Many commercial leases have a rent abatement clause that provided a degree of rent relief in response to the COVID-19 related lockdown.  A lot of other commercial leases do not have the abatement clause – generally these are older leases before the wider abatement clauses became common. 

Tenants on leases that do not have an abatement clause have been left to try to negotiate with landlords for rent relief for a situation that was not envisaged when the lease was signed.  Many landlords have taken a pragmatic view and offered relief to their tenants irrespective of whether their leases included an abatement clause.  However, not all landlords have offered relief.  Equally many tenants simply did not pay rent during the lockdown or unilaterally sought to reduce the rent payable.  A significant number of landlords and tenants have not reached an agreement about rent abatement or deferral. 
 

What are the changes?

More than 10 weeks after Alert Level 4 started, the government has announced that it intends to amend the Property Law Act 2007 (PLA) to provide some smaller commercial tenants with the right to seek an abatement of rent and outgoings where they have suffered a material loss in revenue due to COVID-19 restrictions.

The amendment will imply a clause into certain commercial leases (see the eligibility criteria below).  The implied clause will reduce a fair proportion of rent where the tenant’s business has suffered a material loss of revenue due to the impact COVID-19 restrictions.

The amendment will provide guidance around what is considered to be a fair proportion of rent and outgoings to be deducted. If commercial tenants and landlords cannot agree on a fair proportion, then the fair proportion will be determined by arbitration.

What will constitute a material loss of revenue for a tenant remains to be seen.  For example, what period of time will the material loss relate to, and what if there has been an increase in revenue as the Alert Level restrictions have reduced.
 

Who is a qualifying tenant?

Commercial tenants that are eligible to have the new clause implied into their leases are:

• Businesses that have 20 or fewer full-time employees per lease site;
• Businesses that are New Zealand based; and
• Businesses that have not already come to a binding agreement with their landlord for rent abatement.

Fair reduction will be determined by arbitration if parties cannot agree

It is recommended that landlords and tenants negotiate and determine a fair proportion of the rent and outgoings to be reduced that is suitable for both parties.

However, if an agreement cannot be reached, then it will be compulsory for parties to enter into arbitration. The Government will subsidise each eligible arbitration up to $6,000 including GST.  Parties will have to pay their own legal fees and other costs. To claim the subsidy, the specific providers that have been approved by the Ministry of Justice must be used.
 

When will the temporary change apply? 

The Government has not passed the law to enact this temporary change to the PLA. It has been suggested that this may occur at the beginning of July 2020.

However, when enacted, the amendment to the PLA will apply from 4 June 2020, which was the day that the Government announced the change. The temporary change will apply for six months after the change is made.

It is not clear if the rent and outgoings abatement will apply to rent and outgoings due in the lockdown period before 4 June 2020. If it does not, it will only provide limited relief for many businesses.