Yesterday, the Government introduced the COVID-19 Response (Management Measures) Legislation Bill.
Among other changes, the Bill would:
imply a clause providing for a "fair proportion" abatement of rent and outgoings in an epidemic into leases (that do not already contain such a clause);
prevent enforcement action that is inconsistent with that implied clause; and
require disputes in relation to the implied clause to be referred to arbitration.
What leases are caught?
The change would apply to all leases (or subleases):
The 2012 edition of the ADLS Standard Form Lease contains a "no access in emergency" provision at clause 27.5, which was inserted in response to the "red zoning" of property following the Canterbury earthquakes. Leases on that form would not be affected by the implied clause.
The clause will, however, be inserted into other leases without such provision, which could include leases on earlier versions of the ADLS Standard Form Lease, leases that are on the 2012 edition of the ADLS Standard Form Lease where the parties have struck clause 27.5 out during negotiations, or leases that have been subject to specific negotiation between the parties. The effect is that the terms expressly agreed between the parties are altered and the parties' agreed risk allocation is arguably undermined.
The implied clause can be expressly excluded by the parties. However, any agreement to exclude the implied clause must be made on or after 28 September 2021. A pre-existing clause in a lease that excludes all covenants implied by the Property Law Act would not be effective.
What will the clause say?
The clause would provide that a fair proportion of the rent and outgoings will cease to be payable in relation to a period:
that is in the period between 28 September 2021 and the date the relevant section is repealed;
when there is an epidemic; and
where the lessee is unable to access all or any part of the leased premises to conduct fully their operations, because of reasons of health or safety related to the epidemic, including Alert Level restrictions.
Unlike a previous proposal put forward by the Government in June 2020, the clause will largely (but not completely) align with the equivalent clause in the 2012 edition of the ADLS Standard Form Lease.
How will the fair proportion be determined?
The Bill (in the authors' view, unusually and very optimistically) states that "the fair proportion will be agreed by the lessor and the lessee".
There is limited guidance on how the fair proportion is to be determined, although cases decided in relation to clause 27.5 of the ADLS Standard Form Lease may provide parties with some degree of assistance in determining what is "fair". Specifically, it has been suggested in one case that the fair proportion would be assessed on the basis of what a willing landlord and a willing tenant would arrive at, taking into account factors of benefit or detriment on both sides. From the tenant's perspective, we think that a key factor will often be the extent to which they are able to use the premises at the relevant Alert Level.
The only guidance the Bill provides in relation to the "fair proportion" is that any COVID-19 related variations made to rent or outgoings in relation to the period after 18 August 2021 (being the date that New Zealand most recently moved into Alert Level 4) must be considered by the parties.
What happens if the parties do not agree?
If the parties do not agree, the dispute would need to be referred to arbitration (apparently regardless of existing dispute resolution provisions in the lease).
The landlord would not be entitled to take enforcement action before the landlord and tenant have agreed the fair proportion. Tenants would therefore have considerable power to resist enforcement action by withholding agreement to abatement proposals by landlords. Landlords would then need to obtain an arbitral award confirming the quantum of arrears for the relevant period before being able to take enforcement action for such arrears.
As noted above, the Government previously proposed to introduce a (different) fair proportion rent abatement clause into certain leases. That proposal was blocked by New Zealand First, citing (among other things) sanctity of contract. Subsequently, the Government made subsidised mediation and arbitration services available. Uptake has apparently been low, which may suggest that there are few unresolved disputes in relation to rent abatement.
The timing of the Government's proposal to rewrite contracts agreed between landlords and tenants is curious. The question of rent payable during lockdown was first raised some 18 months ago and many hope that Auckland is now nearing the end of its final lockdown. Many instances of rent abatement have been agreed by landlords and tenants over the last 18 months. The need for a new clause to be implied into leases at this late stage is not clear.
There will be a "short" select committee process on the Bill, with the Government indicating that it is particularly interested in submissions in relation to when the proposed clause should be effective. If you require assistance making a submission, or have questions about how the proposed change affects your lease(s), please get in touch with one of our experts below.