Covid Commercial Lease Reform

Covid Commercial Lease Reform

Relief for Commercial Leases during COVID-19

The New Zealand Government has announced a proposed amendment to the Property Law Act 2007 that would entitle commercial tenants to cease rent and outgoing payments to their landlord  where the tenant’s business has suffered a material loss of revenue due to COVID-19.

As at the date of publishing this article, the draft Bill identifying the intended changes has not yet been published.  Accordingly, there is still some ambiguity around the specifics.  However, the Cabinet Economic Development Committee’s Minute of Decision dated 3 June 2020 and Mr Little’s submissions to the Cabinet Economic Development Committee provide some guidance on what we might expect to occur.

Proposed changes

The proposed changes are set out below.

The amendments to the Property Law Act will imply a clause into leases of businesses that meet eligibility criteria that requires a fair proportion of rent and outgoings cease to be paid when a tenant’s business has suffered a material loss of revenue because of the restrictions put in place to combat COVID-19.

To be eligible, the criteria is as follows:

  1. the business has 20 or fewer full-time equivalent staff per lease site.
  2. the business is New Zealand based.
  3. the business has not already come to an agreement for a rent abatement with their landlord.

The amendments provide clear rules that must be followed when determining what factors must be considered in determining a fair proportion, based on the principles that the interests of the landlord and the tenant should both be taken into account, and the financial burden of COVID-19 fairly proportioned.

The amendments seek to provide clear guidance on what other measures parties may agree to as a temporary change to support them both through the pressures caused by COVID-19.

It will be a requirement that any commercial lease disputes under the amendments to be settled in arbitration in accordance with the Arbitration Act 1996 (with rights of appeal).

It is intended to supporting parties to access arbitration in a timely and cost-effective manner through a government subsidy provided for streamlined arbitrations at a rate of $6,000 per arbitration. This would be delivered through providers who would receive the $6,000 including GST per dispute to deliver a fixed-rate streamlined arbitration service and the parties will be liable to pay any costs exceeding $6,000.

To be eligible one party must also be a small or medium enterprise receiving the Wage Subsidy.

In determining what a “fair proportion” is, the financial position of the lessor, the lessee, and any other relevant party ought to be taken into account, including the following factors:

  1. The impact of the COVID-19 restrictions on the business, including the impact of restrictions that are no longer in place;
  2. Any mortgage obligations relevant to the leased premises;
  3. Any financial support available to them;
  4. Their revenue and profit levels in recent years;
  5. Their ability to survive financially the effects of official requirements to counter an outbreak of COVID-19;
  6. Any difference in size and resources between the lessor, the lessee, and any other relevant party; and
  7. Any other factor that is reasonably relevant.

The proposed amendments has been expressed to be similar to the “No Access in Emergency” clause currently in the standard ADLS lease form but also clearly requires that there is or has been a material negative impact on the tenant’s business due to COVID-19, whether or not the lessee is able to access the premises.

The parties ought to negotiate a fair proportion of rent and outgoings that would cease to be paid. The parties could consider whether, in the circumstances, it was most appropriate for this to take the form of:

  1. No rent being payable for a period; or
  2. Reduced rent being payable for a period, including reductions of varying levels over successive periods; or
  3. A scheduled rent increase being deferred; or
  4. Rent continues to be paid unabated; or
  5. A mix of any of these options.

The amendments would also include a list of other types of measures that could be negotiated, such as a rent deferment, if that is fair in the circumstances. The amendment will therefore enable the parties to negotiate about these matters if they wish to, but this negotiation would not be mandatory.

If the parties cannot agree, they will then be obligated to commence the arbitration process.

Unfortunately, these changes will not apply to tenants who have already agreed with their landlord on the proportion of rent that they should pay in light of COVID-19.

However, it does not include situations where the landlord has insisted on strictly enforcing the terms of the lease in response to the tenant’s request for a rent reduction.

As to when the Bill would come into effect, the Cabinet Economic Development Committee agreed that the amendments will have retrospective effect. It would apply from the date of the policy announcement and extend for six months after enactment of the Bill.

