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Rent Abatement – Levelling the playing field

Changes to the Property Law Act mean that tenants may now be able to claim a rent abatement even when the lease agreement does not provide for this. In this article Laura Fischer sets out the changes and what it means for landlords and tenants.

On 3 November 2021, Parliament passed legislation to amend the Property Law Act and imply a new covenant into leases which do not already have provisions to provide for rent abatement where the Tenant cannot access the premises and to prevent enforcement action (including the termination of the lease) by the Landlord until a rent abatement has been agreed or determined.

What does it say

This new implied covenant provides that a fair proportion of the rent that would otherwise be payable will cease to be payable –

  1. starting on the date when—
    1. there is an epidemic; and
    2. the Tenant, is unable to gain access to all or any part of the leased premises to conduct fully their operations from all or any part of the leased premises, because of reasons of health or safety related to the epidemic; and
  2. ending when the inability to conduct their business ceases.

When does it apply

This new covenant will be implied into leases that:

  1. are in operation in the period from 18 August 2021 to the expiry of the Epidemic Preparedness Notice (currently due to expire on 19 December 2021) (affected period); and
  2. do not already have a no access clause.

Leases which already have a no access clause, such as clause 27.5 in ADLS lease will not be affected by this law change.

Fair Proportion

The fair proportion is to be agreed by the Landlord and Tenant.  In determining that, they must consider any loss of income experienced by the Tenant in respect of that rental period because, for all or any of that rental period,—

  1. there is an epidemic; and
  2. the Tenant is unable to gain access to all or any part of the leased premises to conduct fully their operations in all or any part of the leased premises, because of reasons of health or safety related to the epidemic.

The guidance provided by the legislation is very limited and focussed only on the Tenant’s loss of income.  We agree that the factors listed in the New Zealand Law Society submissions on this Act sets out a number of other relevant factors that could be considered in determining a ‘fair proportion’:

  1. The lessee’s ability to operate remotely;
  2. The nature of the lessee’s business;
  3. The continuing right of the lessee to store goods and business equipment in the premises;
  4. Any Government wage subsidy;
  5. 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; and
  6. 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 is not an exhaustive list of considerations as each situation will be different but a guide to considerations that are likely to be relevant for most situations.

The Property Council has also prepared draft industry guidelines for determining a fair proportion of rent.  Those guidelines can be downloaded here: https://www.propertynz.co.nz/news/introducing-the-draft-industry-operational-guidelines-for-determining-a-fair-proportion-of-rent

Contracting out

This implied covenant can be excluded, changed or extended by the express terms of a lease or by written agreement signed by the parties.  However, if that agreement was reached before 18 August 2021, in order to be effective it must have been an agreement made about what rent was payable for the affected period and made for reasons that include that 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 in all or any part of the leased premises, because of reasons of health or safety related to the epidemic.

Accordingly, a broad provision in an existing lease excluding any covenant implied by the Property Law Act, will not be effective to exclude this new covenant.

If no agreement

Both parties are required to take all reasonable steps to respond to communication to each other about this covenant, within 10 working days of receiving the communication.

If agreement about what a fair proportion is cannot be reached, neither party can go directly to Court but must instead refer it to arbitration.  Alternatively, if the parties agree to they can try a non-binding mediation or other dispute resolution methods, such as expert determination.

No enforcement action

Until the fair proportion has been agreed, a Landlord cannot:

  1. terminate a lease for unpaid rent or issue a notice of intention to cancel a lease;
  2. apply to the court for possession;
  3. re-enter the land peaceably;
  4. take any other action under the Property Law Act related to cancelling the lease.

How this affects you

For Tenants with a lease that does not contain a no access clause, this law change provides a powerful legislative basis to claim rent abatement where their business has been interrupted by the Covid-19 restrictions.

Both Landlords and Tenants entering into new leases will need to consider whether they want to be bound by, exclude, amend or extend this implied covenant in their lease.

This article is current as at the date of publication and is only intended to provide general comments about the law. Harkness Henry accepts no responsibility for reliance by any person or organisation on the content of the article. Please contact the author of the article if you require specific advice about how the law applies to you.

For further information

Laura Fischer - Harkness Henry Solicitor

Laura Fischer

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