It’s no secret that the COVID-19 pandemic and associated lockdowns have been difficult on businesses, with many businesses asking landlords for rent relief.
In September, we wrote about how businesses using the latest Auckland District Law Society (“ADLS”) commercial lease terms have managed to achieve rent reductions through clause 27.5. BUT, what if your lease isn’t on these commercial lease terms?
Help could be on the way!
The government is now proposing a change to the Property Law Act 2007, which would provide similar protection for commercial tenants who have signed a lease that is not on the latest ADLS terms, or that are on older ADLS terms (that do not include clause 27.5).
This will be achieved through the COVID-19 Response (Management Measures) Legislation, which proposes to include a new implied covenant into commercial leases. This would provide relief to commercial tenants by requiring that a fair proportion of the rent and outgoings will cease to be payable while the tenant is unable to access their premises due to an epidemic. The change will apply until the Epidemic Preparedness (COVID-19) Notice 2020 expires or is revoked.
This implied covenant will only apply to commercial leases that meet the criteria, and only to the extent that the parties have not already reached agreement about the operation of their lease under Covid-19 restrictions. The criteria for a lease to meet in order to be captured are:
1. It must be a lease that:
a. is in force on 28 September 2021 (even if it came into operation, was varied, or both, before then); and
b. that does not include a ‘no access in an emergency’ clause that covers an epidemic (this is why recent ADLS leases aren’t captured if they include clause 27.5);
2. And, in the relevant rental period:
a. There is an epidemic; and
b. The tenant (or any subtenant) is unable to access all or any part of the premises due to health and safety reasons resulting from the epidemic.
If a lease meets the criteria, the question is what constitutes a ‘fair proportion' of rent? The Bill itself doesn’t define ‘fair proportion’ but the wording is consistent with the guidance released in the Cabinet Minute dated 3 June 2020. The considerations outlined in that Minute include:
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 the parties;
4. The parties’ revenue and profit levels in recent years;
5. The parties ability to survive financially the effects of the COVID-19 restrictions imposed;
6. Any difference in the size and resources between the landlord, tenant and any other relevant party; and
7. Any other factor that is reasonably relevant.
Of course, what is ‘fair’ will always depend on the situation, but the considerations above will help to guide commercial landlords and tenants in assessing what is fair in their circumstances. The Finance and Expenditure Committee Report highlights that may submitters were concerned about the need to determine a ‘fair proportion’ and the issues that this may cause for landlords and tenants alike.
In addition to the issue of what is fair, we have some concerns about the unintended consequences of the Bill. For example, confidentiality should be carefully considered - both between landlords and tenants when determining what is a ‘fair proportion’ of rent, and between tenants who lease premises from the same landlord. Landlords and tenants might also struggle to determine what is fair in situations of a time-limited rent holiday where, for example, an office fit out is supposed to be carried out but cannot be completed due to the circumstances contemplated by the Bill.
Importantly, parties can contract out of this change through a variation to their lease, or by expressly excluding the provision in a new lease (provided the new lease is signed after 28 September 2021). Any exclusions of implied covenants in an existing lease will not apply to this change.
Although the Bill has not yet become law at the time of writing, it is moving through the House under urgency. If you are either a landlord or a tenant and you want to know more about your options under your lease, or if you’re considering entering into a new commercial lease, we would love to hear from you to chat about your circumstances.
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Disclaimer: The information contained here is of a general nature and should be used as a guide only. Any reference to law is to New Zealand law and legislation. We recommend before acting on it, you consult your accountant or tax adviser