Our Thoughts

We expect the amendments to the Property Law Act to be welcomed by business owners with commercial tenancies.

In our experience there are many tenants that have not yet settled with their landlords as there has been uncertainty and/or they did not have clause 27.5 in their lease.

This amendment levels the playing field for commercial tenants. Further, it goes much wider than clause 27.5 in that it doesn’t just relate to no access but the impact on the business itself.

We are available to assist parties negotiate a commercial outcome and we offer a free 30 minute legal consultation where we can discuss the issues and formulate a strategy that works. You can book a consultation here.

How to Avoid Paying your Commercial Lease in the Era of Covid-19

How to Avoid Paying your Commercial Lease in the Era of Covid-19

The COVID 19 pandemic brings uncertainty not just to the public, but especially to business owners.

As at the date of writing this article, the government issued a level 3 alert, rising to level 4. We are about to be isolated and offices and other commercial buildings left inaccessible.

For business owners, this means among other things that all non-essential businesses must close. During this time, businesses will not have access to the premises. However, does this mean that it must pay for the time where there is no access?

If the lease is on the standard deed of lease from the Auckland District Law Society, then there may be reprieve.

Clause 27.5 provides that:

If there is an emergency and the Tenant is unable to gain access to the premises to fully conduct the Tenant’s business from the premises because of reasons of safety of the public or property or the need to prevent or overcome any hazard, harm or loss that may be associated with the emergency including:

(c) Restriction on occupation of the premises by any competent authority.

Then 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.

Clause 47.1(d) defines an “emergency” to mean a situation that:

(a) Is a result of any event, whether natural or otherwise, including an … epidemic; and
(b)
Causes or may cause loss of life or serious injury, illness or in any way seriously endangers the safety of the public or property; and
(c) The event is not caused by any act or omission of the landlord or tenant.

In the present circumstances, it is highly arguable that there is an emergency as there is an epidemic. This is supported by the fact that an epidemic notice was issued under section 5 of the Epidemic Preparedness Act 2006. Further, the epidemic may cause loss of life and the event is not caused by any act or omission of the landlord or tenant.

Assuming that there is an emergency and the tenant is unable to gain access to the premises to fully conduct its business, then clause 27.5 states that the tenant would not be liable for a proportion of rent and outgoings from when the tenant became unable to gain access until that inability ceases.

Clause 27.6 provides a further option by giving either party the choice of terminating the lease by giving 10 working days written notice to the other if:

The tenant is unable to gain access to the premises for the period specified in the schedule; or

The party that terminates the lease can at any time prior to termination establish with reasonable certainty that the tenant is unable to gain access to the premises for that period.

Accordingly, depending on the period contained in the schedules, the tenant might also be able to terminate the lease.

What does this mean to tenants and landlords? It appears that the purpose of clauses 27.5 and 27.6 is to shift the burden of the cost of emergencies to the landlord. It is important to note that the operation of clause 27.5 does not require notice from the tenant. It means that clause 27.5 operates automatically and it would be highly arguable for tenants to rely on this clause for proportional rent and outgoings.

For landlords, this means that you need to anticipate for this potential outcome and make provision for less rental income.

We highly recommend that tenants and landlords work collaboratively during this period to ensure they both come out of stage 4 lockdown commercially viable. In many cases, the commercial relationship can continue once the dust settles as the reality for most landlords is they are likely to experience difficulty in finding replacement tenants during this time.

For more information, feel free to contact the legal experts at Norling Law for a free 30-minute no-obligation consultation which can be booked here.

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For more information, feel free to contact the legal experts at Norling Law for a free 30-minute no-obligation consultation which can be booked here.

Voidable Transactions: The Rationale

Voidable Transactions: The Rationale

If you have ever ‘stood-by’ a customer who is going through a rough patch by continuing to supply goods/services on credit and holding off on receiving payment, some of us will know there can be a happy ending to this story. With your goodwill and support your customer might manage to trade out of its difficulties, your relationship is stronger than ever and most importantly – you can be repaid in full.

