Important information: a lease law amendment could quietly take effect — issues landlords and tenants need to consider

The Government recently announced proposed legislation which, if passed, would effectively insert clause 27.5 from the standard law society lease into all leases. This clause only attracted attention after New Zealand's first lockdown last year. Before then, it was rarely mentioned publicly, and even most lawyers had never used it.

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With another round of lockdown measures this year, the Labour Government has again announced proposed changes to lease legislation. The proposed amendment differs significantly from last year's proposal and appears closer to clause 27.5 of the ADLS lease. The proposed provision would allow consideration of a “fair proportion” of rent and outgoings being 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 business from all or any part of the leased premises for reasons of health or safety related to the epidemic”.

YIJU spoke remotely with two experienced professionals — a commercial property broker and a lawyer — about issues concerning landlords and tenants.

 

Tommy Zhang

Metro Sales & Leasing Broker

JLL New Zealand

 

Lawyer Han Ben

Dapeng Lawyers, New Zealand

 

Would the proposed provision apply to leases with existing rent relief clauses? 

A concern about last year's proposal was that it would also apply to leases with existing rent relief provisions, such as clause 27.5. That is no longer the case under the new proposal. Instead, the proposed provision would apply only to leases without an existing “no access in an emergency” clause.

Would the proposed provision benefit all tenants?

Last year's proposed provision applied only to “eligible tenants” — those based in New Zealand with fewer than 20 full-time employees — whose businesses had suffered a “material loss of revenue” because of “restrictions imposed to combat the epidemic”. This year's proposal has no such limitations. It is not restricted to small, New Zealand-based tenants or those operating particular types of businesses. The provision would therefore be implied into both office and retail leases.

Would the proposed provision apply where landlords and tenants have already agreed on relief?

Many landlords and tenants may already have agreed on relief from rent and outgoings, whether or not their lease contains a “no access in an emergency” clause. The proposed provision would not apply if they have entered into a rent variation agreement and at least part of the reason for that variation was an inability to access the premises because of the epidemic. However, the agreement must have been entered into before the proposed legislation takes effect.

What period would the proposed provision cover?

The proposed legislation does not clearly specify the period for which rent relief would be available. The key date in the draft bill is 28 September 2021. The proposed provision would apply to “all or any” of a rental period beginning on 28 September 2021. Where rent is calculated by calendar month, this suggests it would apply to rent and outgoings for September, but not August. However, this is not entirely clear. The new legislation should not apply to earlier lockdown periods in New Zealand.

What would trigger the new provision? 

The proposed provision would apply where there is an “epidemic”, as there currently is, and the tenant is “unable to gain access to all or any part of the leased premises to fully conduct their business from all or any part of the leased premises for reasons of health or safety related to the epidemic”.

 

Tommy Zhang：

As commercial property brokers, we must always protect the interests of both landlords and tenants. The law should do the same, so the new lease law amendment should be fair to both parties. Since the pandemic began, retail has been the hardest hit, particularly under Alert Levels 4 and 3. If the bill passes, it could prolong the downturn in the retail and office leasing markets, especially for older properties and those in outlying locations. However, the industrial property market will remain very active. Recently, YIJU reported on New Zealand's richest person buying up industrial property. Not long ago, a landlord and tenant I work with encountered the issue described above. I advised the tenant to first try communicating effectively with the landlord and reach an agreement to reduce the rent. There is no need to incur expensive litigation costs unless absolutely necessary.

Lawyer Han Ben:

The existing ADLS lease already has a similar provision in clause 27.5. The amendment targets leases without comparable provisions. It does not mean landlords will receive no rent; rather, it requires them to offer a reasonable reduction. However, the bill does not clearly define what reduction would be reasonable. The Government has previously indicated that factors to consider include the tenant's business, the landlord's mortgage repayment pressures, both parties' returns over recent years and their financial circumstances. I think the bill does give tenants greater rights, but its fundamental purpose is to encourage both parties to negotiate and share responsibility. Arbitration is less expensive than ordinary court proceedings. Depending on the reason for arbitration — for example, if one party's unreasonable behaviour led to it — the award may reimburse the innocent party for most or even all of their legal costs. Of course, any litigation or arbitration carries risks and requires considerable time and money. I therefore recommend that landlords and tenants negotiate a settlement based on reasonable requests from both sides. As the bill would not change existing provisions for rent relief during the pandemic, landlords can negotiate with tenants before it passes and, by mutual agreement, add pandemic rent relief provisions they find acceptable.

 

Disclaimer: The views above are those of the individual industry professionals and do not represent YIJU's position.