Resolution of Commercial Rent Disputes

The Government has announced a scheme to assist in the resolution of rent commercial disputes between landlords and tenants as a result of Covid-19.

Implied Term
A temporary amendment to the Property Law Act (“the Act”) will be made to imply a term into all commercial leases of businesses (which meet the eligibility criteria) to provide that a fair proportion of rent and outgoings cease to be payable when a tenant’s business has suffered a material loss of revenue because of the restrictions put in place to combat Covid-19.

Eligibility Criteria
The criteria for businesses to be eligible to have this clause implied into their commercial lease are:
(a) The business has 20 or fewer full-time equivalent staff per premises;
(b) The business is New Zealand based;
(c) The business has not already come to an agreement for a rent abatement with their landlord (unless the landlord insisted on strictly enforcing the terms of the lease in response to a tenant’s request for rent reduction).

By implying terms into commercial leases, the legislation levels the playing field for those tenants who occupy premises under an older version of the ADLS lease which do not contain a “no access” clause (clause 27.5 of the 6th edition ADLS lease) which allows a fair proportion of rent to cease to be payable where the tenant is unable to occupy premises due to covid-19 restrictions (see our recent article).

However, the amendment will not apply where the landlord and the tenant have already reached agreement on the issue themselves by the date of the announcement of these amendments to the Act (Thursday 4 June 2020).

What is a “fair proportion” of Rent?
The Act will further be amended to provide clear rules to be followed when determining factors which are to be considered in determining a “fair proportion”, based on the principles that the interests of both the landlord and tenant are to be taken into account and that the financial burden of Covid-19 is fairly proportioned.

Although the legislation has not yet been drafted, it is anticipated that the “clear rules”
for determining a “fair proportion” of rent will include the following factors:

The respective financial positions of the parties;

The impact of Covid-19 on the business;

Mortgage obligations relevant to the leased premises;

Any financial support available to the parties;

The parties’ respective revenue and profit levels in recent years;

The respective parties’ ability to survive financially the effects of official

requirements to counter Covid-19;

Any difference in size and resources between the parties.

Resolution of Disputes by Arbitration
The Act will also require that any disputes under the implied clause must be settled by arbitration and will provide a government subsidy of up to $6,000 (including GST) per arbitration if at least one party to the arbitration is a small or medium enterprise receiving the wage subsidy. The purpose of this amendment is to ensure that the disputes are resolved in a time and cost efficient way, and to provide certainty and consistency.

As noted above, these are temporary amendments to the Act and it is anticipated that they will only apply for a period of 6 months after the Bill is enacted.