This update is the first of a series tailored to keep landlords and tenants of a commercial lease up to date with the legislative and regulatory changes arising out of COVID-19 that may impact their rights and obligations.
What has happened to date?
As the situation evolves and the country works towards slowing the spread of COVID-19, the National Cabinet has been preparing and implementing its ‘business hibernation’ plan to temporarily ‘freeze’ the economy.
Laws dealing with commercial leases are a State matter meaning that any decision made by the National Cabinet must then be adopted and implemented by the WA Government before it is enforceable.
To date, no amendments have been made to WA legislation nor have any new regulations been put in place regarding commercial leases. However, the National Cabinet has made several announcements regarding new measures which are aimed to encourage commercial landlords and tenants to work together through this uncertain period, to ensure that businesses can survive and be there on the other side.
The National Cabinet is encouraging commercial landlords to work together with any tenants in financial hardship as a result of COVID-19, and the landlord’s Banks, to reach a reasonable position on rental payments and mortgage repayments.
What should landlords and tenants prepare themselves for?
Landlords and tenants of commercial leases can expect to see the following measures announced by National Cabinet being legislated in the coming weeks:
- Moratorium on evictions
On 29 March 2020, the National Cabinet agreed on a set of principles to underpin the Government’s aid to commercial tenancies, including a 6 month moratorium on evictions or commercial (and residential) tenancies in financial distress who are unable to meet their lease commitments due to the impact of COVID-19. The moratorium has not yet become law in WA.
What will the moratorium do?
Where it applies, the moratorium will prohibit a landlord from evicting a tenant on the basis the the tenant has failed to pay rent.
Will the moratorium apply to your business?
The moratorium will only apply where the tenant’s ability to pay rent is caused by COVID-19. Landlords and tenants not significantly affected by COVID-19 are expected to honour their lease and rental agreements.
Until the moratorium is legislated in WA, it is unclear what the precise criteria of eligibility will be. However, it is likely the criteria will be governed by similar principles to those relating to the National Cabinet’s proposed code of conduct t (listed below).
- Mandatory Code of Conduct
On 3 April 2020, the National Cabinet announced that it had agreed to develop a mandatory code of conduct for commercial tenancies guided by certain principles, to be subsequently legislated in each State and Territory.
The code of conduct is to apply for commercial tenancies where the tenant is:
a) eligible for the Commonwealth Government JobKeeper assistance; and
b) a small or medium sized enterprise (Less than $50m annual turnover).
The principles that will guide the code, as announced by the National Cabinet, will be as follows:- Where a tenant can pay rent, it should continue to do so;
– Where a tenant is in financial distress as a result of COVID-19 (for example the tenant is eligible for the JobKeeper allowance), then tenants and landlords should negotiate a mutually agreed solution.
– Proportionality will apply to rent reductions based on the decline in turnover to ensure the burden is shared between landlords and tenants;
– Prohibition of termination of leases for non-payment of rent (lockouts and evictions);
– Freeze on rent increases (except for turnover leases);
– Prohibition on penalties for tenants who stop trading or reduce opening hours;
– Prohibition on landlords passing land tax to tenants;
– Prohibition on landlords charging interest on unpaid rent;
– Prohibition on landlords making claims to bank guarantees or security deposits for non-payment of rent; and
– Ensure any legislative barriers or administrative hurdles to lease extensions are removed )so that, for example, a landlord and tenant could agree on a rent waiver in return for a lease extension).
- Land tax waiver and deferral
The National Cabinet has also announced that each State and Territory may, upon application by eligible landowners, provide the equivalent to a 3 month land tax waiver and 3 month land tax deferral, for landlords and tenants that sign up to the code of conduct – with each jurisdiction to monitor the situation. Landlords must pass onto tenants the benefit of any such waiver/deferral.
What should landlords and tenants do?
While the above is not yet law in WA, landlords and tenants who are financially affected by COVID-19 are encouraged to work together to negotiate feasible resolutions to find a way to assist each other through this period of uncertainty to ensure businesses can survive.
Landlords and tenants may wish to consider negotiating any one of the following solutions where a tenant is in financial hardship due to COVID-19:
- Short-term rent relief period for those about to enter new lease agreements;
- Short-term rent deferral or discount, with the deferred/discounted rent to be paid at a later date, or over the balance of the term of the lease following the deferral period;
- Short-term rent abatement;
- Variation of lease to extend the term, in consideration for granting of a short term rent abatement;
- Allowing a tenant to terminate the lease prior to the end of the lease-term, without penalty.
Landlords and tenants should bear in mind that any such arrangements they agree to, may subsequently be impacted by the legislative and regulatory changes once implemented into WA law.
The National Cabinet has advised it will continue its discussion on matters concerning commercial leasing at its meeting on Tuesday 7 April 2020.
Kott Gunning will provide further updates regarding commercial leasing as the situation continues to evolve.
The information published on this website is of a general nature and should not be construed as legal advice. Whilst we aim to provide timely, relevant and accurate information, the law may change and circumstances may differ. You should not therefore act in reliance on it without first obtaining specific legal advice.