Changes are on the way to help commercial tenants impacted by COVID-19 restrictions.

The Government will shortly amend the Property Law Act 2007 to imply terms into all commercial leases for small businesses, that will require rent and outgoings to be reduced by a fair proportion if the tenant’s business has suffered a material loss of revenue because of the restrictions put in place to combat COVID-19.

The changes will only apply to businesses with 20 or fewer full time-equivalent staff per site, that are New Zealand based, provided they have not already agreed to a reduction with their landlord.

If agreement can’t be reached on what a fair reduction should be, the parties will attend binding arbitration, receiving $6,000 (including GST) from the Government to help cover this cost.

The new legislation is also expected to also provide clear rules that must be followed when determining a fair reduction, based on the principles that the interests of both the landlord and tenant be taken into account, and the financial burden of COVID-19 should be fairly proportioned. These rules have not yet been finalised, however the Hon Andrew Little has recommended that in determining a fair reduction, we should consider the financial position of the landlord, the tenant, and any other relevant party*, including:

  • the impact of the 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 survive financially the effects of official requirements to counter an outbreak of COVID-19;

  • any difference in size and resources between the lessor, the lessee, and any other relevant party; and

  • any other factor that is reasonably relevant.

    (*"relevant party” includes any sublessee, any lessor under a superior lease, any parent company for the lessor or lessee, and any other party who is reasonably relevant).

The changes will have retrospective effect, and apply from 3 July 2020 until six months after the legislation is enacted.

It’s also worth noting that the new legislation talks about combatting ‘COVID-19 restrictions’ – it doesn’t specifically mention whether abatement will be limited to levels 3 and 4, and will likely depend on the particular circumstances.

This decision has not been taken lightly. These proposals go against the legal principle of sanctity of contract because they would add contractual terms and obligations to leases that the parties did not mutually agree. There is a general principle in contract law that parties should adhere to what they have agreed, and third parties should not interfere. Although there are some exceptions in law, the general principle of the sanctity of contract provides certainty for businesses and supports confidence in New Zealand’s legal system.

In considering this change, the Hon Andrew Little has said:

  • “The Government has encouraged commercial tenants and landlords to work together to reach a fair agreement on the payment of rent in response to COVID-19. However, some parties appear to be unwilling to renegotiate fair payment terms. This could lead to more businesses becoming insolvent, worsening the impact of COVID-19 on the New Zealand economy”

  • “There is some data that shows businesses are not paying rent. Data based on 800 properties indicates that one-third of commercial tenants did not pay rent in April. Rent from the retail sector was down 53 per cent and office and industrial rents down by around a third.”

  • “New Zealand Council of Retail Property (NZCoRP) concluded from a survey of its membership of commercial premises owners that 75 per cent had offered concessionary arrangements (the nature and extent of which were not quantified) to their tenants with agreement being reached with only 50 per cent to whom they had been offered. It is possible to conclude from this that there is a need for assistance through appropriate statutory signalling and resort to a mechanism that encourages agreement to be reached or to which resort can be taken for an arbitrated decision”

It’s also worth noting that the proposed changes may go even further than the widely discussed (but sparsely litigated) rent abatement provisions already contained in clause 27.5 of the current ADLS commercial Deed of Lease. Abatement under clause 27.5 relates to the tenant’s inability to access their premises, so the effects of wider COVID-19 restrictions on their business are arguably irrelevant. These new changes clearly go much further, requiring the parties to consider the overall economic impact of all COVID-19 restrictions when agreeing on a fair rent abatement.

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