Temporary law change impacts commercial leases

Introduction

In the fallout of COVID-19 and Government mandated lockdowns and restrictions, many businesses found difficulty in paying their fixed costs, such as rent and outgoings. Some businesses found that their lease catered for such a situation, requiring a fair abatement of rent and outgoings while a tenant cannot access their premises to fully conduct their business; others found that their lease had no such clause and were contractually required to pay rent and outgoings in full. Regardless of the particulars of the lease, the Government encouraged parties to work collaboratively in reaching an agreement of what constituted a fair abatement of rent and outgoings in the specific circumstances, acknowledging that this would differ on a case-by-case basis. In seeking to ensure the survival of many New Zealand businesses, the Government has stepped in to try and ensure a ‘fair’ solution is reached.

On 4 June 2020, the Government released substantive details regarding a temporary amendment to the Property Law Act 2007 (PLA) that will imply a clause in commercial leases requiring a fair reduction of rent and outgoings and a compulsory subsidised arbitration scheme where parties are unable to agree on the level of abatement. To be eligible for the implied measures a business must have 20 or fewer full time staff at the leased premises and be New Zealand based.  The changes will come into force as of 4 June and will remain in effect for six months from the date of enactment of the Bill required to amend the PLA. It is not clear when this Bill will be enacted.

The exact wording of the implied provision is not yet available. The Government has however provided guidance as to what is to be expected.

The effect of this law change

The amendment to the PLA is set to imply a term into commercial leases requiring a fair proportion of rent and outgoings to cease to be payable when a tenant’s business has suffered a material loss of revenue because of restrictions put in place to combat COVID-19. While many leases cater for an abatement of rent and outgoings where a tenant is unable to access its premises to fully conduct its business, it is not immediately clear which factors are relevant in determining what constitutes a ‘fair’ abatement of rent and outgoings. The temporary amendment to the PLA will also seek to clearly outline what is relevant in determining the proportion of rent and outgoings that should cease to be payable.

It is intended that eligible parties will use this criteria to come to their own agreement regarding a fair abatement of rent and outgoings. For those who are still unable to come to their own agreement, a government subsidised arbitration scheme will be available.

Who will this affect?

Many landlord and tenants have already come to their own arrangements regarding an abatement of rent and outgoings during the COVID-19 lockdown, regardless of whether the lease provided for an abatement or not. Such arrangements will not be retrospectively altered by this amendment. To be eligible, a business must:

  • have 20 or fewer full-time equivalent staff per lease site;
  • be New Zealand based;
  • have not already come to an agreement regarding rent and outgoings; and
  • have had their revenue negatively affected by restrictions imposed to combat COVID-19.

This is so regardless of whether or not the tenant is able to physically access the premises. If an agreement cannot be reached, a subsidised arbitration scheme will determine what is a fair abatement of rent and outgoings in the context of the specific lease.

What then, is a ‘fair’ abatement?

Even parties whose lease catered for an abatement of rent and outgoings may have found themselves at a loss as to what is liable to be paid. The current ADLS Deed of Lease requires a fair abatement of rent and outgoings when the tenant cannot access the premises to fully conduct its business, but the Deed does not specify what is relevant in making this determination.

Although the specific wording of the amendment has yet to be seen and enacted, the Government has indicated the following factors are relevant:

  • the financial position of the lessor, the lessee, and any other relevant party, including:
  •  the impact of COVID-19 restrictions on the business, including the impact of restrictions that are no longer in place;
  • any mortgage obligations relevant to the leased premises;
  • any financial support available to them;
  • their revenue and profit levels in recent years;
  • their ability to financially survive the effects of official requirements to counter an outbreak of COVID-19;
  • any difference in size between the lessor, the lessee, and any other relevant party;
  • any other factor that is reasonably relevant.
  • the relevant party in any sublease, any lessor under a superior lease and any party who is reasonably relevant.

The options for eligible parties

Parties who are obligated to agree a fair abatement of rent and outgoings have a number of options regarding the abatement given that tenants are now able to again access to their leased premises. The Government has indicated a number of methods available in making this adjustment, including:

  •  no rent being payable for a period;
  • reduced rent being payable for a period, including reductions or varying levels over successive periods;
  • a scheduled rent increase being deferred;
  • rent continuing to be paid unabated;
  • a mix of these options.

It is intended that the incoming implied term will incorporate a list of measures available to eligible parties.

If the parties cannot agree

Eligible parties who still cannot agree as to what constitutes a fair reduction of rent and outgoings are required to settle the dispute through a compulsory arbitration scheme. This scheme will be heavily subsidised by the Government and streamlined. A $40m fixed fund will be available, allocating $6,000.00 (including GST) per dispute. It is estimated this would cover on average 75% of arbitration costs. While parties will continue to be able to choose their own arbitrator, only parties using the contracted service(s) will have access to the subsidy. Following such arbitration, a fair abatement of rent and outgoings will be determined for the landlord and tenant.

Conclusion

Some may find this amendment too little too late and more a dispute resolution option than a support package. Property Council membership indicates that 80% of leasing parties have already come to their own agreement regarding rent relief. Others may be dismayed at the retrospective altering of contractual arrangements between private individuals by the Government. But for those whose lease did not contemplate any form of rent relief and/or have been at a deadlock with their landlord or tenant, this amendment may provide some much needed relief and security to continue trading into the future.

 

 

Contact

Ashley Taggart is a Lane Neave Partner in the Commercial Property teamAshley Taggart
Partner, Lane Neave

t +64 3 377 6875
m +64 27 429 0383
e ashley.taggart@laneneave.co.nz

Sharon Skinner
Partner, Lane Neave

t +64 4 912 0800
m +64 27 487 7186
e sharon.skinner@laneneave.co.nz

Sam Nelson
Partner, Lane Neave

t +64 3 409 0324
m +64 21 228 3331
e sam.nelson@laneneave.co.nz

Ed Smithies
Special Counsel, Lane Neave

t +64 9 892 6503
m +64 27 777 6899
e ed.smithies@laneneave.co.nz