The path to hell is paved with good intentions: a light bulb moment

On 28 September 2021, the government proposed changes to the Property Law Act 2007 pursuant to the COVID-19 Response (Management Measures) Legislation Bill No. 77-1.

The amendments proposed are:

• an implied covenant to ensure a fair proportion, agreed by the lessor and lessee, of the rent, otherwise payable by the lessee, will cease to be payable by the lessee for the period starting on the date when there is an epidemic and the lessee (or any sublessee) is unable to gain access
• implied covenant to apply to leases in operation from 28 September 2021 and the date on which the Epidemic Preparedness (COVID-19) Notice 2020 expires or is revoked that does not include a no access in emergency clause
• implied covenant may be negatived, varied or extended by the express terms of the lease, by written memorandum executed by the parties to the lease, or if implied in a short term lease by express or implied agreement between the parties but only after 28 September 2021
• to determine fair proportion, the matters to be considered must include whether any variations were made to rent payable by a lessee on or after 18 August 2021 and before the start of the affected period that were made because there was an epidemic and the lessee (or any sublessee) is unable to gain access
• any dispute relating to the implied covenant is to be referred to arbitration

The proposed changes are retrospective – meaning that the legislation is intended to attach legal consequences now and in the future for events that took place in the past.

The Bill has not been passed as law and has only had its first reading in Parliament.

Under the standard ADLS lease (and virtually all other leases in NZ), the tenant has no right to set off any rental or portion of rental until either they have reached agreement with the landlord, or an arbitration has been completed with a decision. So, if the landlord disputes the tenant’s proposed fair rental, then the likely timetable for the tenant to complete the arbitration could be many months after the process was started, all while the tenant is required under the lease to pay the full rental until the decision is released.

In the context of COVID-19 lockdowns to date, by the time the arbitration is completed, then the lockdown will have well and truly ended with the normal or “new normal” operating conditions in place.  

What does “fair” mean in this commercial context? Is this based on the impact on the business interruption? If OPEX is included in the rental, should these be required to be paid? Or will the Government update the rates and insurance requirements so that the landlord is only required to pay a fair amount to those providers?   

The government is dabbling into commercial matters without analysing the potential adverse results which may occur. On its face, it is difficult to see the upside of this law, other than for lawyers and arbitrators. Without agreement there will be little joy for either the landlord or the tenant, and this will undoubtedly create lasting relationship issues between these two entities.

In the future, will all landlords with retail or restaurant tenants need to build in a premium to the rental to provision for the cost of a lockdown and a potential rental abatement? Or will landlords need to pivot away from tenants that are most likely to be affected by a lockdown?

Banks will need to adjust their lending requirements so that a landlord client isn’t exposed to too many high-risk tenants like restaurants and cafés. Banking covenants will need to be updated. It is unlikely the government may allow landlords to advise the bank that they will only pay a fair proportion of their mortgage repayment requirements – but then that is no different from the government interfering with all commercial property leases in New Zealand.

It must mean that the cost of borrowing will have to increase to provide for this risk as well.