Proposed Changes to the Property Law Act 2007 - Mandatory Rent Reduction For All Commercial Leases During Lockdown

The Government has moved very fast to make significant changes to the law around commercial leases. The proposed changes would allow all commercial tenants, including business owners of all sizes, whether or not they have suffered material financial losses, a rent reduction for the period of 'no access' to their premises as a result of the current Covid-19 lockdown.

Many commercial tenants and landlords, based on their experience with Covid-19 in 2020, will have discovered some mutual benefit in meeting half-way, by negotiating an appropriate amount of rent payable by the tenants during the period of their hollow occupation of the premises. Also, some lucky tenants with a later edition of the industry standard ADLS lease would have found a provision in their lease allowing for a rent reduction for the period of 'no access' (clause 27.5, also known as the "no access clause").

The Government's proposal calls for changes to the Property Law Act 2007 mandating such rent reductions for all commercial leases where the lease does not already include a "no access clause", and whether or not the landlord is willing to allow any rent reductions. The changes are to apply to all existing leases retrospectively, but the relevant rental period to which the reduction applies will be from 28 September 2021. In other words, the changes will not affect landlords' entitlement (if there were any) to enforce payment of rent arrears outstanding from earlier lockdowns in 2020 or early 2021.

The lessee will need to show that there is an epidemic (eg Covid-19), and that the lessee, or any sub-lessee of the lessee, is unable to access the leased premises to conduct fully their operations, because of reasons of health or safety related to the epidemic. This includes, without limitation, the restrictions under Alert Levels 4 and 3.

For the period to which the above applies, but none before 28 September 2021, a "fair proportion" of the rent otherwise payable by the lessee will no longer be payable. What is "fair" in the circumstances are to be agreed between the lessor and lessee. Any dispute arising in relation to above, eg whether it applies or not, or the amount of rent reduction required, will be referred to arbitration under the Arbitration Act 1996.

Additionally, the changes will not affect any rent variation agreements or negotiations concluded between landlords and tenants to account for the period of 'no access' before the above changes come into force. Nor does it affect leases that already include a "no access clause".

Similar changes were proposed in 2020, but it did not gain enough support in Parliament. This time, however, with the current Government's unprecedented majority in Parliament, it is anticipated that the proposed changes will come into force, and the changes are likely to happen very quickly.

The Covid-19 Response (Management Measures) Legislation Bill, the omnibus Bill proposing for changes in many legislations including the Property Law Act 2007, was first introduced to Parliament on 28 September 2021. In less than a month, it has passed up to the Third Reading, being the final legislative process before the Royal Assent is given, and it is anticipated that the Bill come into effect before the end of this year.

Once the changes come into effect, there may be barriers for the landlords to lawfully cancel the lease for non-payment by the tenants, seeking payment of the rent in arrears, or even in repossessing the premises if there is an on-going dispute as to how much reduction would be "fair".

It is probably prudent for all commercial landlords and tenants affected by the current 'no access' situation to consider starting a discussion with each other now. Please remember that any arrangements or negotiations concluded before the changes come into force, as to the amount of rent payable by the tenants during this lockdown, will remain binding notwithstanding any changes in the law, which will effectively prevent arguments arising in the future as to how much reduction would be "fair".

Please direct any enquiries to:

City Office - Commercial Property

Ross Bedford (Partner) on (09) 306 6722 (rbedford@mcveaghfleming.co.nz)

John Woolley (Partner) on (09) 306 6734 (jwoolley@mcveaghfleming.co.nz)

Albany Office - Commercial Property

James Varney (Partner) on (09) 996 3608 (jvarney@mcveaghfleming.co.nz)

Brandon Cullen (Partner) on (09) 966 3609 (bcullen@mcveaghfleming.co.nz)

Manukau Office - Commercial Property

Paul Foster (Partner) on (09) 262 4949 (pfoster@mcveaghfleming.co.nz)

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