The long-awaited Commercial Tenancies Code of Conduct for Western Australia has been finalised and Gazetted in the Commercial Tenancies (COVID-19 Response) Regulations 2020 today, 29 May 2020 (the Code).
The Code comes into effect from tomorrow (30 May 2020) and complements the Commercial Tenancies (COVID-19 Response) Act 2020 (the Act).
The Code sets out small commercial lease principles to apply during the COVID-19 pandemic. A summary of key points to note from the Code are:
Who does the Code apply to and who must comply?
The Code applies to:
- A small commercial lease that is a relevant small commercial lease
- A person who is a landlord under a relevant small commercial lease
- A person who is a tenant under a relevant small commercial lease
A relevant small commercial lease is a small commercial lease where the tenant is an eligible tenant in relation to the small commercial lease.
Small Commercial Lease
A small commercial lease is defined in the Act as:
- a retail shop lease, as defined in the Commercial Tenancy (Retail Shops) Agreements Act 1985; or
- a lease where the tenant owns or operates a "small business" and uses the land or premises that are the subject of the lease for the purpose of carrying on that business; or
- a lease where the tenant is an incorporated association as defined in the Associations Incorporation Act 2015; or
- any other lease that is of a class prescribed by regulations for the purpose of this definition.
A "small business" has the same meaning as defined in the Small Business Development Corporation Act 1983, and includes a business undertaking which is wholly owned and operated by an individual person or by individual persons in partnership or by a proprietary company and which:
- has a relatively small share of the market in which it competes; and
- is managed personally by the owner or owners or directors, as the case requires; and
- is not a subsidiary of, or does not form part of, a larger business or enterprise.
For a tenant to be an eligible tenant to request rent relief under the Code, they must:
- be a tenant of a small commercial lease; AND
- have a turnover of less than $50 million for the financial year ended 30 June 2019*; AND
- qualify for the JobKeeper scheme, OR
- be able to, at any time during the emergency period (which is currently 29 March 2020 to 29 September 2020), satisfy the decline in turnover test set out in the JobKeeper scheme rules (that is, prove a 30% reduction in turnover due to the pandemic).
* For the purposes of turnover: If the tenant is a franchisee, the turnover is the turnover of that business conducted by the tenant at the land or premises the subject of the particular small commercial lease; or if the tenant is a corporation that is a member of a group, it is the turnover of that group (corporations constitute a group if they are related bodies corporate as defined in the Corporations Act).
Overarching obligations of landlords and tenants
In any negotiations for the purposes of the Code, the landlord and tenant under a small commercial lease must:
- act reasonably and in good faith
- act in an open, honest and transparent manner
- provide each other with sufficient and accurate information, reasonable for the purposes of the negotiations
- not make onerous demands for information from each other.
Requests for rent relief and information
- An eligible tenant may, during the emergency period, request rental relief from the landlord in writing and state they meet the eligibility requirements.
- The tenant must provide with their request, sufficient and accurate information which evidences the tenant is eligible under the Code; and provide evidence of their reduction in turnover (which is associated with their business conducted at the land/premises in question, and which the tenant has experienced during the emergency period).
- Landlords can request "sufficient and accurate information" to verify tenant's eligibility and reduction in turnover, if not provided.
- An example of information evidencing a reduction in turnover of a business might include information relating to turnover generated from an accounting system.
Offering and negotiating rent relief
- Upon receipt of a request for rent relief from an eligible tenant that meets the Code's requirements, landlords have 14 days to make a rent relief offer to the tenant (or such other period as agreed between the parties).
- The landlord's offer of rent relief must be in writing and be in accordance with the principles detailed in the Code.
- Following receipt of the landlord's offer, the parties must negotiate with a view to agreeing on rent relief to apply during the emergency period.
Principles to apply to offering and negotiating rent relief
- An offer or rent relief must apply to the emergency period.
- The rent relief must be at least proportionate to the tenant's reduction in turnover.
- Unless otherwise agreed by the parties, the reduction in tenant's turnover is to be calculated using the principles of the decline in turnover test set out in the JobKeeper scheme rules.
- At least 50% of rent relief offered must be in the form of a waiver or rent, unless otherwise agreed by the parties.
- An offer of rent relief must provide for more than 50% of the rent relief to be in the form of a waiver of rent, in certain situations detailed in the Code (but only if the landlord has the financial capacity to do so).
Giving effect to rent relief
Rent relief agreed under the Code may be given effect by the landlord and tenant by a written variation to the lease, or any other written agreement between the parties that gives effect to the rent relief (either directly or indirectly).
Payment of deferred rent and extension of term of lease
For any rent which is deferred by agreement between the parties, and unless otherwise agreed by the parties in writing:
- the landlord must not request payment of any part of that deferred rent until the earlier of: the day on which the emergency period ends (currently 29 September 2020); or expiry of the term of the lease.
- the parties must vary the lease, or otherwise agree, that the deferred rent is to be paid amortised over the greater of: the balance of the term of the lease; or a period of not less than 24 months.
- the method for amortisation is to be agreed between the parties.
- except in certain circumstances as provided for in the Code, the landlord must also offer the tenant an extension of the term of the lease (on the same terms as the existing lease), for a period equivalent to the period for which the rent is deferred.
Existing agreements and subsequent requests for rent relief
If, prior to the Code coming into effect, a landlord and tenant under a small commercial lease have already entered into an agreement to vary the lease or any other agreement so as to provide rent relief during the emergency period or any part thereof; and if the tenant is an eligible tenant under the Code, then: if the tenant believes that the rent relief provided under that existing agreement is less favourable than the relief which might be provided to the tenant under the Code:
- the tenant may make a request for relief under the Code; and
- the parties must follow the process set out in the Code.
If the financial circumstances of an eligible tenant materially change after a variation to the lease or other agreement has been reached, the tenant may make a further request for rent relief to the landlord under the Code.
- Where an eligible tenant under the Code is unable to conduct their business at the leased premises for any part of the emergency period due to the pandemic, landlords must also consider waiving recovery of any outgoings or other expenses payable to the tenant for the period during which they were unable to trade.
- Where any outgoings charged under the lease are reduced for any part of the emergency period, landlords must not require an eligible tenant to pay any amount of money in respect of outgoings that are greater than the tenant's proportionate share of the reduced outgoing.
- If an eligible tenant has already paid to the landlord an amount of money greater than the tenant's proportional share of the reduced outgoing, the landlord must reimburse the excess amount to the tenant.
Link to the Code – Commercial Tenancies (COVID-19 Response) Regulations 2020
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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