Introduction
The Government has announced that it intends to introduce legislation to:
- imply a "fair proportion" rent abatement clause into certain existing commercial leases;
- require disputes in relation to the application of the implied clause to be resolved through arbitration; and
- introduce a subsidy for any consequent arbitrations between landlords and tenants.
The proposal is recorded in the minute of Cabinet Economic Development Committee dated 3 June 2020. It is based on, but departs from in certain respects, a paper prepared by the Minister of Justice for the Committee ("Cabinet Paper").
The proposed changes to the Property Law Act 2007
The proposal is to amend the Property Law Act 2007 to imply a clause into eligible commercial leases that permits tenants to cease to pay a "fair proportion" of rent and outgoings where the tenant's business has suffered a material loss of revenue due to restrictions imposed to combat COVID-19. The amended legislation would prescribe criteria for determining what is a "fair proportion" and would take into account the interests of both the landlord and tenant. Any disputes arising out of the implied clause would have to be resolved in arbitration, for which the Government proposes to provide a $6,000 subsidy.
Tenant businesses eligible to have the "fair proportion" rent abatement clause implied into their existing leases are those that:
- have 20 or fewer full time equivalent staff per lease site;
- are New Zealand based; and
- have not already come to an agreement for a rent abatement with their landlord.
The proposed amendments would have retrospective effect and apply from 3 June 2020, the date of the policy announcement. The amendments would extend for six months after enactment of the bill.
Standard Form ADLS Lease – Clause 27.5
There will be substantial differences between the proposed implied clause and clause 27.5 of the standard form ADLS Lease, which provides for a fair proportion of rent and outgoings to abate in circumstances where a tenant is unable to gain access to the premises to fully conduct its business because of an emergency. In particular:
- clause 27.5 is engaged where there is a restriction on access caused by an emergency, whereas the proposed implied clause will be triggered by a material loss of revenue because of the restrictions put in place to combat COVID-19 (which does not necessarily require an effect on access to the premises); and
- it is not clear that the calculation of the fair proportion under clause 27.5 takes into account factors that are broader than the effect on the tenant's use of the premises, whereas the Cabinet Paper proposed that the implied term be accompanied by a broad list of legislated factors that should be taken into account to determine a fair proportion, including factors relevant to the overall financial position of the lessor and the lessee.
Notwithstanding those differences, the Cabinet Paper proposed (in effect) that the clause will also be implied into eligible leases containing clause 27.5. The Cabinet Paper is silent on whether the clause will be implied into leases that contain express clauses that are similar to, but different than, clause 27.5.
The Cabinet Paper proposed that, where parties have already agreed an abatement (and possibly also where the parties have agreed there should be no abatement) before 3 June 2020, the implied clause would not apply. However, where the landlord has, to date, strictly insisted on enforcing the terms of the lease, the clause would now come into play.
Further details yet to be resolved
A number of matters will need to be resolved during the legislative drafting process, including, importantly:
- how to define a "New Zealand-based" business;
- how to measure full time equivalent staff per lease site;
- what amounts to a "material" loss of revenue because of the restrictions put in place to combat COVID-19; and
- crucially, the particular factors that will be used to determine a fair proportion.
If you would like to discuss these proposed changes further, including their impact on existing negotiations between landlords and tenants or any enforcement processes that are underway, please get in touch with one of our experts listed below.