New legislation in WA
Commercial landlords and tenants in Western Australia will need to come to grips with:
- The National Cabinet Mandatory Code of Conduct (Code).
- Commercial Tenancies (COVID-19 Response) Act 2020 (WA) (Act).
- Commercial Tenancies (COVID-19 Response) Regulations 2020 (WA) (Regulations).
- Commercial Tenancies (COVID-19 Response (Early Termination)) Bill 2020 (WA).
The Code imposes a set of good faith leasing principles on the parties to commercial tenancies during the current pandemic. The Regulations are yet to be passed by the
Western Australian parliament, but are widely expect to be similar to the Code.
What has changed?
Many of the usual contractual terms in commercial leases have been set aside under the Act. Some of the highlights in the Act include that landlords are prohibited from:
- Evicting small commercial leasing tenants.
- Re-entering the land or premises covered by a small commercial lease.
- Retaking possession or recovery of land.
- Forfeiting a small commercial lease.
- Seeking damages under a small commercial lease.
- Requiring the payment of interest on unpaid rent or any other unpaid money payable by the tenant, including operating expenses.
- Recovering from the security bond or bank guarantee any of the money owed by the tenant under the lease.
- Try to enforce the tenants or guarantors’ obligations under the lease.
- Using any other remedy otherwise available to the landlord against the tenant.
- Increasing the rent, even if a rent increase is due in the lease.
Who do the changes apply to?
The majority of commercial tenancies or at least most small to medium sized enterprises – SME’s. The Act applies to “small commercial leases”, which include:
- Retail shop leases (as per the Commercial Tenancy (Retail Shops) Agreements Act 1985 (WA)).
- Leases where the tenant owns or operates a “small business” from the leased land or premises (as per the Small Business Development Corporations Act 1983 (WA)).
- Leases held by incorporated association (as per the Associations Incorporations Act 2015 (WA)).
- Any other lease described in the Regulations.
What is a “small business”?
A “small business” is business that is:
- owned or operated by an individual; or
- a partnership; or
- proprietary limited company that:
- has a relatively small share of the market in which it competes;
- is managed by the owners or directors, personally; and
- is not a subsidiary of a larger business or enterprise.
What do we do now?
While waiting for the Regulations to be passed, commercial landlords and tenants should negotiate the deferral and waiver of their lease obligations on the basis of the Code.
How is that?
The Code is not a free ride for tenants or business as usual for landlords. Landlord can’t terminate leases for non-payment of rent and Tenants must remain committed to the terms of their lease.
Tenants that do not abide by the substantive terms of their lease will lose any protection provided to them under the Code.
Landlords must offer Tenants reductions in rent in the form of waivers and deferrals based on the reduction in the tenant’s trade during the pandemic and a subsequent reasonable recovery period. The purpose of the Code is to mitigate the impact of the pandemic on the financial position and cashflow of the parties. It follows that if there is no impact on the Tenant’s business there is no reduction in its rent.
For the parties to agree on rent waivers and deferrals, if any, account must be taken of the Tenant’s revenue, expenses and profitability. The Code requires Landlords and Tenants to negotiate in good faith. Key markers of good faith negotiations are that Landlords and Tenants are “…open, honest and transparent, and will each provide sufficient and accurate information” during the negotiations.
It is reasonable for Landlords to request that Tenants provide them with evidence of the Tenants “revenue, expenses and profitability” from 30 March 2020, when the Code commenced, to the present to negotiate the terms of the rent waiver and deferral, if any.
How do we resolve disputes?
Dispute over commercial tenancies should be referred to the Small Business Development Corporation (SBDC) for mediation. If the parties reach an agreement at the SBDC, it will be legally binding and enforceable. If the parties can’t reach an agreement, they can accelerate their dispute to the State Administrative Tribunal.