The COVID-19 pandemic has created a difficult reality for many commercial landlords and tenants. It is important to know what legal changes have occurred that will affect existing leases and change how they work.
Time frames for Cancellation of Leases for Non-Payment of Rent
The COVID-19 Response (Further Management Measures) Legislation Act 2020 received Royal assent on 15 May 2020. This Act made changes to a range of legislation, including inserting new temporary sections into the Property Law Act 2007. The key change in relation to commercial leases is to extend the time periods before a landlord can cancel a lease for non-payment of rent by a tenant from 10 to 30 working days.
This means that a landlord cannot cancel a lease for non-payment of rent unless:
- The rent has been in arrears for not less than working 30 days (up from 10 working days);
- The landlord has served notice on the tenant of the landlord’s intention to cancel the lease because the tenant breached the lease, with such notice giving the tenant a period of not less than 30 working days after the service of the notice for the tenant to remedy the rent arrears (up from 10 working days); and
- At the expiry of the notice period, the tenant has not remedied the default by paying the overdue rent.
It is important to note that the period that the rent has been in arrears and the notice period can run concurrently. Landlords do not need to wait for the rent to be in arrears for 30 working days before starting the notice process.
The above changes to the Property Law Act apply to all leases in operation during the COVID-19 period (even if the lease commenced before COVID-19) where the rent has been in arrears during that period. The COVID-19 period began on 1 April 2020 and will end six months after the Epidemic Preparedness (COVID-19) Notice 2020 expires or is revoked. The changes also apply retrospectively to any default notices in respect of overdue rent served on a tenant on or after 1 April 2020.
As a final point, landlords must ensure, when serving notice on a tenant, that the notice contains the information required by and is served on the tenant in a manner that complies with the Property Law Act for the notice to be effective. These requirements have not changed.
Rent and Outgoings – Fair Abatements where premises could not be accessed – Where to from here?
On 4 June 2020, the government announced a further temporary amendment to the Property Law Act 2007 to assist landlords and tenants in resolving any commercial rent issues that have arisen as a result of the pandemic measures.
The changes will see an implied clause inserted into commercial leases requiring a fair reduction in rent and outgoings where a tenant can show that they have suffered a material loss of revenue because of the restrictions put in place to combat COVID-19.
For a business to be eligible for the rent and outgoings reduction, the following criteria will apply:
- The business has 20 or fewer full-time staff per lease site;
- The business is New Zealand based; and
- The business has not already come to an agreement in response to COVID-19 with their landlord.
The change to the Act will also include clear rules that must be followed to determine the factors to be considered in determining a fair reduction. The rules will be based on the principles that:
- The interests of both landlord and tenant should be taken into account; and
- The financial burden of COVID-19 is to be fairly proportioned.
Guidance will also be provided as to what other measures landlords and tenants may agree to as a temporary change to support both parties through the impact of COVID-19. Measures may include no rent being paid for a period, reduced rent being paid for a period (or reductions of various levels over time), the deferral of upcoming rent reviews or a mix of the different options.
If landlords and tenants are unable to reach agreement in relation to a fair reduction in rent, they will be required to go through a compulsory arbitration process to settle the dispute. The government will be supporting timely and cost-effective access to arbitration through a government subsidy (at a rate of $6,000 per arbitration).
Once legislated, the above amendments to the Property Law Act will apply retrospectively from 4 June and will be in place for six months after the changes have been passed into law.
As the economy begins to recover from the impact of COVID-19 and we move up the Alert Levels into the future, commercial tenants coming to the end of a lease term may be facing a difficult decision as to whether to exercise a right to renew their lease.
Where lease terms have expired, and rights of renewal are not formally exercised, the tenant is usually holding over on a month to month tenancy able to terminate on 20 working days’ notice.
Commercial tenants that struggled to meet their financial obligations (including the payment of rent and lease outgoings) as a result of the COVID-19 measures may now be considering the future of their businesses. Landlords may be facing tenants in arrears and asking for further concessions to renew. Tenants may be asking themselves whether they can financially recover from the impacts of COVID-19 and continue on in business and whether they can commit to a full further lease term. Depending on locality, there may also be more competition for tenants amongst landlords looking to keep properties tenanted.
For more information
As with rent and outgoings reductions, it is our view that landlords and tenants should keep the lines of communication open and work constructively to resolve these issues. This may require some proactive thinking about the structure of the lease and what flexibility may be needed in order to allow the lease relationship to proceed whilst protecting the interests of both parties.
If you would like to learn more about the changes to commercial leasing and how it may affect your existing leases, please feel free to contact Helen Nathan on 07 349 7486 or email email@example.com.