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SA and WA lead the way with legislation to start giving effect to the Leasing Code

21 April 2020

#Property & Real Estate, #Dispute Resolution & Litigation, #COVID-19

Chris Brodrick

Published by Chris Brodrick, Alana Giles

SA and WA lead the way with legislation to start giving effect to the Leasing Code

On 3 April 2020, the National Cabinet announced a Mandatory Code of Conduct (Code) for dealings between landlords and tenants during the COVID-19 pandemic, which we discussed in a previous article here. The Code sets out a number of guiding principles for landlords and tenants as they manage their obligations during the crisis. However, the States and Territories must each pass legislation in order to give effect to the Code, including its commencement date.

As at the time of writing this article, South Australia is the only state to have enacted legislation to give partial effect to the Code, passing the COVID-19 Emergency Response Act (SA Act) on 9 April 2020. In addition to the SA Act, the COVID-19 Emergency Response (Commercial Leases) Regulations (SA Regulations) commenced on 16 April 2020. 

In Western Australia, there are two bills before the Parliament currently: The Commercial Tenancies (COVID-19 Response) Bill (WA Bill) and the Commercial Tenancies (COVID-19 Response (Early Termination) Bill (WA Early Termination Bill)). We understand that the bills have passed the Legislative Council on their third reading.

NSW, Tasmania and the ACT have enacted some minor amendments to existing legislation which permit the relevant Minister in those States and Territory to make regulations (NSW) or declarations (Tasmania and the ACT) prohibiting the termination of leases in particular circumstances. Our searches have not revealed any regulations or declarations made to date.

In this article we examine the legislation which has been enacted in SA and will shortly be enacted in WA. We expect that similar legislation is likely to be introduced in the other States and Territories in the near future. 

Is the legislation retrospective? How long will it apply for?

For the most part, the provisions of the legislation will apply retrospectively from 30 March 2020 (being the day on which the Federal Government announced the introduction of the JobKeeper program).

The relevant provisions of the SA Act will apply from 30 March 2020 until the earlier of the day on which all relevant declarations relating to the outbreak of COVID-19 within South Australia have ceased, or the day which is six months after 9 April 2020 (being the commencement date of the SA Act) – defined in the SA Act as the “specified period”.

Once the WA Bill commences, the relevant provisions will apply for what has been defined as the “emergency period”, commencing on 30 March 2020 and expiring on a date to be prescribed in the regulations. If no expiration date is prescribed before 29 September 2020, then 29 September 2020 will be the end date of the emergency period.

Which leases does it apply to?

The SA Act applies to “commercial leases” including retail shop leases within the meaning of the Retail and Commercial Leases Act 1995 (RCLA)[1], and any other agreement under which a person grants or agrees to grant another person, for value, a right to occupy premises for carrying on a business – whether or not the right is for exclusive occupation, expressed or implied, oral or in writing. 

The WA Bill will apply to “small commercial leases” including retail shop leases within the meaning of the Commercial Tenancy (Retail Shop) Agreements Act (CTAA)[2], leases where the tenant owns or operates a small business and uses the premises for the purpose of carrying on that business, and leases held by a tenant who is an unincorporated association.

Are parties able to contract out of the legislation?

Both the SA Act and the WA Bill provide that the provisions of leases to which the legislation applies “will be taken to be modified to the extent necessary to give effect to the operation of” the legislation (section 7(2)), SA Act and section 6, WA Bill.

There is one section of the SA Act which specifies that a landlord and tenant may agree to terms outside the confines of the Act. Section 7(5) provides that a landlord and a tenant may reach an agreement with respect to rent increases other than as provided for by the SA Act. In the absence of such an agreement, rents must not be increased except as by reference to turnover.

The WA Bill goes further. Section 7(1) provides that a lease, contract or agreement is of no effect to the extent that it purports to exclude or restrict the operation of that Act. Section 7(2) provides that a purported waiver of a right, remedy or benefit conferred on a person under that Act is of no effect. This means that landlords and tenants in WA will be bound to agree on terms in accordance with the principles set out in the legislation, and any agreements outside of those principles will be void and of no effect.

Of course, parties will be able to agree to commercial terms between them surrendering their respective interests in a lease if they so desire.

Breaches of lease

Both the SA Act and the WA Bill provide that any act or omission of a tenant required under a law of that State in response to the COVID-19 pandemic will not amount to a breach of the lease and will not constitute grounds for termination of the lease or taking any prescribed or prohibited actions.

For example, a landlord will not be able to issue a breach notice to a nail salon for failing to open for trade during the pandemic, because nail salons are currently prevented from opening on account of trading restrictions imposed in response to COVID-19.

Prohibited actions during the COVID-19 pandemic

In SA, a landlord is prevented from taking a “prescribed action” against a tenant suffering “financial hardship” as a result of the COVID-19 pandemic on the grounds of a breach of the lease occurring during the specified period which consists of a failure to pay rent or outgoings or a failure to open for trade during the hours specified in the lease (section 7(3)).

A tenant will be taken to be suffering financial hardship if it is eligible for, or receiving, a JobKeeper payment in respect of the tenant’s business (whether as an employer or on their own behalf).