Unfortunately, for some business owners, the story does not always end so happily when the liquidator comes knocking unexpectedly.

If the customer is later placed in liquidation, the liquidator may require the creditor to repay all or some of the payments (or other monetary or non-monetary benefits) received by the creditor from the liquidated company. This is known as the liquidator’s power to ‘clawback’ preferential transactions and is provided for under s 292 of the Companies Act 1993.

Sounds pretty unfair, right?

Voidable transactions (or liquidator’s ‘clawback’) regime is one of the most controversial features of insolvency law in New Zealand. It is designed to protect creditors against the tendency of the directors of troubled companies to pay themselves and their favorite or aggressive creditors before anyone else.

Because directors facing troubled waters typically pay the creditors they have a bias towards. Those creditors are usually the ones who hold personal guarantees. The director has a personal incentive to pay those creditors first. It may be friends or family.

Theory behind the regime

According to the pari passu principle, each and every creditor of the company should share equally and proportionately in the fruits of the liquidation.

The principle recognises that it is unfair to other creditors if an individual creditor can jump the queue and be paid prior to the liquidation because it is favored by the director of the company or because it is being more aggressive than others in its demands.

If payment has been made and the queue is jumped, the law works to make these payments voidable and provides the liquidator with powers to recover these payments for the common pool of creditors in the liquidation.

Operation of the regime in New Zealand

Pursuant to s 292 of the Companies Act 1993, the payments (or other monetary or non-monetary benefit) that the creditor received from the liquidated company may be considered voidable if the following criteria is satisfied:

  1. At the time of payment, the liquidated company was unable to pay its due debts;
  2. The liquidated company was later put into liquidation (either voluntarily or involuntarily);
  3. The payment was within the period of 2 years before the liquidated company was put into liquidation; and
  4. The effect of receiving the payment enabled the creditor to receive more than what they would have otherwise received had they waited for the liquidation to run its course.

Unfortunately, no matter how well intentioned the creditor was, at the time of accepting payment, the law in this area is only concerned with the “effect” of the transaction – if the liquidated company’s payment had the effect of favouring the creditor above other creditors, that payment is at risk of being clawed back.

This comes as a shock to most clients who come to see us after receiving a letter of demand from a liquidator requiring them to repay their hard-earned cash received up to 2 years prior to liquidation.

If a liquidator believes the above criteria is met, the creditor will be served with a voidable transaction notice attempting to void the payments (“VT Notice”). If no response is made to formally object to the VT Notice in compliance with the Companies Act 1993 within the strict time limit of 20 working days, the transaction is automatically set aside.

If an objection to the VT Notice is made, the liquidator could still seek to void the transaction by making an application to Court under s 295 of the Companies Act 1993. However, since this option is considerably costlier, it is not always pursued by liquidators (e.g. where there is limited funding and/or questionable prospects of recovery). Most liquidators will determine whether they will commence proceedings, settle, or abandon the claim based on the objection they receive to the VT Notice.

On that basis, a full and robust objection usually has a positive impact on the outcome for creditors.

In our experience, when business owners are faced with this situation, there are 3 mistakes they make. In particular:

  1. They offer too much information to the liquidator when the liquidator investigates the transaction without obtaining any advice from an expert. Often, the liquidator’s enquiries are masked with a ‘friendly’ invitation to assist with the course of the liquidation, and the business owners volunteer information that is favorable to the voidable transaction claim;
  2. They settle the claim without obtaining expert advice on potential defences and whether all criteria of the voidable transaction claim is satisfied under the Companies Act 1993.
  3. They do not appreciate the importance of responding promptly to the VT Notice (liability for the full amount is automatic if no response is received on time, irrespective of the availability of defences).

Liquidators are often aware of these mistakes. Unfortunately, some liquidators might even abuse the process and issue VT Notices like confetti (as in the case of s 261 notices, please see here) in full knowledge that if no response is received in time, then the business owner is liable for the full amount.

