Commercial Leases During COVID-19 – How Does Arbitration Work?

Commercial leases have been in the spotlight during COVID-19. With many tenants unable to operate from their premises during the Alert Level 4 (and 3 to a lesser extent), resulting in a loss of revenue, the Government has been encouraging landlords to negotiate with tenants. On 4 June 2020, the Government announced that small business commercial tenants and landlords who cannot reach agreement on a fair reduction in rent will enter into a subsidised, compulsory arbitration process.

Eligibility

The rent dispute process will be for businesses with 20 or fewer fulltime employees that can prove a loss of revenue as a result of COVID-19 disruption. The same 20 employees provision applies to landlords (in disputes about paying their own mortgage).

However, commercial tenants and landlords who have already reached agreement in response to COVID-19 will not be eligible.

Step 1: Negotiation

Good-faith negotiation (discussing over a coffee, meeting at the workplace or involving lawyers to advocate for you) is the preferred first step – the relationship is more likely to remain amicable and can result in lower legal costs for both parties. Many tenants and landlords have already been through this negotiation phase and reached an agreement. The Government guidelines also suggest this stage could include mediation; however, this will be up to the parties.

The landlord and tenant should try to negotiate a fair proportion of rent and outgoings which would not be payable by the tenant. A “fair proportion” will depend on the particular circumstances of the tenancy; our article “COVID-19 – What happens to my commercial lease?” discusses the relevant factors. It is important to enter negotiations in good-faith, and it helps if both parties take time to understand how the other side may be being impacted by the COVID-19 pandemic. 

The actual rent reduction can be implemented in several ways:

• A rent-free period;
• A reduced-rent period (including reductions of varying levels over successive periods);
• A scheduled rent increase being deferred;
• Continuing current rent; or
• A combination of the above options.

Step 2: Arbitration

If the tenant and landlord cannot agree on a fair rent price, a temporary change to the Property Law Act will lead to a compulsory arbitration process, even if there is no existing agreement to arbitrate in the commercial lease. The arbitration will be subsidised up to around 75%. The Government has estimated the cost of each arbitration to be approximately $8,000, so the landlord and the tenant will need to make up the remaining $2,000.00 (approximate) shortfall.

What is arbitration?

Arbitration is a way to resolve disputes other than through the public Court system. An independent and impartial Arbitrator will consider the merits of both parties’ cases and decide the outcome. The Arbitrator’s decision is called an “award” and is final and binding, subject to a limited right to challenge/appeal the award of the Arbitrator. One of the benefits of an arbitration is not having to wait for a Court date in the public Court system, which in some cases can take up to two years. By contrast a typical arbitration can usually be dealt with over a period of several months.

While we are still waiting on details on how the “compulsory” element will work, in general parties can agree on an Arbitrator or one can be appointed by a professional body such as the New Zealand Law Society or the Arbitrators’ and Mediators’ Institute of New Zealand. It is usual for a person to be appointed as the Arbitrator who has experience in commercial property/lease disputes.

How does arbitration work?

Although the details are yet to be provided, the Arbitration Act 1996 is likely to apply. Under the Arbitration Act, a formal arbitration agreement is usually drawn up and signed off by the parties and Arbitrator. Pre-hearing conferences may also be held between the Arbitrator and the parties. One of the common provisions in an arbitration is that there is no right of appeal from the Arbitrator’s decision except on questions of law. The parties to the arbitration can agree to waive (i.e. forego) the right to appeal. It is not possible to appeal findings of fact by the Arbitrator at an arbitration.

The arbitration process is generally similar to a Court proceeding, with both parties preparing evidence, presenting formal claims, statements of defence and submissions. Parties will also prepare and then present evidence at the arbitration hearing, usually in written form, and parties can cross-examine opposing witnesses. At the end of the hearing the Arbitrator will either issue the award immediately or send a written award to the parties some time after the arbitration hearing.

If you are considering arbitration, or think you may need to engage in compulsory arbitration as a result of COVID-19, the McCaw Lewis team can assist you with this process. Contact our Dispute Resolution Team for more information.

If you would like further information, please contact Daniel Shore on 07 958 7477.