New Zealand has reached the end of the third week of a 4 week mandatory lockdown period where all non-essential businesses have had to shut their premises. While some businesses have had the capability to generate revenue and operate from home, a lot of businesses around the country have been unable to operate without access to their premises. While the Government has stepped in to assist with wage subsidies, tenants previously operating all over New Zealand have had to review one of their largest outgoings: rent.
Level 4 implications
Tenants who are operating on the most common form of lease (ADLS Sixth Edition 2012) have been reviewing and negotiating with landlords on the their right to a rent and outgoing abatement during the period they cannot access their premises. This clause has been subject to a wide range of commentary on exactly what this means in terms of a reduction for tenants. Negotiations between landlords and tenants have been taking place all over New Zealand with many eagerly awaiting the Government to step in to provide relief measures. Tenants who are not on the ADLS Lease, or an alternative form with no provision for rent relief, are facing the difficult situation of owing full rent and outgoings without access to their premises.
Across the ditch, the Australian Government introduced a new mandatory tenancy code of conduct for commercial landlords in Australia. The code provides clear guidance for landlords and tenants surrounding termination of leases and importantly, waivers and deferrals of rent. This approach provides more certainty for the parties involved as to what rent relief can be given to tenants. However, this approach has not been taken in New Zealand and there is no indication it will be.
What can Landlords do if the rent is not paid?
Under the current 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 serviced a notice of the breach that specifies a period of not less than 10 working days to remedy the breach, and
- The tenant does not remedy the breach by the end of the specified period.
This leaves tenants with the prospect of their lease being cancelled if they cannot remedy rental arrears, while dealing with the financial difficulties COVID-19 has presented. Landlords may be hesitant to take such action, yet they too face the difficulty of outstanding outgoings and mortgage repayments.
Government relief measures announced on 15 April 2020
The Finance Minister has announced a Bill to be introduced to temporarily modify the current Property Law Act 2007. The changes proposed are as follows:
Cancellation of a lease
The Bill will extend the timeframes of 10 working days to 30 working days. This will give more time for commercial tenants to catch up with rental arrears before the landlord can cancel the lease. If the tenant is not able to bring the rent up to date, the tenant will have time to approach the landlord about temporary changes to the rent or lease agreement to help the tenant get by until it can resume operating.
Landlord’s mortgage payments
The Bill will also introduce an extension on the time mortgage payments must be overdue before mortgagees can take action. While mortgage holidays that are currently on offer are likely to be the first port of call, it may not be for all. Currently for mortgaged land, the mortgagee must give 20 working days’ notice before the mortgagee exercises its power to take possession of, or sell, the mortgaged property. The Bill will extend this period to 40 working days. This will apply to all mortgages, whether for commercial or residential property.
The Bill is set to be introduced to make these changes once Parliament resumes. The changes will apply to all notices to cancel a lease or exercise powers under a mortgage issued from 10 working days after the Epidemic Preparedness (COVID-19) Notice 2020 which was issued on 25 March 2020. We calculate this to be on and from Wednesday 8 April.
Where to from here?
These changes are intended to provide support to commercial landlords and tenants facing this unprecedented situation. They aim to provide relief for businesses to help them stay solvent through the pandemic. Some commentators on the proposed relief measures are concerned they do not go far enough in terms of financial support for tenants. There are other measures that have been announced during Alert Level 4 that can assist landlords and tenants who are struggling with their financial obligations.
Business Finance Support Scheme
This provides short-term credit to small and medium-sized firms affected by the crisis. The scheme will include a limit of $500,000.00 per loan and will apply to firms with a turnover of between $250,000 and $80million per annum. The Government will carry 80% of the credit risk, with the other 20% provided by the Bank.
Landlords could approach their Bank to organise a six-month principal and interest payment holiday. This scheme has been introduced for mortgage holders and small business customers whose incomes have been affected by the economic disruption of COVID-19.
Tax relief for businesses
The Government has announced a tax relief package for small and medium sized businesses. Under it, businesses will be able to offset a loss in a particular tax year against a profit in a previous year, and receive a ‘cash refund’ of the tax paid in that previous profitable year.
What happens when we move to Alert Level 3?
The Government has now provided further clarification about what can be expected when we inevitably move to Level 3. Most, but not all businesses can start to open under Alert Level 3. They must take health measures to keep workers safe. Those in the retail and hospitality businesses can open for delivery and contactless pre-ordered pick up, while supermarkets, dairies and petrol stations can continue to allow customers into their stores. Businesses that offer face-to-face contact or sustained close contact will not be able to offer services. This will mean a lot of tenants will be able to conduct business from their premises, albeit they will not be able to have any face-to-face contact with customers. This will mean that businesses allowed to return to their premises will now be able to access their premises to conduct their business, albeit not ‘fully’. Until such time as the tenant is able to access their premises to ‘fully’ conduct their business, an abatement of rent under the ADLS lease should apply (but the rate of abatement would likely be adjusted to reflect the increased use of the premises permitted as we move through the levels of restriction). There is a wide range of tenants with different abilities to operate at each Alert Level. This requires each to be looked at on a case by case basis.