Defences

There are several defences to the voidable transaction claim.

For example, the creditor will have a full defence to a claim if, at the time the liquidated company paid the creditor, the following criteria was met:

  1. The creditor acted in good faith (e.g. honestly);
  2. A reasonable person in the creditors shoes would not have suspected, and the creditor did not have reasonable grounds to suspect, that the liquidated company was, or would become insolvent; and
  3. The creditor gave value for the payment or altered their position in the reasonably held belief that the payment was valid and would not be set aside.

In most cases, creditors will generally be able to satisfy criteria (1) and (3) above. The defence usually turns to whether (2) can be satisfied. The law in this area is not well settled and to run a successful defence requires careful consideration of the facts on a case by case basis.

Another commonly raised defence is the exception of the ‘running account’. This exception to the voidable transaction regime might apply where the parties to a transaction were in a continuing business relationship. In such circumstances, the Companies Act 1993 directs to view all of the transactions that are part of that relationship as a single transaction. In these circumstances, the ‘preferential’ effect of the transactions can be reduced or illuminated in full.

Conclusion

Creditors ought to deal with liquidators carefully. They ought not give information that liquidator seek without first considering whether the information is helpful and or harmful and to consider whether the liquidator is actually entitled to the information.

A creditor needs to act quickly if they receive a VT Notice so that transactions are not automatically set aside.

Our lawyers at Norling Law are experts in this field and routinely act for both business owners and liquidators. If you are the recipient of a VT Notice, our experts can help you to craft a carefully structured objection, and/or negotiate with the liquidator to achieve the best possible outcome for you.

Alternatively, if you intend to receive payment from an ‘at risk’ customer, we can help you to re-structure the transaction to minimise the risk of a future clawback.

Because there are ways to minimise the risk of a liquidator pursuing the transaction as a voidable transaction at a later date.

Fuel your car! And your business!

Fuel your car! And your business!

***Slightly embarrassing story to follow***

So, I was driving on the motorway last week and my car lost power on a hill… It completely lost power. I had to promptly turn on my hazard lights and veer left to get out of the way of traffic.

I ran out of petrol!

Embarrassing, I know.

I would love to say this is the first time it has happened. But it’s not! Although, the last time this occurred, I was a student and had a more credible reason.

My car has two petrol lights. Low. And VERY LOW.

Sometimes I get busy being ‘busy’. And I wait to the last minute to do some ‘things’.

On this occasion I was so busy I just figured I would fill it when prompted I was VERY LOW.

BUT, the hill prior to the Oteha Valley Road exit had other ideas…

I didn’t get my VERY LOW prompt. The angle of the car must have caused the normal process to be skipped.

It was the hills fault. Naturally… I should have got my warning…

As I sat on the side of the road, waiting for breakdown service to arrive, I reflected on my life choices of procrastinating filling my car with the 98 Octane it requires to get me where I need to go.

It wasn’t the hills fault. It was mine.

Sometimes I get so busy fixing other people’s problems, I neglect my own needs. Or the needs of my car! That reminds me, my car is also well overdue for a service!

Reflection is important. Like everyone, I’ve made many mistakes. It is important to learn from mistakes.

Sometimes you win, sometimes you learn!

Business is no different.

The fuel that drives businesses forward isn’t 98 Octane. It is cash!

Cash is king! Cash pays the rent, the mortgage, the staff, the lifestyle (the wife!).

It is important that businesses ensure they have sufficient fuel in their business to continue moving forward.

This time of the year is crucial. This time of the year can be very busy for business. It can also be a period of significant expense.

We help business owners get the fuel their business needs to move forward.

We help collect those debts.

We help restructure the business if the vehicle is not performing as it should.

We work with business owners to improve their business and lifestyle.

The value we provide will significantly outweigh the cost.

Let’s talk before the Christmas break to ensure you don’t breakdown on the side of the road and need to reflect and learn as I did!

I offer a no obligation (free) 30-minute consultation to discuss your needs. It’s easy to book a time with me via our website by clicking “Book a Consultation” above.