Legal Updates

COVID-19 commercial rent relief update

Mandatory COVID-19 rent relief proposal edges closer

Earlier this month, we wrote about the COVID-19 Response (Management Measures) Legislation Bill (“Bill”). If passed, the Bill will have the effect of inserting an implied clause into many commercial leases providing for a rent reduction where, because of an epidemic, the tenant cannot gain access to the premises to fully conduct its business.

The Bill has since been through a public consultation process and the Finance and Expenditure Committee (“Committee”) has now published a report which summarises the various submissions on the Bill that the Committee received.

Importantly, the Committee’s report sets out its recommendations for the Bill. These recommendations provide valuable insight into how the issues and question marks that surround the Bill might be addressed before its third and final reading in Parliament.

What are the issues and how might they be dealt with?

“Access to the premises”

As drafted, the Bill requires commercial tenants to be unable to access their premises in order to have an entitlement to rent relief. This reflects the structure of the “No Access” clause in the widely-used ADLS Deed of Lease.  

Some submitters argued that a tenant’s inability to access their premises is not the most appropriate basis for rent relief. As we noted in our earlier article on this issue, some businesses are able to transition seamlessly into remote working during lockdowns, suffering relatively modest economic consequences only. On the other hand, many businesses experience significant hardship even when they do have access to their premises. Consider, for example, a brick-and-mortar retailer that relies heavily on foot traffic for sales, or a tourism operator whose revenue comes primarily from customers in another part of the country which may be locked down.

The Committee noted that the aim of the Bill was to ensure landlords were assisting tenants with the costs of leasing premises, rather than addressing the wider economic impact of the pandemic. On that basis, we consider it likely that a tenant’s inability to access their premises will remain the trigger for rent relief. However, as the Committee noted, wider economic factors (including access to customers) could be a relevant consideration when parties come to negotiate what a “fair proportion” of the rent is for any period of non-access.

Determining the level of rent relief

Perhaps the main issue facing parties to whom the “No Access” clause may apply will be coming to an agreement on how much rent the tenant should pay. What factors should be taken into account when assessing the level of rent relief to be given?

Some submitters told the Committee that explicit criteria for parties to refer to when determining what constituted a “fair proportion” of the rent would go a long way to remedying the ambiguity that currently surrounds the process. Suggestions included:

  • the financial effects of alert level restrictions on the tenant, including revenue, expenses and profitability;
  • the effect any rent concession could have on the landlord, such as failure to meet mortgage, insurance, rates or other fixed payments;
  • whether rent relief should be provided through deferral or abatement, or a combination of both;
  • the degree to which premises could be used under higher alert levels; and
  • whether there is a bounce-back in the tenant’s sales after restrictions ease.

The Committee considered that there are advantages in not prescribing set criteria when determining rent relief because doing so risks artificially restricting the factors that parties might take into account.

While this approach would allow for greater flexibility when undertaking negotiations, we think some form of official guidance on the matters that parties might take into consideration when negotiating would be a net positive and result in quicker and more cost-effective rent relief agreements. To avoid rigidity, any such guidelines could make it clear that the considerations listed are not exhaustive and the parties’ agreement should take into account their particular circumstances.

However, because it appears the implied clause in the Bill will effectively mirror the equivalent ADLS “No Access” clause, we think it is unlikely that a list of factors to be considered when assessing a “fair proportion” will be incorporated in the final iteration of the Bill.

Retrospective application

If passed, the Bill will apply to any rent paid by a qualifying tenant from 28 September 2021. This has generated much debate, with some submitters pointing to the principle that legislation should generally not be retrospective. Conversely, others have suggested that the Bill’s application should be further backdated to the beginning of the current Delta outbreak in August.

The Committee has recommended that Parliament give this issue further consideration, which suggests an outside possibility that the Bill could be amended to become even more retrospective. If that were the case, landlords to whom the implied clause will apply, particularly those with property in Auckland, will suddenly be required to consider abatements on a further 5 weeks of rent. That is not likely to go down well with those in the property sector.

Dispute resolution

As the Bill currently stands, if landlord and tenant are unable to come to an agreement on the “fair proportion” of rent to be paid by the latter, the dispute must be referred to arbitration.

Some submitters noted that this was not an ideal first step, given the generally time-consuming and cost-prohibitive nature of arbitration when compared with other dispute resolution methods. 

In response to these submissions, the Committee suggested consideration of a faster and lower-cost form of dispute resolution being mandated and supported the Bill being amended to allow the parties to agree to mediation in the first instance. We support this approach and note that mediation generally has a high rate of success and costs participants much less than other more formal dispute resolution processes.    

Quality advice is key

We continue to assist clients with their lockdown rental negotiations. If you are having problems with an aspect of your lease, contact Sarah, Jono, Jordan or Amanda to discuss a solution.