Government releases commercial rent relief package

You may well have seen announcements in the media last week around a Government ‘rent relief package’ for commercial tenancies affected by COVID-19, which involves an implied rent relief clause to be incorporated into ‘qualifying’ leases, and a compulsory arbitration scheme that will apply where parties are unable to agree a fair abatement of rent.

It is important to note that this new rent relief package will not apply where landlords and tenants have already reached agreement (before 4 June 2020) on a level of rent abatement, regardless of what that level of abatement might have been.

The essential components of the package are:

  • It involves temporary changes to the Property Law Act 2007 (PLA) which, once enacted, are intended to have retrospective effect, applying from 4 June 2020. The changes to the PLA are:
    • where the tenant business meets certain criteria, a clause will be implied into the relevant lease that requires a fair proportion of rent and outgoings to cease to be payable when the tenant’s business has suffered a material loss of revenue because of restrictions put in place to combat COVID-19. The qualifying criteria are that the tenant business has 20 or fewer full-time equivalent employees (FTEs) and the tenant is New Zealand based.  It is proposed that ‘New Zealand based’ would exclude tenants with an overseas head office or those that are part of an overseas based multi-national.
    • the addition of clear rules to be followed when determining what factors must be considered in determining a fair proportion, based on the principle that the interests of both landlord and tenant should be taken into account, and the financial burden of COVID-19 fairly proportioned.
    • clear guidance on what other measures parties may agree as a temporary change to support them both through the pressures caused by COVID-19.
    • a compulsory requirement that any disputes related to the implied clause be settled in a streamlined arbitration (which it is intended would be delivered by Ministry of Justice contracted providers).
  • A Government subsidy of $6,000 (plus GST) per arbitration will be available to ensure arbitrations are concluded in a timely and cost-effective manner. It is estimated that $6,000 (plus GST) would likely cover around 75% of arbitration costs, with the parties being required to pick up any shortfall.
  • Appeals from the arbitration decision will still be allowed (per the provisions of the Arbitration Act 1996).
  • The temporary changes will end 6 months after the date of enactment of the Bill bringing these changes into force.

Observations

  • In relation to the exclusion of situations where the parties have already reached agreement on a level of abatement, as yet it is unclear exactly what ‘agreement’ means – for example, whether or not it applies where parties agreed a temporary level of payment to get them through the lockdown phase, but each party reserved its rights under the applicable terms of the lease. However, the background Cabinet Paper to this new package does indicate that the exclusion is not intended to include situations where a landlord has insisted on a strict enforcement of lease terms despite a tenant’s request for an abatement.
  • The exact wording of the new implied clause will be determined during the drafting of the relevant Bill, but the Cabinet Paper indicates it should be similar to the Auckland District Law Society ‘no access in emergency’ type clause (as discussed in our earlier alert), and would apply where there is (or has been) a material negative impact on the tenant’s business due to COVID-19, whether or not the tenant is/was able to access the relevant premises.
  • The Cabinet Paper indicates that these measures are largely targeted at leases that do not have the ‘no access in emergency’ type clauses, but also indicates that the changes to the PLA may include provisions to amend those leases that do already have a no access in emergency type clause in them, so as to be consistent with the new implied clause.
  • The Cabinet Paper indicates that the guidance on determining what a fair proportion is would take into account the financial position and bargaining power of both parties, including:
    • the impact of COVID-19 restrictions on the business, even if those restrictions are no longer in place
    • mortgage obligations
    • available financial support
    • previous years’ revenue and profit levels
    • the parties’ ability to survive financially
    • differences in size and resources between parties
  • The no more than 20 FTEs restriction is on a per site/premises basis, so where national retailers have multiple outlets, the outlets employing 20 or less FTEs will still qualify.
  • The Cabinet Paper proposes that, to qualify for the arbitration subsidy, at least one party would have to be a small or medium enterprise receiving the wage subsidy. As yet, it is unclear how ‘small or medium enterprise’ will be determined, but the same 20 or less FTEs criteria may be applied.

We will continue to monitor this space for more developments, and will report further as and when additional information/clarification becomes available, especially when the draft Bill is released.

Authored by Alastair Gatt, a Senior Associate in MinterEllisonRuddWatts' Property team.

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