Amendment blog blog

The proposed Government lease amendment – a quick Q&A on what it means and for whom

30 September 2021, by

A new implied covenant is set to be introduced into certain commercial leases, effectively adding a clause to leases that may allow rental abatement because of access restrictions during lockdowns. 

The proposed change to the Property Law Act 2007 is part of amendments to the Covid-19 Response (Management Measures) Legislation Bill that received its First Reading on Wednesday. Once law is passed (expected to be end October), the changes would take effect from 28 September 2021.

In detail, the new clause provides that a “fair proportion” of rent and outgoings will cease to be 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 operations from all or any part of the leased premises, because of reasons of health or safety related to the epidemic”. The new clause will only apply to leases without an existing “no access in an emergency” clause.

Many tenants will know that clause 27.5 of the latest ADLS (Auckland District Law Society) lease already allows an abatement. But the proposed amendment would ‘imply’ a similar term into those leases which don’t already include a clause of that nature.

While the proposal reportedly ‘blindsided’ some property managers and landlords and left the Property Council ‘perplexed’, tenants should be delighted. Nonetheless, it raises several issues, and questions on who it will affect and how and why it’s important, some of which we answer here…

First, should the Government be interfering with existing commercial contracts?

The Government acknowledged that the proposal went “against the legal principle of sanctity of contract”, noting that it “would add contractual terms and obligations to leases that the parties did not mutually agree”. One could argue that the proposed amendment superimposes more sensible and fair arrangements that are already commonly available in new leases onto older leases. In that context, the proposal is providing a more level playing field for all landlord and tenant relationships.

How is a “fair proportion” of rent abatement calculated?

The draft legislation leaves it to the parties to agree what is to be a “fair proportion”. Existing arbitration provisions will apply for those not able to reach agreement. Agreeing a fair proportion will remain a vexed issue.

Will the new law overwrite those leases that already have a specific rental abatement included?

We understand that the proposed new clause will only apply to leases without an existing “no access in an emergency" clause. Therefore, tenants and landlords using the current ADLS lease will b​​e unaffected by the proposed amendment. Those tenants with older leases will benefit from the proposed change as landlords will no longer be able to ignore the subject. It will not apply to previous lockdown periods or to those who have already reached an agreement on an abatement solution prior to 28 September 2021.

Who will reimburse the landlords for their rental abatement income “losses”? 

Good question. In many cases, the tenants that will enjoy the abatement may be of better financial substance to the landlords who must subsidise them. Although we freely admit to being biased in favour of occupiers, in the interest of fairness to all parties, that’s something we think the Government should consider.

What next?

The Government announced it will go through a “short select committee” process. In theory, there could be changes to the amendments as a result of that process. 

Where does that leave us?

Although there are positive and negative aspects to the proposed changes on balance, we believe it’s in both landlord and tenants’ interests to have lease terms provide clear and fair outcomes. The amendment retrospectively applies some fairness to leases that have arguably caused unfair outcomes to date. This will be especially helpful for small and medium-sized businesses but will hurt small-to-medium sized landlords.

Contact us and tell us what you think…

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