Similarly, in WA, a landlord will be prevented from taking a “prohibited action” during the emergency period on the grounds of a breach of the lease which occurs during the emergency period, if the breach consists of a failure to pay rent or operating expenses or a failure to open for trade during the hours specified in the lease (section 9). The prohibition on WA landlords will apply in respect of all small commercial leases, not only those tied to receipt of the JobKeeper payment.

The terms “prescribed action” and “prohibited action” have the same meaning and include actions on the part of a landlord such as evicting tenants, exercising rights of re-entry or termination, seeking damages, requiring payments of interest on unpaid moneys including rent, drawing down on securities including bank guarantees and seeking any other remedies available at common law or under other written laws. They include seeking orders or issuing proceedings in courts or tribunals.

What if a landlord has already taken action against a tenant prior to these matters being legislated?

Both the SA Act and the WA Bill contain provisions which account for a situation where a landlord has taken steps to enforce its rights for a breach of lease occurring on or after 30 March 2020, but prior to the legislation being enacted (Relevant Period).

Section 7(12) of the SA Act provides that if a tenant is suffering “financial hardship as a result of the COVID-19 pandemic” and during the Relevant Period:

  • a landlord has taken or commenced, but not yet completed or finalised, a prescribed action (including one which has a periodic or ongoing effect); or
  • a landlord has taken or commenced, but not yet completed or finalised, the performance of any other measure (including one which has a period or ongoing effect) that the landlord would not have been able to undertake or commence during the prescribed period by virtue of section 7(12); or
  • the operation of the terms of a commercial lease has had effect, or has a periodic or ongoing effect, contrary to the operation of section 7(12),

then the action, operation or effect will, insofar as it remains incomplete or ongoing, or has a periodic or ongoing effect, is taken to be stayed or suspended until the end of the prescribed period.

Similar wording can be found in section 12 of the WA Bill, but in addition to the factors described above, it will also apply if a rent increase has been applied during the Relevant Period. Further, it provides that despite the effect of the prohibited action being stayed or suspended until the end of the emergency period, the prohibited action undertaken by the landlord “is as valid and effective as it would have been had this Part not come into operation”. Arguably, this means that the prohibited action will take effect at the end of the emergency period.

We have considered some examples of prescribed or prohibited actions which may have occurred during the Relevant Period. It is clear that the purpose of these sections is to prevent, for example, landlords from enforcing their rights under breach notices which may have been issued on or after 30 March 2020, drawing down on bank guarantees to pay April rent and applying rent increases which would have ordinarily occurred during the Relevant Period.

Another obvious example which raises several issues for consideration is in respect of a lease which has already been terminated during the Relevant Period on account of a post-COVID-19 breach. It may be that because a termination is an action which has already been completed – that is, it is not something which is “not yet completed or finalised” – it will not be overturned as a result of these sections. However, on another reading of the legislation, the opposite might in fact be true – after all, a termination gives rise to an “ongoing event”. 

Despite the legislation being somewhat unclear with respect to a landlord’s right to terminate a lease during the Relevant Period, we consider that if termination has already occurred, the likelihood of a tenant obtaining relief against forfeiture for an isolated breach of failing to pay rent or outgoings or failing to trade since the commencement of the pandemic is very high.

A different result may ensue if the tenant had significant arrears outstanding which pre-dated 30 March 2020. There is nothing in the SA Act or the WA Bill which prevents a landlord from taking action against a tenant in respect of a pre-COVID-19 breach.

What about waiver or deferral of rent?

The leasing principles outlined in the Code with respect to waiver and deferral of rent payable during the COVID-19 pandemic are not expressly dealt with in the SA Act or the WA Bill. 

For the time being, we consider that parties should conduct their negotiations within the parameters of the principles set out in the Code.

The WA Bill provides that the regulations may adopt a code of conduct relating to commercial leasing principles during the COVID-19 pandemic. 

Rent increases and land tax

The SA Act (unless agreement is reached otherwise) and the WA Bill provide that rent payable under a lease is not to be increased during the emergency period, save than as determined by reference to turnover.

The SA Act also provides that to the extent that tenants are liable to pay land tax, the requirement that they do so will be suspended for the prescribed period.

Disputes

Each Act sets out a dispute resolution process.

South Australia

A party to a commercial lease may apply to the Small Business Commissioner for (a) mediation of a dispute in relation to whether or not the tenant is suffering financial hardship as a result of the COVID-19 pandemic, or (b) a determination to that effect (section 7(8)).

In determining whether or not a tenant is suffering financial hardship, the SA Regulations provide that the Commissioner must have regard to:

  • whether or not the tenant is eligible for, or is receiving, a JobKeeper payment
  • any reduction in turnover of the tenant’s business (as verified by financial records or statements provided by the tenant) during a specified period as compared with another specified period determined by the Commissioner as being relevant to the circumstances of whether or not the tenant is suffering financial hardship as a result of COVID-19.

A party can appeal the Commissioner’s determination that a tenant is or is not suffering financial hardship to the Magistrates’ Court.

