A proposed law change to amend contracts between landlords and tenants to account for epidemic conditions still fails to give guidance on what a 'fair proportion' of rent would be for any abatement. Bell Gully partner Jane Holland, senior associate Morgan Powell and associate Justin Maloney explain.
The Government this week proposed a new law that would affect leases without an existing rent abatement clause, effectively adding a clause that may allow an abatement because of restrictions in place to combat Covid-19.
Many commercial leases already allow for such an abatement, with the best-known example being clause 27.5 of the ADLS (Auckland District Law Society) lease. But the proposed amendment to the Property Law Act would ‘imply’ a similar term into those leases which don’t already include a clause of that nature.
Government-ordered lockdowns resulting from Covid-19 have undoubtedly had a significant impact on both tenants and landlords. During last year’s lockdown, the government floated a similar proposal for a statutory amendment to insert a new contractual term into existing leases, which would have given tenants the right to claim rent relief. However, that proposal did not proceed, apparently as a result of a disagreement between the two coalition parties, Labour and New Zealand First.
With a new lockdown this year, the Labour government has again announced proposed statutory amendments to leases. However, this year's proposed amendments differ significantly from last year’s proposal, and appear to more closely align with clause 27.5 of the ADLS lease. In particular, the proposed new clause provides that a “fair proportion” of rent and outgoings will cease to be payable when there is an “epidemic”, and the tenant is “unable to gain access to all or any part of the leased premises to fully conduct their operations from all or any part of the leased premises, because of reasons of health or safety related to the epidemic”.
As a result, there are a number of issues that landlords and tenants will need to consider if the statutory amendments are passed into law.
Will the proposed new clause apply to leases with existing rent abatement provisions?
One of the concerning features of last year’s proposal was that it would also apply to leases with existing rent abatement provisions, such as clause 27.5. We discussed the issues that it raised in an update to our clients last year.
That is no longer the case with the new proposals. Instead, the proposed new clause will only apply to leases without an existing “no access in an emergency” clause. In our view, this means that tenants and landlords using the current ADLS lease will be unaffected by the proposed amendment.
Will the proposed new clause benefit all tenants?
Last year’s proposed clause would have applied only to a “qualifying tenant” (that is, a New Zealand-based tenant with fewer than 20 full time employees) and where the tenant’s business had suffered a “material loss of revenue” because of “restrictions put in place to combat Covid-19”. By contrast, this year’s proposal contains no such qualifications. It is not limited to small, New Zealand- based tenants nor to tenants operating certain types of business. So it is implied in both office and retail leases, for instance.
Will the proposed new clause apply where landlords and tenants have already agreed an abatement?
A number of landlords and tenants may have already agreed on an abatement of rent and outgoings, whether or not there is an existing “no access in an emergency” clause in their lease.
The proposed new clause will not apply if a rent variation agreement has been entered into where at least part of the reason for the variation was an inability to access the premises because of the epidemic. However, that agreement must be entered into before the proposed new law comes into force.
What period does the proposed new clause apply to?
The proposed new law is unclear as to the period for which rent and outgoings that may be abated. The key date in the draft Bill is September 28, 2021 (although the government has said that it would welcome submissions on this date). The proposed new clause would apply in respect of a rental period “all or any of which” is in the period starting on September 28, 2021. In cases where rent is by calendar month that suggests that proposed new clause would apply for September’s rent and outgoings, but not for August. However that is not entirely clear. The new law will not, however, apply to previous periods of lockdown that have occurred in New Zealand.
What is the trigger for the new clause?
The proposed new clause will apply when there is an “epidemic”, (which is currently the case) and the tenant is “unable to gain access to all or any part of the leased premises to fully conduct their operations from all or any part of the leased premises, because of reasons of health or safety related to the epidemic”.
This language is close to that used in clause 27.5, but not identical. It is unclear why the Government has chosen to use somewhat different language, and whether that simply reflects a different drafting style or whether the proposed new clause was intended to be somewhat more beneficial to a tenant.
If the proposed new clause applies, how much of a rent abatement is the tenant entitled to?
The proposed new clause provides that a “fair proportion” of rent and outgoings will cease to be payable, and that this amount “will be agreed” by the landlord and tenant. However, with one limited exception, the proposed new clause gives no guidance as to what is to be taken into account when trying to decide what constitutes a “fair proportion”.
This is the same language used in clause 27.5 of the ADLS standard form lease. However, that language has caused significant debate as to what factors must be taken into account in assessing the rent abatement. We have discussed that in a client update, which you can read here.
The Government’s proposals last year set out a number of factors that were required to be taken into account in assessing a “fair proportion", including the impact on the tenant business, the landlord’s mortgage obligations, the parties’ respective profits in recent years, and the parties' ability to survive financially. None of these factors are repeated in this year’s proposed new clause, which instead leaves a “fair” abatement for landlords and tenants to work out.
Have the Courts given any guidance as to what is “fair”?
We do not have any guidance from the Courts as to how to assess what is fair, as the ADLS lease that contains clause 27.5 requires the parties to submit any dispute to arbitration, which is a private dispute resolution process. Although the meaning of clause 27.5 has been considered in arbitrations, those decisions are not publicly available.
The same requirement will also apply to the proposed new clause. It will require all disputes to be resolved by arbitration.
Can landlords and tenants contract out of the proposed new clause?
The proposed new clause is being inserted into Schedule 3 of the Property Law Act. That schedule sets out the clauses that are implied into leases. As the Property Law Act allows parties to contract out of those implied provisions, the proposed new clause can also be excluded by agreement between the parties.
However, the proposed statutory amendments also provide that the proposed new clause cannot be excluded by a lease provision that excludes the Schedule 3 conditions if that agreement was entered into before September 28, 2021. In other words, parties can only contract out of the proposed new clause if they agree to do so after September 28, 2021.
Our view
When it proposed to amend the Property Law Act last year, the Government acknowledged that its proposal went “against the legal principle of sanctity of contract”. This was because, as the Government observed, the proposal “would add contractual terms and obligations to leases that the parties did not mutually agree”.
The same observation applies to the new proposed amendments. While parties are free to exclude the implied clause from new leases, the proposed change leaves landlords with existing leases locked into a new clause that they never agreed to.
While landlords will be frustrated by the proposals, tenants are likely to welcome the reforms, particularly in circumstances where they have been impacted by the lockdown and have been unable to negotiate an outcome with their landlord.
It is, however, surprising that the Government has not taken the opportunity to give more guidance as to what is meant by a “fair” reduction in rent and outgoings, given the number of disputes that have arisen under similar clauses in existing leases.
The Government has said the proposed amendments will go through a “short" select committee process, with the Government specifically inviting submissions as to when the rent abatement provisions should become effective. It remains to be seen if the Government will make any changes to the proposed amendments following that process.
Jane Holland is a partner, Morgan Powell a senior associate and Justin Maloney an associate at law firm Bell Gully
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