Rent relief and insolvency relief to continue till 28 March 2021. Will this create a problem for our economy?
Some of the significant COVID-19 government relief packages were due to end on 29 September 2020, both the federal and WA governments have decided to continue relief packages till 28 March 2021. Is this a problem for our economy on a longer term view? Both the commercial tenancies and residential tenancies COVID-19 response legislation protecting tenants from eviction for failure to pay rent during the state of emergency was due to come to an end on 29 September 2020 but this has been extended to 28 March 2021. The Federal Government has also decided to kick the can down the road, by extending the insolvency protections unchanged until 31 December 2020. We will however see a gradual reduction in the relief provided by JobKeeper and JobSeeker starting at the end of September.
So that we can understand some of the businesses that may be affected by the impending changes to protections provided to commercial tenants during the state of emergency, let’s have a look at the small business sector in Western Australia. As at 30 June 2019, 64% of the businesses in Western Australia were sole traders, 33% small businesses (1 – 19 staff), 2.6% medium businesses and 0.2% large businesses. That means 97% of all businesses trading in Western Australia are classed as small, that is, 226,411 businesses. A lot of small businesses operate as sole traders being approximately 150,000 of them. They can often trade from home or without the need to rent commercial premises. However, approximately 77,000 small businesses in Western Australia employ people and they employ 493,650 people being 41% of Western Australia’s private sector workforce and, therefore, a lot of them require commercial premises to lease to operate their business. This significant portion of the Western Australian economy is, to some degree, likely to be affected by the upcoming changes by the withdrawal of the government relief packages for commercial tenancies. WA Small businesses contribute $50.1 billion to the economy (these statistics are provided by the Small Business Development Corporation).
In April 2020, the National Cabinet created the Mandatory Code of Conduct for SME Commercial Leasing Principles during COVID-19. These principles set out a way forward, that operated from 3 April 2020 as to how landlords and tenants were to deal with rental and other obligations under commercial leases during the COVID-19 pandemic. They created an obligation on state governments to then enact legislation and regulations to govern the situation. The Western Australian Government did so through the Commercial Tenancies (COVID-19 Response) Act and Regulations. The Act came into force on 24 April 2020 and the regulations on 30 May 2020, however, they are effective from 30 March 2020 through to 29 September 2020 (now extended till 28 March 2021). They provide protection for ‘commercial leases’. A ‘commercial lease’ is defined to include:
- a retail shop lease as defined in the Commercial Tenancy (Retail Shops) Agreements Act 1985;
- a leased premises tenanted by a small business (being a business of less than 20 employees); and/or
- a lease where the tenant is an incorporated association.
The tenant then needs to be an eligible tenant and an eligible tenant is defined to be a business with turnover in the financial year ended 30 June 2019 of less than $50 million and one that qualifies under the JobKeeper Scheme.
What protections does the legislation contain?
Protections provided under the legislation include:
- a six-month moratorium on evictions due to non-payment of rent;
- a freeze on rent increases;
- a restriction on penalties for tenants who do not trade or reduce their trading hours;
- a prohibition on landlords making a claim on any form of security (e.g. a bank guarantee or security deposit) for the performance of the tenants obligations under the lease; and
- a prohibition on landlords progressing action against a tenant for a breach that occurred after 30 March 2020 but before commencement of the new laws.
Overarching obligations on landlords and tenants
The code created under the regulations requires landlords and tenants to:
- act reasonably and in good faith;
- act in an open, honest and transparent manner;
- must provide each other with sufficient and accurate information that is reasonable for them to provide in the circumstances for the purpose of the negotiations; and
- not make onerous demands for information from each other.
What type of relief should be granted?
The tenant is required under the legislation to make an application in writing to the landlord for relief. In that application, the code sets out what information is required to be provided but includes information such as; details of their downturn of business, that they qualify under the code as being eligible tenant, providing evidence of their downturn being satisfying the JobKeeper and can be required to continually provide updates of that for each month. The relief provided under this legislation is different to JobKeeper insofar as JobKeeper, if you satisfy the criteria for one month, it provides you relief for the balance of the six month period, however, under the tenancy relief the landlord can require for the tenant to prove a 30% or greater downturn for each month that they are seeking rental relief.
The rental relief that is to be provided is to be by way of a waiver of rent and deferment of rent. The waiver of rent needs to be at least 50% of the amount that is being reduced by and the balance can be deferred either for the balance of the term of the lease or 24 months, whichever is the greater, then to be repaid by equal monthly instalments from 28 March 2021 until the period elapses. The relief also requires that if, for a period of time, the tenant was not able to occupy and operate their business from the premises, then outgoings were not required to be paid by the tenant during that period.
What if agreement cannot be reached between the landlord and the tenant?
If an agreement cannot be reached under the code, the small business commissioner can mediate or conciliate the matter and if it cannot be resolved by that process, then a dispute can be taken to the State Administrative Tribunal.
One of the significant concerns that we have for tenants is that if the tenant does not resolve the matter with the landlord before 28 March 2021 and/or there remains money owing to the landlord at that date by way of rent that has not been agreed to be waived or deferred, then the landlord, after that date, can take steps to enforce their rights under the lease to commence steps to evict a tenant for failure to pay rental. This period of time is getting very close.
If a tenant has not made a formal request for relief in writing and has set out the factors required under the code, they must urgently act, as the landlord has 14 days within which to respond to that request. If the landlord has not responded to your request within 14 days, we strongly advise tenants to take steps to either approach the small business commissioner for mediation or commence proceedings in the State Administrative Tribunal.
It will be interesting to see the potential rush of matters being filed with the State Administrative Tribunal and the need for tenants to seek relief from forfeiture (being a landlord’s right to terminate the lease for failure to pay rent) if the landlord and tenant have not reaches a resolution of the waiving or deferment of rent before the relief provided under the legislation ceases on 28 March 2021.
If tenants reach an agreement with landlords, they should also ensure that that is clearly documented and signed by both parties to ensure that after the relief period comes to an end, neither party seeks to alter the agreement that was reached.
Now that the tenancy relief has been extended till 28 March 2021, landlords and tenants may want to be proactively managing their negotiations as whilst the lease cannot be terminated, the arrears will be building up if they have not been paid since April 2020 and will potentially become a big problem in April 2021. We can assist with informal negotiations, SBDC mediation or action in the SAT for both landlords and tenants to take proactive steps to move towards a resolution now before the problem become insurmountable.
January 2021 when historically a lot of Australians take extended summer vacations may now become the witching hour for Australian businesses. The insolvency protection and the protections for director liability for insolvent trading will be lost and rental arrears will come due. We could see a tsunami of businesses collapse in Australia, not the New Years resolution most of us would be hoping for.
With COVID tenancy protections then ceasing on 28 March 2021, we could then see a second wave of business collapses in the small business sector, that remember makes up 97% of businesses trading in WA and is worth $50.1 billion to the WA economy annually.
Whilst each business situation will depend on independent circumstances, without doubt, all businesses should be taking proactive steps now to be prepared for a potentially volatile economy in early 2021.
About the author:
This article has been authored by Steven Brown who is a Perth lawyer and director at Lynn & Brown Lawyers. Steven is a Perth lawyer and director, and has over 20 years’ experience in legal practice and practices in commercial law, dispute resolution and estate planning.