Mandatory rent abatements now law

The COVID-19 Response (Management Measures) Legislation Act 2021 has received royal assent and is now in force. Tenants now have the leverage many have wanted during the pandemic to negotiate some relief from their landlords. However, given that the legislation prevents landlords from taking enforcement action until a “fair proportion” has been agreed, landlords may want to be proactive in seeking a resolution to any rent abatement dispute as quickly as possible.

Which leases are affected?

The implied rent abatement covenant is to be applied to all leases that are in operation during the ‘affected period’ (i.e., during the COVID-19 pandemic) except:

• Those that already have a “no access in emergency clause”;
• If the parties have contracted out of the implied covenant;
• If the parties have already entered into a “pre-commencement rent variation agreement”.

What is the “affected period”?

The “affected period” commenced on 18 August, which is the date on which Auckland went into its current lockdown and ends when the Epidemic Preparedness (COVID-19) Notice 2020 either expires or is revoked. In other words, the legislation is specific to the current COVID-19 pandemic.

What is a “fair proportion” of rent to abate?

Firstly, “rent” is defined to include outgoings. Secondly, the legislation leaves it to the parties to agree on what is to be considered a “fair proportion”. However, the legislation directs the parties to consider any loss of income experienced by the lessee in respect of the relevant rental period due to the restrictions. This is therefore likely to be the guiding factor in determining what a “fair proportion” of rent is. Note that what is a ‘fair proportion’ is likely to change depending on alert levels.

What if the parties can’t reach an agreement as to what is a “fair proportion”?

The legislation stipulates that if the parties can’t agree on what is a fair proportion, the dispute is to be referred to arbitration. This does not prevent the parties from mutually agreeing to some other form of dispute resolution – the legislation was amended following the recommendation of the Select Committee to make this expressly clear. The requirement to resolve by arbitration would, however, prevent either party from forcing the other party to court over the issue. The Act also clarifies that the provision, requiring dispute to be resolved by arbitration, is subject to section 16 of the Disputes Tribunal Act 1988, which prevents a contracting out of that jurisdiction.

No right of enforcement until “fair proportion” is agreed upon

Landlords may not take any enforcement action due to non-payment of rent until the parties have reached an agreement as to what is a ‘fair proportion’ of rent to abate.

This article was provided by Dentons Kensington Swan.

Michelle is a partner in Dentons Kensington Swan's property team. She has over 20 years’ experience in commercial real estate law advising on a full spectrum of commercial property matters, from acquisitions, disposals, due diligence, and leasing of significant property assets to subdivisions, unit title matters and development projects. She helps clients with commercial property deals and provides specialist advice on a range of body corporate matters, as well as advising on body corporates undertaking significant remedial work. Clients praise Michelle for being 'thorough, knowledgeable, careful and responsive'.