Name Your Discount - What is a “Fair Abatement” of Rent?
On 28 August 2021, the COVID-19 Response (Management Measures) Legislation Bill (“the Bill”) was passed, and the Bill will be rubber stamped into the law shortly. Somewhat surprisingly, the Bill introduces a new “rent reduction in an emergency” clause which will function as the default “rent reduction” clause for leases that do not already have one. This article discusses what the Bill means for landlords and tenants in the commercial space.
Background – ADLS clause 27.5
The current standard form ADLS commercial lease, the ADLS Deed of Lease 6th edition (2012) (5) (“ADLS Lease”) includes clause 27.5, titled “no access in an emergency”. This clause was formulated as a response to the 2012 Christchurch earthquakes. The concern then was that tenants should not have to continue to pay the full rent for premises they could not access (i.e. premises in the Christchurch Red Zone). In the wake of the COVID-19 pandemic, clause 27.5 has been thrust into the spotlight as a way to justify rent reductions for tenants unable to access their business premises, but there are a number of problems:
- The operating terms of clause 27.5 (emergency; inability to gain access to the premises; and inability to operate fully from them) are vague, and vary from lease to lease;
- Clause 27.5 was designed as a response for emergencies in localised areas (i.e. Christchurch), and most likely did not contemplate an emergency stretching across all of New Zealand;
- Clause 27.5 has never actually been interpreted by the Courts, meaning despite its existence, there is very little guidance on what to do if a “fair abatement” of rent cannot be agreed.
As a result, working out the exact amount of rent to “discount” has largely been left to landlords/tenants to work out between themselves, and various landlords and tenants have resorted to drafting their own “no access in emergency” clauses which are yet to be tested in the event of disagreement.
The Bill was passed on 28 September 2021. One of the Bill’s key changes is introducing a standardised “no access in emergency” clause (“the Amendment”). The Amendment is largely based on the ADLS Lease clause 27.5, and allows landlords and tenants to agree an appropriate rent reduction for an “affected period”, which is effectively the period of the pandemic. The start date of the affected period stretches as far back as 18 August 2021 (i.e. the date that all of New Zealand moved back to Level 4), and the Amendment is implied into all commercial leases that do not already have a similar clause.
The Amendment will be contained in the Property Law Act 2007, and we outline our key observations.
Who does this affect?
The Amendment affects anyone with a lease that does not contain an equivalent “no access in emergency” clause; and/or parties that have not otherwise agreed an existing arrangement. This means recent, unamended, ADLS leases are likely unaffected, but parties with non-ADLS leases, amended ADLS leases, or hastily made alternative rent arrangements, may be caught out. If you have an ADLS lease that commenced on or before December 2012, there is a good chance that it will not contain a “no access in emergency” clause and you will be affected by the Amendment.
What is the “affected period”?
The “affected period” is a rental period:
- That runs from 18 August 2021, and ends when the Epidemic Preparedness (COVID-19) Notice 2020 expires or is revoked. It does not apply to the initial lockdown in 2020;
- Where the lessee is unable to access all or any part of the leased premises to fully conduct their operations because of reasons of health or safety related to the epidemic.
The “affected period” also includes any rent or outgoings arrangements made from 18 August 2021.
What is a “fair proportion” of rent reduction?
The Bill does not list any particular considerations to take into account when agreeing rent reductions. This is to avoid restrictions on what can and cannot be taken into account. A submission from the NZLS (which was not implemented into the Amendment) suggested these factors to consider:
- the lessee’s ability to operate remotely;
- the nature of the lessee’s business;
- the continuing right of the lessee to store goods and business equipment in the premises;
- any Government wage subsidy;
- the number of staff able to attend at the premises and the extent to which the premises can be used in a manner that is consistent with social distancing requirements;
- the borrowings and commitments of the lessee in relation to its business, and the borrowings and commitments of the lessor in respect of the lessor’s building in which the premises are situated.
This means that ultimately, the reduced rent amount will be agreed by the landlord and tenant on a case-by-case basis.
What happens if there is no agreement on rent reduction?
Any disagreement for an appropriate rent reduction under the Amendment will first be resolved between the parties, or failing that, by arbitration.
Would this apply to ground leases?
While the changes in the Bill will apply to all leases, the Amendment provides relief for leases that cannot fulfil their purpose. It is unlikely a ground lease will have an applicable no access provision because, for ground leases, the purpose is long term land use for the improvements to the land (primarily buildings) and that purpose has not been interrupted by the epidemic.
Can I get out of the Amendment?
People can “contract out” of the Amendment, but this does require agreement from both sides. Landlords that try to contract out of the Amendment, without a satisfactory alternative in place, will find this position difficult to support.
It is worth noting that the Amendment will expire when the Epidemic Preparedness (COVID-19) Notice 2020 expires or is revoked. You will need to consider whether a “no access in emergency” clause is appropriate for any other emergency or natural disaster that may occur.
The Amendment will be keenly observed by many, and we will continue to keep a close eye on developments in this space. We would advise anyone with commercial interests to closely examine their version of a “no access in emergency” clause, especially if they are under an older version of the ADLS lease or a non-standard ADLS lease.
Should you have any concerns or questions about the Bill and how it affects you, get in touch with one of our experts at McCaw Lewis.
Andrew is a Solicitor in our Dispute Resolution Team and can be contacted on 07 958 7447.
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