Time to negotiate: Commercial rent relief mandate enacted

The COVID-19 Response (Management Measures) Legislation Act 2021 (“Act”) has come into force, mandating landlord and tenant rent (and outgoings) relief negotiations in the COVID-19 pandemic from mid-August 2021.

We discussed the Act (then, a Bill) in detail in our previous articles when the proposal was announced (see here) and after public consultation recommended a number of changes (see here).

On 2 November 2021, after final submissions were considered by Parliament, the Act received Royal Assent. The Act has amended the Property Law Act 2007 (“PLA”), with effect from 18 August 2021, inserting an implied rent relief clause in many commercial leases (leases which do not already have a rent relief clause or are not subject to a pre-existing rent variation agreement between the parties).  These changes also apply to subleases and licences of land.

In the final stages of Parliament’s consideration of the Bill, a number of minor changes were made. These include a lengthier retrospective application, optional alternative dispute resolution and a requirement for the parties to consider the tenant’s loss of income experienced due to COVID-19 restrictions when determining what is a “fair proportion” of the rent and outgoings for abatement.

Application period

The implied clause now applies from 18 August 2021 (when New Zealand entered Level 4 lockdown in response to the Delta outbreak), instead of 28 September 2021 as initially proposed. Importantly, the implied clause is only engaged for periods after 18 August 2021 when the tenant is unable to access the leased premises to fully conduct their operations due to COVID-19 restrictions.

“Fair proportion” of rent  (and outgoings)

The Act inserts an implied rent relief covenant which provides that a fair proportion of rent (the Act defines “rent” as including the tenant’s contributions to outgoings) ceases to be payable for the period that a tenant is unable to gain access to all or any part of the leased premises to fully conduct their operations, due to health and safety reasons related to the epidemic.

The Act provides little guidance on factors to consider when determining a “fair proportion” of rent (and outgoings), despite submissions for Parliament to define a list of factors. However, in contrast to the rent relief clause in the ADLS lease which provides no guidance on the issue, the Act states that the matters the parties will consider must include any loss of income experienced by the tenant during the affected rental period due to COVID-19 restrictions which made them unable to access their leased premises to fully conduct their operations.

The Finance and Expenditure Committee’s October report signalled, rather vaguely and without a timeframe, that guidance is being developed for landlords and tenants regarding what would constitute a fair proportion of rent. This guidance will not be legally binding but should, eventually once released, aid landlords and tenants in navigating the issue.

This still leaves a significant degree of uncertainty on the importance or weight of other factors the parties consider in their unique circumstances (if these factors are relevant at all). For example, as emphasised in an earlier article in this series, the disparity of COVID-19’s impact on a hair salon compared to an accounting firm is profound. Without clear-cut guidance on the factors landlords and tenants must consider, we remain cautious that issues will arise in these negotiations when determining “fair” rental abatement due to disrupted business operations.

Dispute resolution

The Act now states the parties are not prevented from agreeing to alternative dispute resolution such as mediation as opposed to the formal and costly standard of arbitration. Given the default method is arbitration unless the parties agree otherwise, we recommend landlords and tenants alike proceed carefully when addressing the issue.

In response to submissions on the lack of engagement by parties affected by the Bill, the Act also now requires the party receiving communication on this issue to respond within 10 working days of receipt.

Time to negotiate

Now that the Act has come into force, it is time for landlords and tenants to negotiate rent relief options. We are experienced advisors that have assisted both landlords and tenants navigating these issues. If you are facing any issues with leasing matters, contact Sarah, Jono, Jordan or Sean.