Changes to the Property Law Act 2007: Resolving Commercial Rent Disputes caused by COVID-19
The Government has announced its plan to change the Property Law Act aimed at facilitating rent and outgoings relief for small businesses that are struggling to meet fixed costs due to the loss of revenue caused by COVID-19. The government has announced that it will insert an implied clause into commercial leases requiring a fair reduction in rent and outgoings where a business has suffered a material loss of revenue due to the restrictions put in place to combat COVID-19.
Will my business be eligible?
The proposed clause will only be implied into commercial leases with businesses that meet the following criteria:
(a) The business has 20 or fewer full-time equivalent staff per leased site;
(b) The business is New Zealand based;
(c) The business has not already come to an agreement for a rent abatement with their landlord.
For any commercial lease that is in the form of a standard sixth edition ADLS commercial lease (which includes a "no access in emergency clause") or a commercial lease that includes a similar rent abatement clause, such clause will be modified by the implied clause to be consistent with the implied clause.
What is a "fair proportion" of the rent and outgoings that will cease to be payable?
The proposed implied clause will require that a fair proportion of rent and outgoings cease to be payable if a tenant's business has suffered a material loss of revenue because of the restrictions put in place to combat COVID-19, whether or not the tenant has been able to access the premises.
When tenants and landlords are negotiating what will be a fair proportion of the rent and outgoings, they may consider whether, in the circumstances, it will be appropriate for this to take the form of:
(a) No rent being payable for a period; or
(b) Reduced rent being payable for a period, including reductions of varying levels over successive periods; or
(c) A scheduled increase being deferred; or
(d) Rent continues to be paid unabated; or
(e) A mix of these options.
The government has suggested that the interests of both the landlord and the tenant should be taken into account when determining a fair proportion. The financial position of the landlord, the tenant and any other relevant party should be accounted for including:
(a) The impact of the COVID-19 restrictions on the business, including the impact of those restrictions that are no longer in place;
(b) Any mortgage obligations relevant to the leased premises;
(c) Any financial support available;
(d) Their revenue and profit levels in recent years;
(e) Their ability to survive financially the effects of official requirements to counter the outbreak of COVID-19;
(f) Any difference in size and resources between the landlord, the tenant and any other relevant party;
(g) Any other factor that is reasonably relevant.
Relevant parties that should be accounted for include a sub-lessee, any lessor under a superior lease, any parent company for the landlord or tenant, and any other party who is reasonably relevant.
Potential Consequences of the Government Initiative
Many of those tenants who entered into a standard sixth edition ADLS commercial lease have already agreed with their respective landlords the proportion of rent and outgoings that they will pay during the seven week period of the COVID-19 government imposed lock down under clause 27.5 of the lease (which provides that "a fair proportion of the rent and outgoings shall cease to be payable for the period commencing on the date when the Tenant became unable to gain access to the premises to fully conduct the Tenant's business from the premises until the inability ceases").
Such tenants could potentially be precluded from taking advantage of the new implied clause because the government has noted that businesses that have reached an agreement for a rent abatement with their landlord will not be eligible for further relief. For these tenants, whilst they may have benefited from a certain amount of rent relief for a seven week period (during Alert Levels 3 and 4), such tenants will not be able to obtain rent relief (to which they otherwise would have been entitled) over the next six months. This would not be an equitable result for these tenants, however, this issue could potentially be addressed in the relevant legislation.
The minutes of the Cabinet decision noted that clear rules will be included in the relevant legislation with regard to determining what factors should be considered in determining a fair proportion of rent and outgoings to be paid by tenants as well as the way in which such relief can be implemented. This will be essential to avoid a significant number of disputes and to minimise the arbitration subsidy (of $6,000 per arbitration) to be provided by the government under this initiative.
What can my business do if a dispute arises?
If landlords and tenants cannot reach agreement on a fair rent, the parties will be required to seek arbitration to resolve disputes under the new legislation. Generally, the results of arbitration will be final and binding.
$40 million has been set aside by the Government to provide access to arbitration for small or medium businesses.
While the proposed legislation may assist those tenants caught out by COVID-19 without a rent abatement clause in their lease, we hope that the provision of a $40 million arbitration fund is not a signal that the legislation is going to be sufficiently ambiguous to cause a significant number of disputes (because a $40 million arbitration fund effectively means that the government is forecasting 6,667 formal arbitration proceedings at $6,000 per arbitration). The factors determining what will amount to a fair reduction in rent set out in the Cabinet minutes are broad but should be clarified in the legislation. Everyone can agree, even the lawyers, that diverting a business's resources and time towards arbitrating rental disputes will be counterproductive and may not provide businesses with the effective solutions they need in these unprecedented times. With clear legislation, a significant chunk of the $40 million arbitration fund could then be allocated to a more productive business initiative.
If you are a landlord or a tenant and you would like advice about the impact that these changes to the Property Law Act may have on your rights and obligations under your commercial lease then please contact Barton Hoggard or Paul Hunter.