COVID-19 & Commercial Tenancies

Coronavirus has seen a monumental and rapid shift in the commercial sphere. Since March 2020, unprecedented changes have been made to our ‘normal’ way of life and the impact has been felt by many.

In response to these changes, the Commercial Tenancies (COVID-19 Response) Bill 2020 has recently been passed by WA Parliament.

Once it is proclaimed by the Governor, it will become law. We expect this will happen sometime in the next 10 days.

In preparation for the changes, we wanted to give you an overview of the Bill and what we know so far.

What commercial leases does the COVID-19 Response affect?

The changes apply to small commercial leases. These are leases that:

• Are retail leases, as per the Commercial Tenancy (Retail Shops) Agreements Act.
• Have a tenant that is defined as small business under the Small Business Development Corporation Act.
• Have a tenant that is an incorporated associated under the Associations Incorporation Act.

Emergency Period

As you know, because of Coronavirus a State of Emergency has been declared across the country, including in WA.

Under the new laws, an Emergency Period will also be officially recognised in commercial tenancies. This Period is for six months and will effectively start on 30 March 2020.

There is the possibility that this Period can be reviewed and extended.

National Cabinet Mandatory Code of Conduct

The National Cabinet released a code of conduct on 7 April 2020. The National Cabinet Mandatory Conduct – Small to Medium Commercial Leasing Principles during COVID-19 will be implemented through the states and territories of Australia by regulations or legislation.

This new Bill will see the Code of Conduct to be adopted by regulations.

While the regulations for WA are still being finalised, it is expected that they will largely reflect the code released by the National Cabinet.

About the Code

The Code imposes principles for commercial tenancies, where the tenant is eligible for the Government’s JobKeeper payment.

The principles apply to negotiating changes to leasing arrangements where tenants have experienced disruption due to Coronavirus and the Government’s response to this pandemic.

Overall, the objective of the National Cabinet is to share the financial burden in a proportionate manner during the COVID-19 period.

Leasing Principles of the Code

The Code states the following principles should be applied as soon as they can, on a case by case basis.

Restriction on breaches & terminations

The Code advises breaches and terminations should be restricted during the pandemic period.

We do know that the Bill will introduce laws so that Landlords will not be able to breach tenants in relation to:

• Failure to pay rent, operating expenses or any other money owing under the lease.
• Not operating their business in accordance with the trading hours/ times specified in their lease.
• Any other act or omission prescribed in the regulations.

Landlord’s will also not be able to terminate tenants for non-payment of rent during the pandemic and recovery periods.

No rent increases

It’s also been confirmed that rent cannot be increased during the Emergency Period under the new laws. The only exception to this rule is rent, or any portion or rent, based on turnover.

Tenants to remain committed

Tenants are to remain committed to their lease, subject to any amendments that may be negotiated. If Tenants fail to honour substantive lease terms, any security or benefit available to them under the Code will be forfeited.

Rent Relief

Under the Code, Landlords must offer rent relief to eligible Tenants in proportion to their reduction in trade. This is applicable during the pandemic period and any recovery period that follows.

Rent relief will be in the form of waivers and deferrals and can be up to 100% of the normal amount paid. The next two points outline the minimum standard for rent relief under the Code, however Landlords and Tenants can make alternative agreements if they wish.

Rent Waivers

Rent waivers are to constitute 50% of the total rent reduction. So, if the total rent reduction is $5,000 per month, $2,500 of that reduction is waived.

The Code states that waivers should constitute a greater proportion if failure to do so will threaten the Tenant’s ability to fulfill their lease obligations in the long term.

Rent Deferrals

The remaining 50% of the rent reduction will be a deferral, so Tenants will be obliged to pay that back.

This must be amortised over the balance of the Tenants lease term, or over 24 months – whichever longer. Other repayment agreements can be made between the parties.

No interest or fees may be charged on deferred or waived amounts.

Reduction in outgoings

If there is any reduction in insurance premiums, council rates or other statutory charges, these are to be passed onto the tenant. The savings are to be passed on in the proportion set out in their lease.

For example, if they are responsible for 25% of the buildings outgoings, 25% of the savings are to be passed onto the Tenant.

Deferring loan payments

If the Landlord defers any loan payments, the Code states they should look to share any benefits associated with those deferrals with their Tenant.

Recovery of outgoings

Under the Code, Landlords should seek to waive recovery of any outgoings or other expenses where a tenant is unable to trade. Landlords will reserve the right to reduce services where those payments are waived.

Repayments

For all repayment agreements negotiated by Landlords and Tenants, the Code states that repayments should happen over an extended period.

It also states that repayments should not commence until the end of the pandemic (as determined by the Government) and subsequent recovery, or the lease has expired.

Tenant bonds must not be drawn on

Landlord’s will not be able to draw on a cash bond, bank guarantee or personal guarantee for non-payment of rent during the pandemic and recovery period.

Lease extensions

Tenants must be given the option to extend their lease for a period that is equivalent to the rent waiver/ deferral period. So, if their rent is waived/ deferred for 6 months, they must be offered the opportunity to extend their lease for that length of time.

This is intended to give Tenants the option to trade for longer, on existing lease terms, during the recovery period.

More information yet to come

The regulations relating to these changes are still a work in progress and final details aren’t available just yet. We’ll keep you informed as further information comes to light. In the meantime, you can read a copy of the National Code in this link.

The Department of Mines, Industry Regulation & Safety, our industry body in WA, also have a some FAQ’s on the COVID-19 response which will be updated as further information becomes available. You can check it out in this link.

If you have any queries or questions about how the Code and changes will impact you, get in touch on 9755 8234 so that we can help you work through it.