The Western Australian (WA) Parliament proposes to pass a suite of legislation to provide urgent relief for commercial tenants in response to the COVID-19 pandemic, comprising the Commercial Tenancies (COVID-19 Response) Act 2020 (the Commercial Tenancies Act) and Commercial Tenancies (COVID-19 Response (Early Termination)) Act 2020 (the Early Termination Act). Currently, these Acts are still in the form of bills but the former is expected to come into effect soon.
However, it’s important to note that, during the second reading of the Early Termination Act, the Minister for Commerce said it would only be enacted if there was ‘evidence of widespread abuse by landlords of their obligation for good faith negotiations’.
The following summarises the measures relevant to commercial leases under the proposed legislation.
Commercial Tenancies Act
Who does the Commercial Tenancies Act apply to?
The National Cabinet’s Mandatory Code of Conduct was directed to small and medium sized enterprises with an annual turnover of less than $50 million per year. However, the Commercial Tenancies Act contains a different test and applies to ‘small commercial leases’, being:
·a retail shop lease as defined in the Commercial Tenancy (Retail Shops) Agreements Act 1985;
a lease where the tenant owns or operates a ‘small business’ (as defined in the Small Business Development Corporation Act 1983, being a business that is wholly owned and operated by an individual, individuals in partnership or by a proprietary company, which has a relatively small share of the market, is managed personally by the owners and/or directors and is not a subsidiary of, or form part of, a larger business or enterprise);
a lease where the tenant is an incorporated association; or
any other lease that is of a class prescribed by the regulations.
What are the provisions relevant to landlords and tenants?
The Commercial Tenancies Act introduces the following key measures:
1. Emergency period: The relief measures prescribed by this Act apply during the emergency period, being defined as the period beginning on 30 March 2020 and ending on 29 September 2020 or such earlier date specified by the regulations.
2. Prohibited actions moratorium: a moratorium during the emergency period on the landlord’s ability to take ‘prohibited actions’ (defined below) in relation to breaches consisting of:
a failure to pay rent or other amounts payable under the lease, including outgoings;
the business normally carried on at the premises not being open during the hours specified in the lease; or
any act or omission of a kind prescribed by the regulations.
3. Acts or omissions: acts or omissions of a tenant during the emergency period that are required under a written law in response to the COVID-19 pandemic will not be regarded as:
a breach of the lease;
grounds for termination of the lease; or
grounds for taking a prohibited action.
4. Freeze on rent increases: rent (except for rent which is calculated by reference to turnover) cannot be increased during the emergency period.
5. Code of conduct: the regulations may adopt a code of conduct setting out commercial leasing principles during the COVID-19 pandemic.
6. Dispute resolution: parties will be able to apply to the State Administrative Tribunal for disputes relating to the new legislation or code of conduct.
7. Prohibited actions: Prohibited actions’ include actions for any of the following:
eviction of the tenant from the premises;
exercising rights of re-entry;
termination of the lease;
requiring payment of interest on unpaid rent or any other unpaid amount of money payable by the tenant;
recovery of any security for the performance of the tenant’s obligations under the lease; and
performance of obligations by the tenant (or any other person) under a guarantee given in respect of the lease), including making a demand on a bank guarantee.
Any prohibited action taken between 30 March 2020 and the date this Act receives Royal Assent is valid and effective except to the extent the prohibited action remains incomplete or ongoing or has an ongoing effect, in which case it will be stayed or suspended until the end of the emergency period. Similarly, any increase in rent that occurred during this period is valid but the increase is taken to be stayed or suspended until the end of the emergency period.
Early Termination Act
Who does the Early Termination Act apply to?
This Act applies to tenants of commercial leases who are in ‘severe financial distress’ caused by the COVID-19 pandemic.
Commercial leases include a small commercial lease (as defined in the Commercial Tenancies Act) or any other lease of a class prescribed by the regulations.
A tenant is in severe financial distress if:
the tenant is suffering from financial hardship as a result of COVID-19 consequences;
the tenant has made reasonable endeavours to negotiate waivers, deferrals of rent and other concessions from the landlord; and
despite those reasonable endeavours and any waivers, deferrals or concession granted by the landlord, it is reasonable to conclude that because of the tenant’s financial hardship, the tenant is or will be unable to perform its obligations under the commercial lease.
The process of terminating a commercial lease
The tenant may at any time during the emergency period (as defined in the Commercial Tenancies Act) give the landlord a notice in writing proposing termination of the lease.
Within 14 days of the tenant’s notice, the landlord may give the tenant notice (which must be in the prescribed form) that the landlord will agree to the termination or apply to the Tribunal to determine whether the lease should be terminated.
If the landlord agrees to the termination or does not give the notice within this time, the commercial lease is deemed to be terminated 21 days after the tenant’s notice was given.
If the landlord gives notice it will apply to the Tribunal for determination but fails to do so within 7 days, the lease terminates at the end of the period of 7 days after that 7 day period.
If the Tribunal determines that the tenant is in severe financial distress, it may make an order terminating the lease from a particular date.
If the Tribunal determines that the tenant is not in severe financial distress, it may nonetheless make an order for rent waiver or deferral or some other concession to be given by the landlord to the tenant.
Effect of termination
The effect of the termination is that the landlord and tenant have no further liability to each other arising from the lease. However. the tenant remains liable for payment of rent or other outgoings in respect of the period before 30 March 2020 and for its make good obligations under the lease. Failure by the tenant to comply with these obligations will entitle the landlord to draw down any security or bank guarantee given by the tenant.
While the Acts apply to both retail and non-retail leases, a tenant of a non-retail lease who is not a small business or an incorporated association will not be entitled to the protection under these Acts.
The relief measures prescribed by these Acts override any written law or lease or agreement and extend to any oral or written agreements allowing for a right of occupation, whether or not the right is a right of exclusive possession.
While Western Australia will introduce its own code of conduct, this code is anticipated to adopt the same principles of the National Cabinet Mandatory Code of Conduct in respect of the parties’ obligations to act in an open and honest manner and for tenants to demonstrate a reduction in turnover commensurate to the relief sought.
Where a dispute relates to a small commercial lease or to the landlord of a small business lease, the parties must have first sought the assistance of the Small Business Commissioner to mediate the dispute before applying to the State Administrative Tribunal to resolve the dispute.
If the Early Termination Act becomes law, tenants should only seek to terminate their leases if they can demonstrate that the relief measures contemplated by the Commercial Tenancies Act are unsuccessful or inadequate.
The supporting regulations may provide further guidance on what other leases are captured by these Acts and what other breaches of a lease (other than failure to pay rent or trade) are captured by the moratorium on landlord’s rights.
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