The Latest Covid-19 Update – Arbitration for Commercial Lease Disputes

Small businesses paying full rent on commercial leases when Covid-19 measures prevented them fully occupying their premises have been given a pathway to rent reductions in a long-awaited government package released today.

Justice Minister Andrew Little has unveiled a process which can see tenants and landlords enter compulsory arbitration if they have not yet agreed a Covid-19 rent abatement. Minister Little highlighted that the package has been released to “provide the means for parties in a commercial situation to come up with a sensible solution”.

Significantly, a temporary legislative amendment will see the Property Law Act 2007 (“the Act”) amended to imply a clause into eligible commercial leases, that will require that a fair proportion of rent and outgoings be abated. The implied clause will apply to commercial leases irrespective of whether they include a clause such as the now well-known clause 27.5 of the current Auckland District Law Society lease form.

To be eligible to have the clause implied into a commercial lease, a tenant’s business must:

• employ a maximum of 20 full-time equivalent employees (per lease site – up to a maximum of 50 full-time equivalent staff altogether);

• be New Zealand based; and

• be able to substantiate a loss of revenue as a result of Covid-19

The package will not apply to parties that came to an agreement before the announcement. It will, however, apply to situations where a landlord has insisted on strictly enforcing a lease in response to a tenant’s request for a rent reduction.   

Although the legislative amendments have not yet been drafted, the amendments will have retrospective effect and apply from today.

The intention is for eligible parties to negotiate a fair proportion of rent and outgoings that cease to be paid. In negotiation, the parties could consider whether it is most appropriate for this to take the form of:

• no rent being payable for a period; or

• reduced rent payable for a period; or

• a scheduled rent increase being deferred; or

• rent continuing to be paid unabated; or

• a mix of these options.

There will be statutory rules for interpreting the implied clause, and the legislation should provide guidance on factors to be considered in interpreting and applying the implied clause. Determining a fair proportion may consider:

• the financial position of the parties;

• the impact of Covid-19 restrictions on the business;

• any financial support available to the parties;

• revenue and profit levels in recent years; and

• other factors that are reasonably relevant.

If the parties cannot agree on abatement using the clause, disputes will be settled in a fast track directed arbitration.

Minister Little announced that $40 million has been allocated towards arbitration costs to support parties’ access to timely and affordable arbitration. This will involve contracted arbitrators receiving a subsidy of $6,000 (including GST) per dispute to deliver a fixed-rate, streamlined arbitration service. The parties would then fund the remaining costs of the service.

However, to be eligible for the subsidy, one or both of the parties involved in the dispute must be a small or medium enterprise receiving the Government’s Wage Subsidy.

Ultimately, tenants and landlords should be guided by the principle that the financial burden of Covid-19 is apportioned so it is fair to both. We recommend that tenants and landlords affected by the new policy work constructively to agree a fair outcome to prevent the need for arbitration, which can be heavily time and resource intensive.

Whether you are a commercial tenant or landlord, if you have questions about your existing lease and the impact of this announcement, or other lease queries generally, please contact Sarah, Mark, or Jono.