The Ministry of Justice has compiled guidance related to commercial property leases and mortgages and how they are affected during Alert Level 4.
The New Zealand Law Society | Te Kāhui Ture o Aotearoa Property Law Section made a significant contribution in consultation with the Ministry to keep the advice up to date.
Businesses renting commercial property are unable to operate, access or use their premises if they are not essential services, impacting their ability to pay rent and other outgoings, incurring difficulty for landlords making mortgage payments.
Government-announced changes to assist commercial property agreements
Under the Property Law Act 2007, a commercial landlord can cancel a lease where a tenant fails to pay rent if:
- the rent is unpaid for no less than 10 working days, and
- the landlord has served a notice of the breach that specifies a period of not less than 10 working days to remedy the breach (these periods can overlap), and
- the lessee does not remedy the breach by the end of the specified period.
The Government has announced its intention to introduce a Bill, once Parliament resumes, to extend these timeframes from 10 working days to 30 working days.
To assist commercial landlords and others with mortgages, the Government has announced the intended Bill will also extend the time mortgage payments must be overdue before mortgagees can take action.
The Bill is also intended to apply to all notices to cancel a lease or exercise powers under a mortgage issued from 10 days after the Epidemic Preparedness (COVID-19) Notice 2020 was issued on 25 March 2020. This will ensure they apply to all tenants and mortgagees affected by the measures taken against COVID-19.
This amendment is temporary and intended only to provide relief to tenants and mortgagees affected by the response to COVID-19 and to allow time for affected parties to discuss how they may get through this period and resume business when the Alert Level allows for it.
The law will return to the current timeframes six months after the end of the end of the Epidemic Preparedness (COVID-19) Notice 2020.
The Ministry of Justice says once the Bill is passed, notices already issued that specified a shorter period than prescribed by the new rules will be treated as specifying the new minimum period.
Changes to residential property are treated differently. The Government has already made changes to termination provisions in the Residential Tenancies Act 1986, as well as a mortgage repayment holiday scheme.
Guidance on cessation of rent payments for commercial property leases
Stopping or reducing rent payments depend on the terms of the lease.
Leases such as the popular Auckland District Law Society (ADLS) ‘Deed of Lease’ version 6 contains a no access in emergency clause which provides for a ‘fair proportion’ of rent and outgoings to be reduced while a property cannot be accessed in an emergency.
This clause’s term ‘fair proportion’ (27.5) has not yet been interpreted by the courts, and current guidance on determining proportions depend on the individual circumstances between the commercial tenant and landlord.
It’s also possible that what constitutes a ‘fair proportion’ may change over time as the Alert Level changes.
The ADLS has provided some guidance to lawyers on this clause.
The Property Council of New Zealand’s property contract involves a slightly different clause, and has published some relevant guidance on rent payments.
What if the tenant can’t afford the rent but the lease doesn’t provide for reduced rent in an emergency?
Lawyers are encouraged to help their landlord clients consider the position the tenant is in and the landlords’ interest in the tenant remaining viable. When advising your client, you should consider that the measures being taken against COVID-19 and the requirements of particular Alert Levels are neither a landlord’s, nor a tenant’s fault.
It is usually in both the landlord and the tenant’s interest for the business to remain viable and able to resume operating once the Alert Level allows for it. Landlords are encouraged to consider the following options:
- a rent payment holiday,
- a reduction in rent,
- a variation of the lease which assists the tenant, for example by deferring a rent review date,
- an interim agreement, such as a deferred rent payment plan, to take financial pressure off temporarily,
- the early termination of a lease, or
- a tenant might extend their lease term in return for the landlord giving relief.
What if a commercial landlord and tenant can’t reach an agreement?
This will depend on the terms of the lease in question. For example, if the lease is the ADLS 6th edition lease, then the parties should endeavour to reach agreement by negotiation or, if they agree, by mediation. Failing this, the lease requires the matter to be determined by arbitration.
Lawyers are encouraged to support their clients to find a solution which is both sustainable and meet the needs and interests of the parties involved. No matter the form of lease, parties should be encouraged to work together constructively to find this solution.
What can you do if your client or the other party refuses to discuss new arrangements?
Lawyers play a crucial role in supporting businesses, commercial tenants and landlords to reach agreements in light of extraordinary circumstances. They should make sure their client is aware of their legal position, but also that of the other party, the Ministry says.
Lawyers can provide their best advice and support to their clients but cannot prevent people from insisting on strictly enforcing their contractual rights.
Where this happens, and no agreement can be reached, this could lead to legal proceedings which can be costly, unpredictable, and in current circumstances have the potential to be significantly delayed. Lawyers are encouraged to make sure their clients are aware of the risks if the parties can’t agree.