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 commercial disputes 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.