COVID-19 Measures for Commercial Tenancies
As many small businesses continue to grapple with cash flow issues in the midst of the COVID-19 pandemic, one area where relief may be sought is in relation to lease expenses.
On 7 April 2020, the Federal Government introduced the “National Cabinet Mandatory Code of Conduct: SME Commercial Leasing Principles During COVID-19” (“Code”). The intention of the Code is to impose a set of “good-faith leasing principles” to deal with the landlord/tenant relationship. In turn, the Code intends for the State Governments to legislate as appropriate to give effect to these principles.
The Mandatory Code of Conduct
The idea of the Code is that both landlord and tenant share the pain in a “proportionate measured way.” As will be seen, it seems that the Code tends to favour tenants over landlords.
The Code sets out the following leasing principles:
- landlords must not terminate leases due to nonpayment of rent during the COVID-19 period (or during any reasonable subsequent recovery period);
- tenants must remain committed to the terms of their lease subject to any amendments negotiated under the Code;
- landlords must offer tenants proportionate reductions in rent based on the tenant’s reduction in trade during the pandemic period;
- rental waivers must constitute no less than 50% of the total reduction in rent and may be greater if necessary;
- payment of rental deferrals by the tenant must be amortised over the balance of the lease term and for a period of no less than 24 months;
- reduction in statutory charges or insurances must be passed on to the tenant in the appropriate proportion;
- any benefit a landlord receives by way of loan deferrals should be shared with the tenant in a proportionate manner;
- landlords should seek to waive recovery of any other expenses during a period when the tenant is unable to trade;
- if the tenant is required to make repayments (as negotiated), this should occur over an extended period of time with no repayment commencing until the pandemic period has expired;
- no fees, interest or charges should be applied with respect to rent that has been waived. Punitive interest should not be charged on deferrals;
- landlords must not draw on a tenant’s security for nonpayment of rent;
- the tenant should be provided with an opportunity to extend its lease for an equivalent period of the rent waiver and/or deferral period;
- landlords must not increase rent for the duration of the pandemic period; and
- landlords may not apply any prohibition or levy any penalties if tenants reduce their opening hours or cease to trade.
The Western Australian Response
The Commercial Tenancies (COVID-19 Response) Act 2020 (“Act”) came into force in Western Australia on 24 April 2020, with an effective date of 30 March 2020, although regulations have not yet been promulgated to fully enact the measures under the Code. It is expected that WA’s own version of the Code will be included in the regulations.
The Act applies to “small commercial leases” being:
- a retail shop lease as defined in the Commercial Tenancy (Retail Shops) Agreements Act 1985 (WA);
- a lease where the tenant owns or operates a “small business” (as defined in the Small Business Development Corporation Act 1983 (WA));
- a lease where the tenant is an incorporated association under the Associations and Corporation Act 2015; or
- any other lease that is prescribed by regulations.
Section 6 provides that the provisions of any lease are taken to be modified to the extent necessary to give effect to the Act. Section 7 provides that the parties are unable to contract out of the operation of the Act.
Section 9 prevents landlords from taking any “prohibited action” by virtue of the tenant’s not paying rent; not being open for business at hours or time specified in the lease; or any other act or omission prescribed by the regulation. The prohibited actions include evicting a tenant; retaking possession; terminating a lease; claiming damages; requiring a payment of interest on unpaid rent; or recovering under any security.
Clause 11 prohibits rent from being increased during the relevant periods.
Section 13 expressly refers to a Code of Conduct being adopted wholly or partly by regulations. It remains to be seen how much of the Federal Code is in fact adopted.
There remains a lack of clarity until we see the regulations. At first blush, we offer the following thoughts.
Tenants who foresee a downward impact on cashflow should consider entering negotiations with landlords as soon as possible and request a rent waiver or deferral. The approach should be made transparently, including providing details of the tenant’s financial position and projections. Ultimately, whatever points are agreed between the parties should be clearly documented to avoid any dispute in the future.
Landlords should be careful to ensure that the outcomes agreed with the tenant are compliant with the Code and the Act. Of course, landlords should not simply agree to any rent deferral or waiver without evidence from the tenant as to their financial hardship. Landlords should consider obtaining evidence, e.g. of accounts or supporting letters from the tenant’s accountants. As mentioned above, any outcomes agreed with the tenant should be carefully documented. Advice should also be taken in relation to actions the landlord may wish to take which may straddle the pandemic period, e.g. if the landlord had already taken steps to evict a tenant prior to the start of the pandemic period.
If you require assistance in negotiating a variation to your lease (either as a landlord or tenant) and to document the variation, please contact us today.