Property Alert: WA Code of Conduct – Commercial Tenancies (COVID-19 Response) Regulations 2020

2 June 2020

Publications

Following on from the introduction of the Commercial tenancies (COVID-19 Response) Act 2020 (the Act), the WA Government has now introduced regulations which introduce the WA code of conduct which is to guide negotiations between landlords and tenants in relation to rent relief during the COVID-19 emergency period.

The dispute resolution provisions of the Act still apply if negotiations stall or the parties cannot reach agreement.

Who does it apply to?

The Act applies to small commercial leases, which includes:

  1. A retail lease for the purposes of the Commercial Tenancy (Retail Shops) Agreements Act 1985;
  1. A lease for premises to conduct a small business (which has a relatively small market share, is personally run by its directors or owners, and does not form part of a larger business or enterprise); and
  1. A lease where the tenant is an incorporated association.

The regulations introduce further thresholds in relation to their application.  A tenant will be an ‘eligible tenant’ for the purposes of obtaining the benefit of the regulations and therefore the code of conduct if, in addition to being a tenant under a small commercial lease the tenant:

  1. had a turnover of less than $50,000,000 in the 18/19 financial year; and
  1. either:
    1. qualifies for the jobkeeper scheme; or
    2. has had a decline in turnover of over 30% during the emergency period.

In most cases, including where the tenant is a franchisee, the turnover threshold in 1 above refers to the turnover of the business conducted from the relevant premises, however in the case of a group of companies made up of related bodies corporate, the turnover of the group will be considered.

Key Concepts

In entering into negotiations all parties must cooperate, act reasonably, in good faith and in an open, honest and transparent manner.  This includes providing each other with sufficient and accurate information, without making onerous demands for such information.

Agreements should be in writing and may either take the form of a variation of the lease, or a separate written agreement.

The principles applying to negotiating and offering rent relief include:

  1. The rent relief offered must be at least proportionate to the reduction in the tenant’s turnover in the business operating from the premises during the emergency period.
  1. At least 50% of the rent relief offered must be in the form of a rental waiver (unless otherwise agreed in writing between the parties).
  1. In determining what percentage of rent relief above 50% should be in the form of a waiver, consideration should be had to the relative abilities of the tenant and the landlord to absorb the financial burden.
  1. Any relief from a head landlord to a tenant must be passed down to any subtenant of the premises. However there is no provision that if a tenant is required to offer relief to a subtenant, that the tenant must be afforded relief from a head landlord.
  1. Unless otherwise agreed between the parties, deferred rent repayment must:
    1. not be repayable until the earlier of the end of the emergency period or the expiry of the lease; and
    2. be repayable over the greater of 24 months, or the balance of the term of the lease.
  1. Unless otherwise agreed, the Landlord must offer the Tenant an extension of lease equivalent to the period for which rent is deferred.

How does this affect existing arrangements?

For those parties who have already reached agreements in relation to rental relief, the introduction of the code does not go so far as to either validate or void those agreements.

There are numerous carve outs within the code where the provided rule will apply unless otherwise agreed between the parties.  This will allow much of what has already been negotiated to continue to operate.

The code does, however, provide tenants with an opportunity to seek additional rent relief or renegotiate the position previously agreed to if they believe that the position previously agreed is less favourable than the provision that would have been required under the code.

If at any time during the emergency period the tenant’s financial position changes, and as a result it requires further or increased assistance, the tenant may seek further relief to what has already been agreed.  Note that this option remains open to the tenant regardless of whether an agreement was entered into before or after the code was introduced.

For further information, please contact a member of our National Property Team.