The COVID-19 epidemic has caused significant financial hardship for businesses forced to close their doors in response to Government enforced lockdowns. Keeping up with rental outgoings has placed additional strain on businesses who have lost some, or all of their income. While many commercial leases already contain rent abatement clauses to deal with situations like the epidemic, this was not the case for all. Some businesses found themselves in a position where they were contractually obligated to continue paying their full rent.
In June 2020 the Government responded to this issue by releasing a temporary amendment to the Property Law Act 2007 (PLA), requiring parties to negotiate a fair reduction of rent for commercial premises (see our previous article ‘Temporary law change impacts commercial leases’). An official amendment has now been implemented which provides a formal rent adjustment mechanism to assist landlords and tenants to fairly distribute the financial loss suffered as a consequence of the epidemic. The Ministry of Justice (MoJ) has also released information on the changes.
We expect this amendment will have much broader implications than those immediate on leases which do not already contain a similar clause. It will likely also provide overarching guidance to all parties of commercial leases as to the key factors that should be considered when negotiating a fair rent reduction in response to emergency situations such as the COVID-19 epidemic.
Changes to the PLA
The PLA amendment involved inserting clause 4A into Schedule 3. The clause, which came into force on 3 November 2021, provides landlords and tenants with much needed clarity surrounding how rent should be reduced in commercial leases. The law now states that where COVID-19 has meant a tenant can no longer access or conduct business from their leased premises, a ‘fair proportion’ of rent will cease to be payable.
How is a ‘fair proportion’ calculated?
What constitutes a ‘fair proportion’ of the rent is not defined, as it will differ on a case by case basis. However, the PLA now states that the income lost by the tenant as a consequence of not being able to conduct their business from the premises must be considered in these calculations.
This provides flexibility and enables landlords and tenants to share the financial burden of the epidemic to the extent that their business has been negatively impacted. For example, a business which can easily operate from home and experienced no, or limited loss of income may only be entitled to a limited rent reduction.
Does the amendment apply to all commercial leases affected by COVID-19 restrictions?
No, implied covenants only apply to commercial leases in operation after 18 August 2021 which do not contain a no access in an emergency clause (no access clause). For example, clause 27.5 of the current ADLS Deed of Lease requires a fair abatement of rent and outgoings when the tenant is unable to access and operate fully from the premises. Leases containing this clause will not be subject to these amendments.
If an agreement to vary the rent has already been made for the period access was impacted, the implied clause will not apply. Parties can agree to negate, vary or extend the implied clause in a new or existing lease, provided this has been done after 3 November 2021.
Where does this leave leases with existing no access clauses?
We expect that the amendment may have more far-reaching implications than is immediately apparent. While many leases cater for rent abatement in circumstances like those resulting from COVID-19, they lack specific guidance on how rent adjustments should be calculated. The advice on how to calculate a ‘fair proportion’ now provided by these amendments to the PLA may become a helpful reference point parties can turn to when negotiating rent adjustments under their own lease agreements.
When does the implied clause apply?
The implied clause only applies for the period of time in which the tenant is unable to gain access to all or any part of the leased premises to operate their business due to the epidemic.
The affected period commenced on 18 August 2021 and will cease to apply once the Epidemic Preparedness (COVID-19) Notice 2020 (Notice) is no longer in force. The Notice expires on 18 March 2022, unless the Government decides to lift it earlier. The Notice can be extended further if required.
What will parties do if they cannot reach an agreement?
If parties are unable to reach an agreement on a fair rent proportion, disputes must be resolved through arbitration, unless an alternative dispute resolution process such as mediation has been agreed. To assist landlords and tenants in this position, arbitrations will be subsidised by up to $6,000 (including GST) per dispute.
Arbitration is a method parties commonly use to resolve commercial lease disputes, without having to go through the public court system which can be time-consuming and costly. An independent and impartial arbitrator will make a final and binding decision to resolve the dispute after consideration of both parties’ arguments. Decisions are, however, subject to a limited right of appeal.
Parties do not require representation by a lawyer for arbitration, however, we would advise getting in touch with one of our team if you are going through the process.
The subsidised services can be accessed until March 2022. More information on these services are available on the Ministry of Justice website.
Where can I find out more about these changes?
For detailed advice on how the amendments may impact you as a commercial tenant or landlord, please get in touch with our commercial property team.
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