Compulsory rent reductions for COVID-19 affected businesses?
Compulsory rent reductions for COVID-19 affected businesses?
Wednesday 29 September, 2021
As New Zealand enters its 7th week since the outbreak of the COVID-19 Delta variant, businesses throughout the country, particularly in Auckland are struggling with the effects of Alert Level restrictions. Businesses using the 6th edition of the Auckland District Law Society (ADLS) commercial lease have a clause allowing for the parties to agree a “fair proportion” of rent and outgoings that should be abated during an emergency if they cannot access the property to fully conduct their business (a ‘no access’ clause). This clause has been widely used by commercial landlords and tenants, particularly during Alert Levels 3 and 4.
However, older editions of the ADLS commercial lease do not have this clause. In addition, businesses with custom leases, such as shopping mall leases, are often very landlord-focused and may not contain a ‘no access’ clause. Businesses without ‘no access’ clauses have been liable to pay full rent throughout the COVID-19 pandemic, although many landlords and tenants have negotiated rent reductions even without a ‘no access’ clause.
In 2020, the Government tried to amend the Property Law Act to help tenants without a ‘no access’ clause in their commercial lease by introducing an implied “fair reduction in rent” clause but could not proceed after New Zealand First withdrew its support. The Government then introduced a subsidy scheme for businesses trying to resolve commercial lease disputes through mediation or arbitration, but the scheme, which ended in March 2021, had very low uptake.
On 28 September 2021, the Government introduced an amendment to the Property Law Act which will imply a ‘no access’ clause into commercial leases which do not already provide for adjusted rent payment terms during an epidemic emergency. As in situations where a commercial lease contains the ‘no access’ clause, the parties will need to agree on what is a fair rent reduction. If they cannot agree, they will have to submit to arbitration, unless they can agree on an alternative dispute resolution process such as mediation.
This amendment is likely to be welcome news for affected businesses but came as a surprise to many in the Property Industry, as the Government introduced it without prior consultation or warning.
The amendment will apply retrospectively from 28 September 2021 once the law has been passed but will not affect agreements between landlords and tenants to adjust rent obligations made prior to that date. The Government intends the amendment, part of the COVID-19 Response (Management Measures) Legislation Bill, to go through a short select committee process, and those affected are encouraged to make submissions. The Bill has passed its first reading and we will keep you posted as it progresses through.
Tompkins Wake has worked closely with landlords and tenants since the start of the COVID-19 pandemic to reach agreement on what is a fair reduction in rent. If this amendment will affect your lease, our commercial property experts can help.
If you have any questions relating to this article, please get in touch with one of our experts below.
