-anticipated commercial leasing code of conduct (the Code) relating to rent-relief negotiations for small businesses affected by COVID-19 closures and restrictions.
The WA Code is based on the National Code, which we previously wrote about here.
In addition to the eviction moratorium set out in the Commercial Tenancies (COVID-19 Response) Act 2020 (the Act), the Code sets out the expected standards of behaviour of both tenants and landlords when it comes to rent relief negotiations.
What does "rent relief" even mean? [clause 1]
Rent relief means any form of relief in respect of a tenant's obligation to pay rent but specifically includes:
- Waiver, which simply means that the tenant does not have to pay the waived portion of the rent. Ever.
- Deferral, which means that some of the rent is not payable until a later date (see below).
Who is eligible for rent relief? [clause 2]
A tenant under a small commercial lease is an eligible tenant in relation to that lease if the tenant's turnover (or group turnover for corporations in a group) in the financial year was less than $50 million dollars (so, yes, that's pretty much everybody...) and the tenant —
- qualifies for JobKeeper under the Coronavirus Economic Response Package (Payments and Benefits) Rules 2020 (Cth) (the JobKeeper Rules), or
- has satisfied, at any time during the emergency period (30 March 2020 to 29 September 2020, unless shortened by regulation), the decline in turnover test set out in the JobKeeper Rules.
The JobKeeper Rules can be tricky to navigate and the last thing you want at the end of all this is a debt to the ATO, so speak to your accountant if you have any queries about this.
Overarching obligations [clause 4]
Division 2 of the Code sets out the "overarching obligations of landlords and tenants" as follows:
In negotiations for the purpose of this Code, the landlord and the tenant under a small commercial lease —
- must cooperate; and
- must act reasonably and in good faith; and
- must act in an open, honest and transparent manner; and
- must provide each other with sufficient and accurate information that is reasonable for them to provide in the circumstances for the purposes of the negotiations (naturally, all financial information provided is confidential—see clause 13); and
- must not make onerous demands for information from each other.
Australian courts have resisted implying a term of "good faith" into commercial contracts for many years; leaving parties to a contract to act entirely in their own commercial self-interest as long as their conduct fit within the framework of the contract. This Code flips that on its head (if only for a short while).
I am a tenant. How do I make an application for rent relief? [clause 5]
The Code provides that a rent relief request must (note the imperative) be in writing and be accompanied by —
- a statement by the tenant to the effect that (a) the lease is a small business lease (as that term is defined in the Act) and (b) the tenant is an eligible tenant (defined in clause 2 of the Code);
- sufficient and accurate information that evidences the tenant's eligibility (i.e., books and records demonstrating the required reduction in turnover); and
- sufficient and accurate information to show that the reduction in turnover is associated with the business conducted at the leased premises and that the reduction in turnover occurred during the emergency period (30 March 2020 to 29 September 2020,).
Demonstrating that the reduction in turnover occurred during the emergency period should be simple enough. However, it will be interesting to see how the requirement that the reduction in turnover be "associated" with the leased premises is interpreted, especially for those tenants that operate a single business from several locations.
I am a landlord. What do I do if I receive a request for rent relief? [clause 6]
If you receive a request for rent relief (that meets the criteria above), the Code says that you must (again, imperative) offer rent relief to the tenant within 14 days after receiving the request, unless you and the tenant agree on a longer period of time.
The landlord's offer of rent relief must be in writing and in accordance with the principles discussed below.
Unless the offer is immediately accepted by the tenant, the landlord and tenant must negotiate the rent relief in accordance with the principles in clause 7 (and, of course, the overarching obligations).
General principles applicable to rent relief negotiations [clause 7]
As a general summary, an offer of rent relief —
- must apply to the emergency period.
- must be at least proportionate to the tenant's decline in turnover.
- must be calculated in accordance the principles of the decline in turnover test set out in section 8 of the JobKeeper Rules unless otherwise agreed.
- may relate to up to 100% of the rent payable.
- must provide that not less than 50% of the rent relief is to be a waiver of rent unless otherwise agreed.
- must provide that more than 50% of the rent relief is in the form of a waiver of rent if (a) failure to do so would compromise the tenant's capacity to fulfil its ongoing obligations under the lease, or (b) the landlord has the financial capacity to do so (and remember that the obligation to provide financial information cuts both ways).
- must pass on any benefit that the landlord receives under any head lease.
If you can't agree, the Act provides a dispute resolution mechanism, including case management and mediation through the Small Business Development Corporationand, if all else fails, the State Administrative Tribunal.
Giving effect to rent relief [clause 8]
The Code provides that the rent relief may be effected by a written variation to the lease or any other written agreement.
It probably goes without saying but...
MAKE SURE YOU GET IT IN WRITING!!!
When does deferred rent become payable? [clause 9]
Ultimately, it will depend on the agreement between the parties but, absent agreement, deferred rent cannot be demanded before the earlier of —
- the day on which the emergency period ends; or
- the expiry of the term of the lease (i.e., if that falls within the emergency period).
The Code also requires (again, absent agreement to the contrary) that the deferred rent be paid back in instalments over the greater of —
- the remaining term of the lease; or
- a period not less than 24 months (and to facilitate this, the landlord must offer to extend the lease on the same terms as existed prior to the emergency period unless that would be inconsistent with the landlord's pre-existing obligations).
What if my tenant and I have already agreed to rent relief? [clause 10]
Even if you and your tenant have agreed to some rent relief before the Code came into force, the tenant is free to make another request for rent relief under the Code if they think that they might be able to negotiate a better deal. If that occurs, you must follow the process outlined in the Code and re-negotiate the rent relief.
Further, if there is a material change to the tenant's financial circumstances, even after you negotiate a rent relief package under the Code, they are free to make a further request for greater rent relief based on their new circumstances.
What about outgoings? [clause 11]
If the tenant is prevented from carrying out their business at the leased premises, the landlord must consider waiving any outgoings payable during the period that the tenant is not able to conduct their business from the premises.
Well, that's it—the Western Australian Commercial Tenancies (COVID-19 Response) Code of Conduct in a nutshell. Hope it's helpful.
If you've got any queries or need some advice, feel free to contact us.