The Government has just announced a temporary amendment to the Property Law Act 2007 (“the Act”) coupled with a financial package to address the concern that there are some landlords and tenants who have been unable to reach agreement on an abatement of rent to account for the serious financial impact of the restrictions imposed to combat Covid-19.
In particular, the Government has alluded to addressing concerns of behaviour involving large commercial tenants refusing to pay rent, and landlords demanding rent from small retailer tenants who have been unable to operate during the restrictions.
The standard form of the current ADLS Deed of Lease used by many landlords and tenants throughout New Zealand contains a clause that provides for an abatement of rent and outgoings in emergency circumstances, including a pandemic. In simple terms, the clause provides that where a tenant is unable to access the premises to fully conduct business from the premises for certain reasons associated with the emergency, a ‘fair proportion’ of rent and outgoings shall cease to be payable until that inability ceases. This clause has been heavily cited and relied upon by tenants from the outset of the lockdown period.
A difficulty is that what is considered a ‘fair proportion’ is not defined, leaving the position open to subjective reasonableness and protracted negotiation.
In our experience, many landlords and tenants have been able to successfully negotiate and reach agreement on what is a ‘fair proportion’ given their particular circumstances. However, some have not, and they remain at a stalemate. In addition, those tenants on earlier versions of the lease do not have the benefit of this abatement clause at all.
The amendment to the Act will imply a clause (presumably as a code) into leases relating to all businesses that meet certain eligibility criteria that a fair proportion of rent and outgoings shall cease to be paid when a tenant’s business has suffered a material loss of revenue because of the restrictions imposed to combat Covid-19.
The criteria for a business eligible to have the clause implied into their commercial lease shall include:
- The business has 20 or fewer full-time equivalent staff per lease site;
- The business is New Zealand-based;
- The business has not already come to an agreement for a rent abatement with their landlord.
The Government proposes to 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 should be fairly proportioned.
Any disputes that arise on account of the implied clause, including the determination of what is a ‘fair proportion’ shall be settled by way of arbitration. Arbitration is a process for the settlement of disputes in which an independent and impartial arbitrator makes a decision (normally final and binding) after considering the representations of the parties. The Government will assist the parties to access this dispute resolution mechanism by way of a Government subsidy at a rate of $6,000.00 per arbitration.
Please contact us if you have any questions or if you wish to obtain some guidance on the impact of the amendment to the Act or your commercial lease arrangements more generally.