Parties can continue to make applications for mediation in respect of issues arising under, or relating to, the lease or occupation of the relevant premises.

Western Australia

A party to a dispute (in respect of the Act and including a code of conduct dispute, which may include a dispute about the waiver or deferral of rent payable under a lease) may apply to the WA State Administrative Tribunal to have the dispute determined, but only if mediation attempts have failed (section 15).

The Tribunal will have power to make orders that one party pay money to another, a party do or refrain from doing something, or in relation to a code of conduct dispute, that specified amounts of rent payable under the lease be waived or deferred and paid in a specified timeframe (section 17).

In making orders relating to a code of conduct dispute, the Tribunal must have regard to:

  • the financial impact of the COVID-19 pandemic on the tenant’s business and capacity to meet the tenant’s obligations under the lease
  • if relevant in accordance with the adopted code of conduct – the landlord’s financial capacity
  • the principles of proportionality and fairness, and any other relevant principles, set out in the adopted code of conduct.

Applications for termination based on “severe financial distress”

The WA Early Termination Bill (not replicated in SA) sets out a regime where a tenant in “severe financial distress” may give a landlord a notice in writing proposing termination of its lease.

A tenant is in “severe financial distress” if:

  • the tenant is suffering financial hardship as a result of COVID-19 consequences
  • the tenant has made reasonable endeavours to negotiate waivers or deferrals or rent, or other concessions, from the landlord
  • despite those reasonable endeavours and any waiver or deferral of rent or other concessions made by the landlord, it is reasonable to conclude that because of the tenant’s financial hardship, the tenant is not, or will not at some later time, be in a position to perform the tenant’s obligations under the lease.

“COVID-19 consequences” is defined to mean a restriction imposed under a written law in response to the COVID-19 pandemic, changes in societal behaviour in response to the COVID-19 pandemic and any other consequences.

If a tenant gives a landlord a notice in writing proposing termination of its lease on account of severe financial distress, the WA Early Termination Bill suggests that the following steps will occur:

  • landlord to give notice within 14 days either (a) agreeing to termination, or (b) stating that the landlord intends to make an application to the Tribunal to determine whether the lease is to be terminated
  • if the landlord agrees to termination or does not give a notice within 14 days, the lease ends 21 days after the day on which the tenant’s notice was given
  • if the landlord gives a notice that it intends to make an application to the Tribunal, it must make that application within seven days of giving the notice. If it fails to do so, the lease will terminate seven days after the expiration of the seven day period in which the application was to be made
  • the Tribunal, on the hearing of the application, must consider whether the tenant is in severe financial distress
  • if satisfied that the tenant is in severe financial distress at the time it determines the application, the Tribunal must make an order that the lease be terminated, including when the termination is to take effect
  • if the Tribunal is not satisfied the tenant is in severe financial distress at the time it determines the application, it must make an order to that effect, but if it considers it appropriate to do so, it may make orders for waiver, deferral or other concessions to be provided by the landlord.

Effect of lease terminated due to “severe financial distress”

If a lease is terminated on account of the tenant being in severe financial distress, the landlord and tenant are released from any liability, and have no further liability to each other, under or arising out of the lease, such that:

  • the tenant will be liable to pay the landlord any rent and charges which were required to be paid prior to or for a period before the commencement of the emergency period
  • if the tenant fails to make good the premises in accordance with the lease, or leaves the premises unclean or in a state of disrepair, the tenant will be liable for the landlord’s costs of making good, cleaning or repairing the premises, except if they relate to something the tenant was not liable to do under the lease
  • the landlord may use the security deposit or bank guarantee provided by the tenant to pay any arrears or repair/make good costs, but must otherwise return or release any security held.

It is not yet clear whether other States and Territories will enact similar legislation with respect to the termination of leases by tenants in severe financial distress. Arguably the matters set out in the WA Early Termination Bill are in direct contrast to the principles of the Code, which provides that “tenants must remain committed to the terms of their lease, subject to any amendments to their rental agreement negotiated under this Code.”

Should you have any queries regarding these legislative developments and how they may apply to your business, please feel free to contact us to discuss. We will prepare further updates as the other States and Territories enact their legislation.

Author: Chris Brodrick & Alana Giles

[1] The RCLA (SA) does not apply to retail leases where: (a) the rent payable exceeds $400,000 per annum; (b) the tem is for one month or less; or (c) the lessee is a public company, a subsidiary of a public company, an ADI, a body corporate authorised to carry on the business of insurance, the Crown or a local Council.
[2] The CTAA (WA) does not apply to retail shop leases where: (a) the lettable area of the shop exceeds 1,000 square metres; (b) the lessee is a public company, a subsidiary of a public company, a body corporate listed on a foreign stock exchange or a subsidiary of such a body corporate; or (c) the lessee leases premises only for the operation of a vending machine or an ATM.

Disclaimer
The information in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, we do not guarantee that the information in this newsletter is accurate at the date it is received or that it will continue to be accurate in the future.

Chris Brodrick

Published by Chris Brodrick, Alana Giles

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