HHG Legal Group’s Property team’s Matthew Lilly and Julia McCullagh explore the newly gazetted WA Code of Conduct which finally provides certainty for landlords and tenants looking to negotiate rent relief.
Weeks of uncertainty for WA landlords and tenants has ended as the WA Code of Conduct was gazetted on Friday 29 May 2020. Until Friday landlords and tenants found themselves having to negotiate rent relief using the Commercial Leasing Principles under the National Cabinet Mandatory Code of Conduct for SME Commercial Leasing Principles (National Code).
The WA Code of Conduct (which came into operation on 30 May 2020) is found in the WA Commercial Tenancies (COVID-19 Response) Regulations 2020. This code is WA’s response to the National Code endorsed by the National Cabinet.
As most of us would recall, on 29 March 2020 the National Cabinet announced that a moratorium on evictions for non-payment of rent would be applied across commercial tenancies impacted by financial distress due to the COVID-19 pandemic. The National Code was endorsed on 7 April 2020 and set out overarching principles and specific leasing principles to guide negotiations to help commercial tenants and landlords reach agreements about rent during the COVID-19 pandemic.
Why two codes?
Under the Australian Constitution the Commonwealth Parliament can only make laws on certain matters. States retain legislative powers over matters not specifically listed in the Constitution. Therefore the National Code could only be given force by state legislation (although it can and has been used for guiding principles during negotiations).
The Commercial Tenancies (Covid-19 Response) Act 2020 (WA) (WA Act) was assented to on 24 April 2020, and it :
- Enabled a WA regulation to be made to adopt a code of conduct.
- Introduced a moratorium on evictions for small commercial tenancies.
- Introduced a freeze on rent increases during the emergency period.
- Provided for the resolution of disputes, either by way of an application to the SAT or in some cases by applying to the Small Business Development Commissioner.
Issues for WA landlords and tenants
At the time that the WA Act came into operation there was no WA Code of Conduct in place. Whilst waiting for the WA Code of Conduct landlords and tenants were encouraged to use the National Code principles as a guide for negotiations. Now that the WA Code of Conduct has come into operation there will be issues for landlords and tenants already engaged in negotiations or who have successfully negotiated an agreement.
Under the WA Code of Conduct if the tenant believes that the rent relief provided under a pre-existing agreement (that is an agreement pre-dating the WA Code of Conduct) is less favourable than the rent relief that might be provided under the WA Code of Conduct, the tenant is entitled to make a further request for rent relief under the new code. This potentially throws existing agreements into doubt and means more work for both parties.
Another question will be to what extent parties who negotiated an agreement prior to the adoption of the WA Code of Conduct will be able to rely on the dispute resolution provisions in the WA Act.
The WA Act specifies that the dispute resolution provisions apply to disputes arising out of, or in relation to, the operation of the WA Act including “a code of conduct dispute.” A code of conduct dispute is defined as a dispute that arises out of, or in relation to, the application of the code of conduct adopted by way of regulations under the WA Act (including, without limitation, a dispute about the waiver or deferral of rent payable under a lease). So in circumstances where the parties to a lease have negotiated an agreement for the waiver or deferral of rent prior to the adoption of the WA Code of Conduct and a dispute arises about the terms of that agreement, there is a question as to whether those parties can apply to the SAT to have the dispute determined.
How is the WA Code of Conduct different?
Most of the leasing and general principles from the National Code were ultimately adopted in the WA Code of Conduct (although worded somewhat differently). While the WA Code of Conduct has similar principles to the National Code there are some differences, these include:
- The WA Code of Conduct (unlike the National Code) imposes an obligation of confidentiality on landlords and tenants. For example, the parties must not share protected information including information relating to business processes or financial information including information about the trade of a business.
- The WA Code of Conduct (unlike the National Code) specifically deals with the situation where the landlord is also a tenant. If the landlord is a tenant under a lease (the head lease) of the land or premises and as the tenant, is provided rent relief under the head lease, the landlord must pass on the benefit to the sub-tenant.
- Missing from the WA Code of Conduct is the overarching principle from the National Code that the parties will assist each other in their respective dealings with other stakeholders including governments, utility companies, and financial institutions.
- The WA Code of Conduct also sets out clear processes and timelines for landlords and tenants where the tenant is seeking rent relief. For example, a tenant seeking rent relief must put the request in writing to the landlord and provide information and evidence of the reduction in its business. Landlords must respond with an offer of rent relief within 14 days of receiving such a request. This puts landlords under some real-time pressure.
To whom does the WA Code of Conduct apply?
There is the potential for a tenant to be covered by the National Code but not by the WA Code of Conduct if the lease does not meet the WA definition of “Small Commercial Lease.” We also note that the WA Code of Conduct applies to landlords and tenants only, it does not apply to guarantors.
An “Eligible Tenant” is defined in the WA Code of Conduct in a similar manner to the National Code. An “Eligible Tenant” is a business whose turnover for the financial year ending on 30 June 2019 was less than $50 million (noting also that if the tenant is a corporation that is a member of a group* the $50 million turnover is the turnover of the group not the individual tenant that applies). An “Eligible Tenant” also qualifies for the Jobkeeper scheme under the Coronavirus Economic Response Package (Payments and Benefits) Rules 2020 (Commonwealth).
Small commercial leases
However, the WA Code of Conduct also only applies to relevant small commercial leases. “A small commercial lease” is defined in the WA 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 (small business has the meaning given in the Small Business Development Corporation Act 1983); or
- A lease where the tenant is an incorporated association as defined in the Associations Incorporation Act 2009; or
- Another type of lease prescribed in the regulations but not yet determined.
Where to go to from here?
Landlords and tenants in Western Australia now need to review their agreements made prior to the WA Code coming into force.
If you are a tenant and you believe that the rent relief provided under a pre-existing agreement (that is an agreement pre-dating the WA Code of Conduct) is less favourable than the rent relief that might be provided under the WA Code of Conduct you should make a further request for rent relief from your landlord.
Landlords, if you have been resisting providing rent relief to your tenant of a small commercial lease you cannot continue to resist any longer.
* As defined in the Corporations Act 2001 (Commonwealth) Section 9, corporations constitute a group if they are related bodies corporate.
HHG can assist
For over 100 years HHG Legal Group has been proudly serving Western Australian families, business and individuals. We have a team of experienced leasing and dispute resolution lawyers that can assist both landlords and tenants during this difficult time in negotiating terms of rent relief and lease variations that will comply with the WA Code and any disputes arising out of those negotiations.
With a choice of consultation methods (video, phone or safely-spaced, face-to-face), should you require some assistance please send us an enquiry or call us on +61 8 9322 1966.