On 3 June 2020, the Minister of Justice, Hon Andrew Little, announced that the Government will make temporary changes to the Property Law Act 2007 to help businesses impacted by COVID-19 to resolve disputes around entitlements to rent relief under commercial leases.
Drafting of the Bill is yet to be completed, but the amendment will have a retrospective effect and apply from the date of the policy announcement and extend for six months after the enactment of the Bill.
Details of the bill
The Bill will:
Imply a clause into all commercial leases which requires that a fair proportion of rent and outgoings cease to be paid where that business has met certain eligibility criteria
Provide statutory direction on how the implied clause is to be interpreted, including factors that would need to be considered in determining the reduced rent. The purpose of this direction is to attempt to minimise disputes.
Require that disputes be resolved through a compulsory arbitration process.
Support parties to access arbitration in a timely and cost-effective manner through a Government subsidy provided for streamlined arbitrations.
Who is eligible for the subsidy?
New Zealand based businesses who have 20 or fewer full-time equivalent staff per lease siteInternational taxation issues arising under double tax agreements
Note: Businesses that have an overseas head office or are part of an overseas multi-national are not eligible
Businesses who have already come to an agreement for a rent abatement with their landlord and/or tenant are unlikely to be able to take advantage of the implied term.
Key aspects of the implied clause:
Again, while the Bill is yet to be drafted, the Cabinet Paper suggests that the clause should require that:
There is, or has been, material negative impact on the tenant’s business due to COVID-19, whether or not the lessee is/was able to access to access the premises.
Parties must negotiate a ‘fair proportion’ of rent and outgoings that would cease to be paid. This may take the form of:
a. No rent being payable for a period; or
b. Reduced rent being payable for a period; or
c. A scheduled rent increase being deferred; or
d. Rent continues to be paid unabated; or
e. A mix of the above.
The legislation will clarify how ‘fair proportion’ should be determined, taking into consideration:
The financial position of the parties
The impact of COVID-19 restrictions on the business (including restrictions that are no longer in place)
Mortgage obligations relevant to the leased premises
Revenue and profit levels in the recent years
Any difference in size between the lessor, the lessee and any other relevant party, including any sublessee, lessor under superior lease, parent companies and any other party who is reasonably relevant.
What this seems to suggest is that the focus will be on a sharing of the hardship caused by the impacts of the COVID-19 restrictions.
Arbitration – where parties cannot agree:
Where the parties cannot reach an agreement, they must seek arbitration as a compulsory dispute resolution mechanism.
This Bill proposes that the government allocate funding of $40 million from the COVID-19 Response and Recovery Fund. This funding is to provide an arbitration subsidy of $6,000 including GST per dispute. This is approximately 75% of the likely cost of arbitration.
The statutory framework under the Arbitration Act 1996 would apply to any disputes under the implied clause.
Only in limited situations can an arbitral decision be appealed to the High Court.
Note: To be eligible for the subsidised arbitration service, at least one party would need to be a small to medium enterprise and be in receipt of the Government wage subsidy.
How we can help:
Braun Bond & Lomas are specialists in litigation and dispute resolution. Our team have knowledge and experience in dealing with lease disputes, often giving advice to both lessors and lessees regarding contractual rights and obligations as well as strategies to use in the event of a dispute.
We can assist parties with negotiating under the new implied clause in commercial leases and provide representation and guidance during arbitration.
If your lease arrangements have been impacted by COVID-19 restrictions, and you wish to reach an agreement under the new implied clause in commercial leases, or are unable to reach agreement, get in contact with us to see how we can help.