It has been another year of disruption and financial strain for business owners who have again faced continuing lockdowns due to the COVID-19 epidemic.
On 3 November 2021, the Government passed the COVID-19 Response (Management Measures) Legislation Act 2021 (the Act). This Act amends the Property Law Act 2007 to imply an abatement of rent and outgoings into commercial leases. It has retrospective effect, dating back to the start of the current lockdowns (18 August 2021).
The new ‘implied term’, is only read into commercial leases that do not already contain a provision that provides for an abatement of rent where the tenant cannot access its premises due to an emergency. For tenants and landlords on the current sixth edition of the Auckland District Law Society (ADLS) lease, the implied term will not apply to those leases. The reason for this being that the sixth edition lease has a ‘no access’ clause that applies during an emergency. It already requires that a fair proportion of the rent and outgoings shall be abated during the emergency period, if the tenant cannot access the premises to fully conduct its business during that time.
The New Implied Term
A fair proportion of the rent (and outgoings) that would otherwise be payable, will cease to be payable:
- Starting on the date when: a) There is an epidemic; and b) The tenant is unable to gain access to all or any part of the leased premises to fully conduct its operations from all or any part of the leased premises, because of reasons of health or safety related to the epidemic; and
- Ending when the inability to conduct its business ceases.
The implied term cannot be contracted out of unless both the landlord and tenant agree to do so. Any agreement reached between the parties that relates to a period prior to 18 August 2021, cannot be extended to apply to the period from 18 August 2021, without a new agreement being reached between the parties to do so.
When does the Implied Term Commence?
The new implied term is read into commercial leases from 18 August 2021, provided the lease does not already have a no access clause.
How to determine a Fair Proportion
Deciding on the ‘fair proportion’ requires agreement by both parties to the lease. If agreement cannot be reached between the parties, they can head to mediation.
In determining a ‘fair proportion’ the New Zealand Law Society has suggested (in its submission prior to the bill passing) that consideration should be given to:
- the tenant’s actual loss of income during the period of the epidemic;
- the tenant’s ability to operate remotely from its premises;
- the wage subsidy available to the tenant;
- the nature of the tenant’s business. For instance, businesses like cafes and restaurants are more heavily affected by an epidemic than office tenants;
- the right of the tenant to continue to store its goods and equipment at the premises;
- the number of staff that can attend the premises, and the extent to which the premises can be used in compliance with social distancing requirements; and
- the borrowings and commitments of the tenant for the business, and those of the landlord for those premises.
In our experience, most landlords and tenants are applying these considerations when determining the proportion of abatement.
Other Guidance for Determining a ‘Fair Proportion’
During the Government’s consultation period it indicated it would release operational guidelines to assist landlords and tenants to determine a ‘fair proportion’ of rent and outgoings abatement. As yet, no guidelines have been released. The Property Council New Zealand has filled the gap by developing its own set of guidelines (in draft at this time) which, in the absence of any other guidelines, are likely to become the industry standard. These can be found here. The guidelines are just that, and are not be regarded as being legally binding in the event of a dispute. The Property Council states that its intention is to give landlords and their tenants a starting point for discussion around the level of abatement.
The Property Council is seeking feedback from the property industry on the draft guidelines and will update the guidelines further to include that feedback, and any other changes that arise in the future.
Written by Kate James
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