COVID-19 and Leasing

Greg Lynn

The COVID-19 pandemic has had a huge impact on the lives of everyone.  But have you considered the impact of COVID-19 on yourself or your business as a landlord or tenant?

This is especially important to consider for those who run small businesses and who have a commercial tenancy arrangement with their landlord.  COVID-19 has had a particularly hard impact on those who run small businesses which are service oriented or which rely on a lot of face-to-face customer contact.  Your business structure may be as a sole trader, a partnership or a corporation.  Each of these structures is different, with its own unique aspects and challenges.  Perhaps your business also falls into one of the following categories:

• Cafés
• Newsagents
• Small to medium-sized professional services firms (i.e. accountants, real estate agents or financial planners)
• Thrift stores/Op Shops & Charity Shops
• Auto-repair businesses
• Computer shops
• Office Supples & Office Equipment Sellers
• Delis
• Pharmacists
• Medical services centres
• Retailers including sports stores, clothing stores, jewellers, bookshops and Hi-Fi/Electric Goods stores
• Bars or small pubs
• Restaurants
• Food halls
• Gyms/fitness centres

As you can see, a commercial tenancy agreement can cover many, many types of different business.

What is a commercial lease? 

A commercial lease is a legally binding agreement between two parties which gives each parties certain legal rights and duties to each other.  Usually unless a lease is made by oral agreement, it is in writing and contains many pages outlining the obligations parties have to each other.

What is a commercial lease? 

Small businesses are a cornerstone or the Australian economy and many people in WA make their living by running their own small business and are self-employed and therefore cannot work from home or use the Internet to make a living.  While some people are able to run their businesses from their home or online, many people still need a physical location to operate their business, requiring them to set up a shop, a workshop or a professional office in a physical location owned by another party.   In the vast majority of businesses, this requires the business owner to create a legal agreement known as a commercial lease.

What does a commercial lease look like? 

Commercial leases are often lengthy and complex legal documents that contain many provisions (covenants).  A lease, whether written or oral in nature, is both a legally binding agreement (contract) as well as being one kind of legal relationship covered by property law (leases) and these two complex areas of law overlap in leases.  Leases generally contain provisions which cover matters that detail the mutual legal obligations of the tenant (the lessee) and the landlord (lessor) covering matters including:

• Lease duration and options to renew (usually for a fee);
• Rent and rent reviews;
• Permitted uses of the property;
• Costs, including repair and maintenance;
• Who is responsible for outgoings and contributions for shared premises with other businesses (i.e. a sinking fund or strata arrangements);
• Compensation to the tenant from the landlord when the landlord makes repairs or renovations to the property;
• Assignment and sub-leasing;
• Default clauses;
• Termination clauses, including when a lease can be ended by either party.

A commercial lease agreement, even for a relatively small business can cover many different matters and be surprisingly complicated.  There are also many small businesses defined as ‘retail shops’ under WA law, which are covered by a special government Act known as the ‘Retail Shops Act 1985.’  If you are entering into a lease, negotiating a new lease, exercising an option or thinking about exiting a lease as either a landlord or tenant, it is critical you get expert legal advice to help avoid problems down the track.

What impact has COVID-19 had on commercial tenancies? 

COVID-19 has made it very difficult for many small and medium sized businesses to operate normally as people have stopped going to public places where other people frequently visit or to go out to cafes, bars and restaurants and in many cases, government restrictions and closures relating to COVID-19 have made it very hard or even impossible for many small to medium sized businesses (for example hairdressers, cafes, restaurants, retailers and others) to perform many of their normal contractual obligations in a commercial lease, particularly in relation to paying rent, trading hours and performance of other obligations and thus putting them in legal default of their lease.

Is there assistance for WA businesses in a commercial lease impacted by COVID-19? 

In April, the WA government announced a range of relief measures for businesses impacted by COVID-19.  These relief measures included:

• The passing of the Commercial Tenancies (COVID-19 Response) Act 2020 along with a new ‘Commercial Tenancies Code of Conduct’ modifying the legal obligations of tenants and landlords in WA in commercial tenancy arrangements during the COVID-19 pandemic;
• Financial Support and Grants for eligible businesses;
• Eligibility to apply for relief for land tax and other charges;
• In some cases, legal protections for tenants against eviction and demands to pay rent at the usual market rate, provided the tenant can demonstrate their business has had a COVID-19 related reduction in turnover.

When does the Commercial Tenancies Response Act 2020 and Code Apply? 

According to the COVID-19 Response Act, it applies to businesses covered by ‘small commercial leases’ during the relevant period.  The Act defines a small commercial lease to include a ‘retail shop lease’, a lease where the tenant is a ‘small business’ as defined by the Small Business Development Corporation Act (SDBC Act) 1983 and where the tenant is an ‘incorporated association’ defined by the ‘Associations Incorporation Act’ 2015.

What are some of the key changes under the Commercial Tenancies Code of Conduct 2020? 

The legislation outlines some important modifications to the existing law around commercial tenancies.  These include the following changes:

• 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 enforcing claims against tenants or guarantors (i.e. through a bank guarantee or security deposit) for non-performance of a tenant’s obligations in a commercial lease;
• Deferrals or reductions in rent payments;
• Dispute resolution mechanisms including requiring landlords and tenants in commercial leases to ‘negotiate in good faith’ to resolve issues or disputes arising because of COVID-19 related restrictions or lockdowns;
• A detailed process to negotiate relief for rent in proportion to the loss of revenue due to COVID-19.

What do I need to show in order to be eligible for relief under the Code? 

You will need to demonstrate to your landlord (if you are the tenant) you have suffered a 30% decrease or more in your turnover using sufficient evidence (i.e. financial records) and notify your landlord in writing.  Your landlord must respond in 14 days to your request.  To be eligible to be a ‘small business’ under the Code, any small business (including retail stores) need to have an annual turnover of $50 million or less and which qualify for the ‘Job-Keeper’ scheme or who have experienced a decline in turnover of 30% or more during the ‘emergency period’ (six months from March 2020).  Small charity organisations only need to show a 15% reduction in turnover.

What happens if I can’t resolve my dispute under the Code? 

The Small Business Commissioner can mediate or conciliate and disputes can be referred to the State Administrative Tribunal (SAT) if you are unable to resolve your issues.  The SAT has jurisdiction to resolve disputes involving tenancy issues.  Also if you are involved in legal action to recover unpaid rent or terminate a lease, you may need legal representation in Court.

What should I do next? 

If you are either a landlord or tenant and your business has been impacted by COVID-19 and related restrictions and if you are seeking relief from your obligations under a lease because of COVID-19 or you have a dispute because of COVID-19, it is prudent to seek detailed legal advice to ensure you understand the full ramifications of the COVID-19 related changes to WA’s commercial tenancies laws and the implications to you.

If you or someone else you know would like further information or needs help and advice, please call us at 08 9375 2353, or email us at lennard.admin@iinet.net.au today.

Image credit: Artem Beliaikin via Pexel