We alert you to the long-awaited release as of 16 April 2020 of the Western Australian Codes of leasing currently in front of Parliament waiting to be passed.
Since the National Cabinet announced the Mandatory Code of Conduct on 7 April 2020 for commercial tenancies, each State government has been working on designing their framework for implementation of the guidelines in the Code as it will apply to that State.
We expect that negotiations between WA landlords and tenants will be accelerated now that both parties have more clarification.
It is timely to remind both parties that the aim of the legislation is to help small and medium-sized enterprises that are in financial distress due to the impacts of the
Covid-19 disruption to survive the current restrictions.
The Codes only apply to eligible small and mid-market businesses and investors. The definition of eligibility is businesses that generate up to $50M in revenues and have had at least a 30% reduction in revenue as a result of COVID-19. Refer to our newsletter of 4 April 2020 which outlines the detail of the Mandatory Code of Conduct.
However, we are witnessing a growing trend of what appears to be non-eligible tenants and large corporation tenants who questionably have not been impacted significantly by the current pandemic requesting non proportionate rent waivers and for some the audacious act of merely not paying any rent at all.
With the changes implemented it is certainly the case that the business risk of the tenant has effectively been passed on to the landlord.
We envisage that application of the new WA leasing Codes will raise a myriad of other issues and coming to a timely resolution will heavily rely on both parties adopting the overarching principle of negotiating in “good faith” as required under the National Code of Conduct.
We provide below a summary of the main factors presented in the new WA Code of Conduct Bills as it relates to commercial tenancies together with some of our practical insights.
Note: the below information is not effective until the legislation has been passed.
The Commercial Tenancies (COVID-19 Response) Bill 2020 will introduce the following measures with effect during the emergency period of 30 March 2020 to 29 September 2020:
- a six month moratorium on evictions due to non-payment of rent
- a freeze on rent increases
- will this be a forfeiture of rent reviews or merely deferrals?
- if deferral, can rent reviews be applied retrospectively?
- if rent reviews are applied retrospectively, how will the tenant ever recover?
- how will existing lease incentives impact waivers and deferrals?
- any freeze does not apply to rent determined by reference to turnover under a small commercial lease.
- an extension of term
- tenants will be given an opportunity to extend the terms of the lease by the waiver period and/or by the deferral period.
- will this extension impact any plans to redevelop by the landlord?
- with regards to leases with less than 24 months to their current expiry date, will this result in any tenant deferral needing an extended bank guarantee for security beyond the lease expiry date?
- will any extension of the lease term trigger a requirement to obtain FIRB approval considering the recent changes reducing the thresholds of value to zero?
- a passing on of state tax reductions to the tenant
- many lease agreements effectively cater for this already.
- landlords will need to be careful to not overcharge outgoing recoveries and exclude such taxes where they have been reduced or waived to the landlord.
- there has been no mention of land tax relief for WA as of 19 April 2020.
- numerous restrictions on penalties for tenants who do not trade or have reduced their trading hours;
- landlords are encouraged to waive outgoings for the period a tenant is unable to trade.
- where outgoings commonly represent around 30% of rent, landlords still have obligations such as maintenance and insurance to cover.
- a prohibition on charging interest on rent arrears;
- the introduction of a dispute resolution process;
- if the parties cannot agree on the rent relief.
- fast tracking and free.
- an ability for government to prescribe a code of conduct.
Summary of State relief for commercial tenants
Take away actions:
- There is an obligation for both parties to negotiate in good faith.
- Tenants to continue to comply with the lease until a negotiated agreement is reached under the Code. If the tenant breaches any material term of the lease as amended, then the tenant will lose the protection of the Code.
- Clearly document any negotiations and new arrangements so you have a clear record that will pass the test of examination and evidence of discussions.
- Both parties to provide each other sufficient and accurate information. Act honestly.
- Each lease negotiation will be conducted on a business case basis. All factors should be considered such as industry profiles, eligibility of a tenant for the JobKeeper payment scheme and whether a tenant is already in arrears.
The WA Government has also introduced draft legislation to cover residential tenancies to address the financial impacts of the COVID-19 coronavirus.
The proposed Residential Tenancies (COVID-19 Response) Bill 2020 will:
- give powers to The Commissioner for Consumer Protection to make the conciliation of disputes between landlords and tenants mandatory.
- introduce a moratorium on eviction for six months except in limited circumstances including where:
- a tenant is causing damage to the property;
- a tenant is causing injury to the landlord or a person in neighbouring premises;
- the landlord or tenant is experiencing undue hardship;
- a tenant is experiencing family violence and the perpetrator needs to be evicted;
- the tenant abandons the premises; or
- the tenancy agreement is frustrated.
- prohibit rent increases during the emergency period between 30 March 2020 and 29 September 2020;
- tenants must continue to pay rent.
- if a tenant can’t pay their rent they will still have the obligation to pay any rent outstanding later.
- if any notice has already been given for an increase in rent, for a start date which was to occur in the emergency period, the rent increase is deemed to start from 30 September 2020.
- provide that any fixed term tenancy agreement due to expire during the emergency period will continue as a periodic agreement;
- relieve lessors of the obligation to conduct ordinary repairs if the reason they cannot do so is COVID-19 related financial hardship or a lawful restriction on movement;
- enable a tenant to end a fixed term tenancy prior to its end date without incurring break lease fees (tenants will still be liable for damage and rent arrears).
The proposed changes will apply to:
- residential tenancies agreements under the Residential Tenancies Act 1987 (WA),
- long-stay agreements under the Residential Parks (Long-stay Tenants) Act 2006 (WA); and boarders and lodgers, and
- all public housing tenancies and government employee housing provided by the Housing Authority.
The WA State Government has outlined in its guidelines that renters are not required to provide their landlord with a proof of their savings or lack thereof, and that a letter from a former employer should be sufficient to prove financial hardship.
WHERE WE CAN ASSIST YOU
During these difficult times, our expert team is ready to assist you:
- We can introduce you to specialist property lawyers to help you in your negotiations whether as a landlord or tenant.
- We can review financial records submitted by either party to substantiate evidence of financial hardship and impact from COVID-19 disruption.
- Review and advise on eligibility of the JobKeeper Payment Scheme.
This newsletter is current as of 19 April 2020, however, please note that announcements and changes are being made by the Government and the ATO regularly, and we expect that the tax and business-related responses will continue to evolve. Please contact us to discuss.