COVID-19 | WA Code of Conduct provides guidance on rent relief obligations for WA landlords and tenants during the COVID-19 pandemic
1 June 2020
Shanna Livingstone, Special Counsel, Melbourne
The long awaited Commercial Tenancies (COVID-19 Response) Regulations 2020 (WA) have now been released and include a Code of Conduct (Code of Conduct) which gives effect to the National Cabinet Mandatory Code of Conduct and sets out a number of principles that landlords and tenants must follow during the COVID-19 pandemic.
Which tenancies will the Code of Conduct apply to?
The Code of Conduct will apply to any small commercial lease in WA where the tenant is an eligible tenant. An ‘eligible tenant’ is one who:
- has turnover in the financial year ending on 30 June 2019 less than $50,000,000; and
- qualifies for the JobKeeper scheme or, at any time during the emergency period, satisfied the decline in turnover test for the JobKeeper scheme.
Unless the tenant is a member of a corporate group, turnover is calculated based on the business conducted by the tenant at the premises. Tenants will be a member of a corporate group if they are related bodies corporate within the meaning of the Corporations Act 2001 (Cth). In that case, turnover means the turnover of the corporate group (not just the business conducted at the premises).
It is important to note that, even if the Code of Conduct does not apply, the restrictions in the Commercial Tenancies (COVID-19 Response) Act 2020 (WA) (COVID-19 Legislation) continue to apply to all small commercial leases until 29 September 2020. Those restrictions include prohibitions on terminating leases or calling on bank guarantees for breaches of lease during the emergency period and a ban on rent increases during the emergency period.
For further discussion on what is a ‘small commercial lease’ and the prohibitions under the COVID-19 Legislation, see our earlier article available here.
When does the Code of Conduct commence?
The Code of Conduct applies for the emergency period and therefore is backdated to commence on 30 March 2020 and continues until 29 September 2020.
A prescribed procedure for rent relief
Following Victoria and Queensland, the Code of Conduct sets out a prescribed manner in which tenants may request rent relief and how landlords must respond to that request.
An eligible tenant under a small commercial lease may request rent relief from a landlord. That request must be in writing and must be accompanied by:
- a statement by the tenant that its lease is a ‘small commercial lease’ and the tenant is an ‘eligible tenant’ together with sufficient and accurate information which evidences this; and
- sufficient and accurate information that evidences the reduction in the tenant’s turnover:
- is associated with the business conducted at the premises; and
- the tenant has experienced during the emergency period.
A landlord must offer a tenant who requests relief in this manner rent relief within 14 days or another period agreed by the parties. A landlord’s offer must be in writing and in accordance with the principles discussed below.
Following the landlord’s offer, the landlord and the tenant must then negotiate with a view to agreeing on rent relief to apply during the emergency period. Those negotiations must be conducted in accordance with the principles discussed below.
Negotiating rent relief
The Code of Conduct follows the National Cabinet Mandatory Code of Conduct and sets out a number of principles that the parties must following during the COVID-19 pandemic. The following principles apply to rent relief negotiations:
- Proportionality: Rent relief offered by the landlord must be at least proportionate to the reduction in the tenant’s turnover that is associated with the business conducted at the premises and the tenant has experienced during the emergency period.
- Waiver of rent: An offer of rent relief must provide that not less than 50% of the rent relief is to be in the form of a waiver of rent, unless the landlord and tenant otherwise agree in writing. However it goes further than the National Cabinet Mandatory Code of Conduct as it requires the landlord to waive more than 50% of the rent relief if:
- the failure to do so would compromise the tenant’s capacity to fulfil the tenant’s ongoing 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.
- Deferral of rent: If any part of the rent is deferred, the landlord cannot request payment of the deferred rent before 30 September 2020 (or the expiry of the lease if that occurs prior to that date). The tenant must pay the deferred rent to the landlord amortised over the greater of:
- the balance of the term of the small commercial lease; or
- a period of not less than 24 months.
- Extension of term: If any part of the rent is deferred, the landlord must offer the tenant an extension of the term equivalent to the period for which the rent is deferred on the same terms and conditions that applied immediately before 30 March 2020.
- Outgoings: If a tenant is not able to conduct their business at the premises during the emergency period, the landlord must consider waiving recovery of any outgoing for the period that the tenant is not able to conduct their business at the premises.
- Further rent relief: If the financial circumstances of an eligible tenant materially change after rent relief has been agreed, the tenant may make a further request for rent relief and the prescribed procedure set out above applies. There is no clarity as to what constitutes a ‘material change’ and, unlike other jurisdictions, the requirement for 50% of the rent relief to be waived applies to the further rent relief.
- Existing agreements: For landlords and tenants who have already entered into rent relief agreements, if the Code of Conduct applies, tenants may still request rent relief under the Code of Conduct if the tenant believes that the rent relief already provided by the landlord is less favourable than the rent relief the tenant would be entitled to under the Code of Conduct.
- Good faith obligations: During negotiations, both a landlord and a tenant must:
- cooperate; and
- act reasonably and in good faith; and
- act in an open, honest and transparent manner; and
- provide each other with sufficient and accurate information that is reasonable for them to provide in the circumstances for the purposes of the negotiations; and
- not make onerous demands for information from each other. We understand the WA Government may release some guidance on this issue.
- Sub-leases: If the landlord is a tenant under a small commercial lease (head lease) and the landlord, as the tenant, is provided rent relief under the head lease, the landlord must pass on the benefit of the rent relief to the sub-tenant under the small commercial lease.
While the Code of Conduct prescribes a process for requesting rent relief and sets out a number of principles to be considered, it is ultimately for landlords and tenants to reach agreement. Each lease will be different so questions of what circumstances are relevant and what weight is to be given to each of the principles will need to be determined on a case by case basis. For assistance in navigating the Code of Conduct or developing a strategy in respect of your lease or leasing portfolio, please get in touch.
For details of all our COVID-19 tips and updates, visit the Gadens COVID-19 Hub.
Shanna Livingstone, Special Counsel
This update does not constitute legal advice and should not be relied upon as such. It is intended only to provide a summary and general overview on matters of interest and it is not intended to be comprehensive. You should seek legal or other professional advice before acting or relying on any of the content.