On 16 April 2020, the Western Australian Parliament introduced the Commercial Tenancies (COVID-19 Response) Bill 2020 (Code Bill) and the Commercial Tenancies (COVID-19 Response (Early Termination)) Bill 2020 (Termination Bill).

The Code Bill was passed on 17 April 2020 and is expected to become law shortly, providing relief for small commercial tenants and provides for the national code of conduct to come into effect in Western Australia in the future.

The Termination Bill will confer a right on tenants under a small commercial (or such other class of lease that may be prescribed in regulations) in severe financial distress caused by the COVID-19 pandemic to terminate their lease. The government has stated that there is no current intention for the Termination Bill to be passed at this time but they will seek to pass the Termination Bill should there be evidence of widespread failure by landlords to negotiate in good faith pursuant to their obligations under the Code Bill. At this stage Western Australia has not followed some other jurisdictions by providing a waiver or reduction in land tax.

Application of the Code Bill and the Termination Bill – 'small commercial lease'

Both the Code Bill and the Termination Bill apply to landlords and tenants in respect of a 'small commercial lease'.

A small commercial lease is a lease:

• That is a retail shop lease under the Commercial Tenancy (Retail Shops) Agreements Act 1985 (WA);
• Of premises that are used by a tenant who owns or operates a small business;
• Where the tenant is an incorporated association under the Associations Incorporation Act 2015 (WA); or
• Prescribed by regulations.

A 'small business' is a business that:

• Has a relatively small share of the market in which it competes;
• Is managed personally by the owner or directors;
• Is not a subsidiary of a larger business; or
• Is declared to be a small business.

Retrospective operation

Both the Code Bill and the Termination Bill will have retrospective operation and the key provisions will have effect during the 'emergency period' which is the period from 30 March 2020 to 29 September 2020 (or an earlier date prescribed by regulations).

Commercial Tenancies (COVID-19 Response) Bill 2020

Key prohibitions and moratoriums

The Code Bill prohibits landlords from taking certain actions against a tenant under a small commercial lease who is in breach of its lease by failing to make rental or other monetary payments (including operating expenses), to keep premises open or other breaches that may be prescribed by regulations during the emergency period. The prohibited actions include:

• Eviction or other action to re-enter or repossess the premises;
• Termination of the lease;
• Claims for damages;
• Charging interest on unpaid amounts (including operating expenses);
• Claiming on tenant security or guarantees granted under the lease (eg bank guarantees); and
• Other remedies available to the landlord.

Further, landlords are prohibited from increasing any rents that are not determined by reference to turnover during the emergency period. However, any increase in rent that was due during the emergency period (eg a rent review) can be implemented after the emergency period.

Code of Conduct

The Code Bill also enables a code of conduct to be adopted by regulations. The Attorney-General and Minister for Commerce, John Quigley, stated during the second reading parliamentary debate that government intends for the code of conduct to be adopted as reflective of the national position and it will be around 1 month until it comes into effect.

The code of conduct will currently apply to small commercial leases though the definition could be extended in the regulations.

Dispute Resolution

Any disputes occurring or arising out of the operation of the legislation may be referred to the Small Business Development Commissioner in the first instance and then to the State Administrative Tribunal (SAT).

A landlord can seek orders in relation to a small commercial lease (including an order to terminate the small commercial lease) if the tenant has failed to pay amounts due under the lease and the failure was not due to any financial hardship as a result of COVID-19. In making orders, SAT must take into account, amongst other things, the landlord's financial capacity.

Commercial Tenancies (COVID-19 Response (Early Termination)) Bill 2020

Intent of the Termination Bill

While the Termination Bill has been introduced into parliament, the Attorney-General has stated that at this time, there is no intention for the Termination Bill to become law. They will only seek to enact it if it forms the view that landlords are not acting in good faith in their negotiations with tenants. Relevantly, the Attorney-General has stated that:

'Importantly, it is not the government’s intention to proceed immediately to list the second reading debate of this bill and will only do so if there is evidence of widespread abuse by landlords of their obligation for good faith negotiations for rent relief for commercial tenants as provided for in the Commercial Tenancies (COVID-19 Response) Bill 2020. Should those circumstances arise, this bill will have laid on the table in this chamber for the 21 days as required by standing orders and, if needed, will be enlivened immediately.'

Termination of lease if tenant is in severe financial distress

The Termination Bill allows a tenant under a small commercial lease who claims to be in 'severe financial distress' to give the landlord a notice (in a form required by the legislation) proposing termination of the lease.

A tenant is in 'severe financial distress' if it:

• Is suffering financial hardship as a result of COVID-19 consequences;
• Has made reasonable endeavours to negotiate waivers or deferrals of 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 commercial lease; and
• Meets other criteria that may be prescribed by regulations.

Within 14 days of the tenant's notice being given, the landlord may give notice (in a form required by the legislation) to the tenant either:

• Agreeing to the termination of the lease – in which case the lease terminates 21 days after the date of the tenant's notice (this also applies if the landlord fails to give a notice within the 14 day time limit); or
• Stating that they intend to make an application to SAT to determine whether the lease is to be terminated – in which case the landlord must make the application within seven days of its notice to the tenant (failing which the lease terminates seven days after the tenant's notice).

SAT then has powers to made orders that the lease be terminated or that the lease be performed with any appropriate concessions. Even if SAT orders that the lease is not terminated, it can make an order for the waiver or deferral of rent or other concessions from the landlord. This can go beyond what may have already been agreed between the landlord and tenant.

Effect of early termination of the lease

If a lease is terminated on grounds of the tenant's severe financial distress, the tenant will not be required to pay:

• Any amounts arising under the lease after commencement of the emergency period; or
• The usual compensation or damages to the landlord associated with early termination of a lease (often referred to as ‘break lease costs’).

However, the tenant must pay any rent or other monies owing under the lease that were required to be paid, or related to the period, before the commencement of the emergency period. Also, the tenant must leave the premises in a state consistent with the terms of the lease. In either case, the landlord may recover the monies from any security provided by the tenant.

We continue to monitor the progress of both Bills and will provide further updates.