Mandatory rent abatements now law

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The COVID-19 Response (Management Measures) Legislation Act 2021 has received royal assent and is now in force. The legislation amends the Property Law Act 2007 by implying into applicable leases a covenant requiring a rent abatement from 18 August 2021 if the lessee, or any sublessee of the lessee, is unable to gain access to all or any part of the 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.

Which leases are affected?

The implied rent abatement covenant is to be implied into all leases that are in operation during the ‘affected period’ (i.e. during the COVID-19 pandemic) except:

  • Those that already have a ‘no access in emergency clause’ (i.e. terms which expressly allow for a reduction in rent where there is an emergency and the tenant is unable to gain access to conduct fully their operations such as clause 27.5 of the Auckland District Law Society Inc deed of lease form)
  • If the parties have contracted out of the implied covenant
  • If the parties have already entered into a ‘pre-commencement rent variation agreement’ (i.e. an agreement as to how much rent the tenant should pay, which was made for reasons that are, or include, that there is an epidemic and the lessee (or any sublessee) is unable to gain access to conduct fully their operations).

What is the ‘affected period’?

The ‘affected period’ commences on 18 August 2021, which is the date Auckland went into its current lockdown, and ends when the Epidemic Preparedness (COVID-19) Notice 2020 expires or is revoked. In other words, the legislation is specific to the current COVID-19 pandemic. The legislation does not provide an abatement for lockdown periods prior to this date but will provide tenants with some comfort moving forward. Note also that the rent abatement is only until the tenant can once again access the premises to conduct fully their operations. For Auckland retail, for example, the affected period will end on Tuesday, 9 November 2021.

What is a ‘fair proportion’ of rent that is to abate?

Firstly, ‘rent’ is defined to include outgoings. Secondly, the legislation leaves it to the parties to agree what is to be a ‘fair proportion’. Many well know the difficulties encountered by landlords and tenants to date in reaching agreement as to what is a ‘fair proportion’ for those leases already containing a rent abatement clause. However, the legislation directs the parties to consider any loss of income experienced by the lessee in respect of the relevant rental period due to the restrictions. This is therefore likely to be the guiding factor in determining what a ‘fair proportion’ of rent is. Note that what is a ‘fair proportion’ is likely to change depending on alert levels (for some, an abatement may only apply during alert level 4, for others, there may be a case for an abatement through until alert level 2).

What if the parties can’t reach agreement as to what is a ‘fair proportion’?

The legislation stipulates that, if the parties can’t agree on what is a fair proportion, the dispute is to be referred to arbitration. This does not prevent the parties mutually agreeing to some other form of dispute resolution (such as mediation) and the legislation was amended, following the recommendation of the Select Committee, to make this expressly clear by providing other dispute resolution options. The requirement to resolve by arbitration would, however, prevent either party from forcing the other party to court over the issue. The Act also clarifies that the provision, requiring dispute to be resolved by arbitration, is subject to section 16 of the Disputes Tribunal Act 1988 which prevents a contracting out of that jurisdiction.

No right of enforcement until ‘fair proportion’ agreed

Landlords may not take any enforcement action due to non-payment of rent until the parties have reached agreement as to what is a ‘fair proportion’ of rent to abate.

What does this mean for you?

Tenants now have the leverage many have wanted during the pandemic to negotiate some relief from their landlords. Given the legislation prevents landlords from taking any enforcement action until a ‘fair proportion’ has been agreed, landlords may want to be proactive in seeking a resolution to any rent abatement dispute as quickly as possible. However, both parties will want to ensure that the costs, time and resources to reach agreement on what is a ‘fair proportion’ do not outweigh the sum in dispute.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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