Commercial leasing during COVID-19 – new law inserting fair rental provisions
What is the new law?
On 2 November 2021, Parliament passed the COVID-19 Response (Management Measures) Legislation Act 2021. The legislation inserts provisions regarding an implied term for commercial leases in the Property Law Act 2007 (PLA). The purpose of the amendment was to ensure that commercial landlords and their tenants work together to share the financial burden of the COVID-19 response and epidemic.
When would this new implied term apply?
The new implied term applies to all commercial leases in operation during the “affected period”, beginning on 18 August 2021 and ending on the revocation or expiration of the Epidemic Preparedness (COVID-19) Notice 2020. The new implied term does not apply to leases if the lease already provides for rental adjustments during COVID-19. Parties can also agree to contract out of or vary this implied term by executing a written memorandum.
If the implied term applies, a “fair proportion” of rent is not payable by the tenant while the tenant is unable to gain access to all or any part of the leased premises to run their business (for health or safety reasons). Parties must also take reasonable steps to respond to communication regarding the term’s application within 10 working days.
What is a ‘fair proportion’ of rent?
The landlord and tenant must agree on what a “fair proportion” is. When considering what this is, the landlord must consider any losses experienced by the tenant in respect of that rental period because of COVID-19 and the inability to conduct business on the premises.
The legislation does not provide any other guidance as to how the sum is decided. However, the term is similar to those triggered by emergency clauses in standard ADLS leases. With those provisions, relevant commentary suggests that the rent should be reduced with reference to what both parties constitute as fair, and the extent that the tenant is unable to conduct its business. Initially, Cabinet did release guidance in a Cabinet Minute for deciphering a fair proportion. This guidance was not included in the eventual legislation, but provides a useful indication of what other factors parties may want to consider:
- The impact of COVID-19 on the respective businesses
- Any mortgage obligations
- Any financial support available to the parties
- Each party’s revenue and profit levels in recent years
- Each party’s financial resilience to COVID-19 restrictions.
- Differences in size and resources between parties
- Any other relevant factors
If the term applies, landlords cannot take action for overdue rent payments until the landlord and tenant have agreed upon the fair proportion payable. If parties cannot agree on a fair rent proportion, the dispute will be referred to arbitration unless parties agree to resolve the dispute by some other means of dispute resolution.
Please refer to our previous article on how a fair proportion of rent might be assessed: [https://hobec.co.nz/news-resources/2020/april/update-the-adls-lease-and-epidemics]
At Holland Beckett Law, our property lawyers can guide you with those discussions and negotiations with your landlord or tenant. If you are in the process of entering a new lease, we would recommend having discussions of what this fair proportion might be, and consider whether the lease terms should be amended accordingly. If agreement is not able to be reached, our litigation department is experienced with arbitrations and can guide you through the process.