On September 28th 2021, the New Zealand Government released draft legislation which, if enacted, will include rent abatement covenants in affected leases. While it still needs to go before the Select Committee, it is fair to say this legislation has taken the industry by surprise and if enacted will be in effect from September 28th. Here are some key aspects you need to know:

What is proposed?

The draft legislation, the COVID-19 Response (Management Measures) Legislation Bill, seeks to amend the Property Law Act 2007 by including a covenant, into applicable leases, allowing for rent abatement during the COVID-19 pandemic. This means (with some exceptions) 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, the rent abatement comes into effect.

Which leases are affected?

The rent abatement covenant is to be included 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 (an example here is clause 27.5 of the Auckland District Law Society Inc deed of lease form);

• If the parties have contracted out of the implied covenant; or

• 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’?

Once enacted, the ‘affected period’ commences on 28 September 2021 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. 

What constitutes contracting out of the implied covenant?

Lease clauses that broadly exclude implied covenants (which many do, such as the ADLS and Property Council forms of lease) will not be sufficient to contract out of the included covenant: the parties have to expressly and specifically exclude a right to an abatement of rent during a pandemic. Further, the contracting out must have occurred after the legislation takes effect and any existing lease clauses purporting to exclude the operation of such legislation will not apply.

What is a ‘fair proportion’ of rent 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.  It may have been helpful for the legislation to provide guidance as to what should be taken into account. Apart from directing the parties to take into account any rent variations that may have been agreed from 18 August 2021 for reasons relating to the pandemic and inaccessibility, no such guidance has been provided.

As such, the parties are left to negotiate and reach agreement themselves. Interestingly, the legislation has expressly included the situation where it is the tenant’s subtenant that is unable to fully conduct their operations. This gets around one argument, that has been circulating, that a head tenant is not entitled to an abatement.  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 dictates 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) but does prevent either party from forcing the other to court over the issue. Arbitration is an expensive and often drawn out dispute resolution option and likely included as a stick to motivate parties to get around the table and negotiate a pragmatic outcome.

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. This includes steps to cancel the lease, or recover the arrears such as enforcement of personal guarantees and drawing down on bank guarantees.

What does this  mean for you?

There is an opportunity to make submissions on the Bill, although given this is emergency legislation it is unclear what impact submissions at this stage may make. If the legislation does become law, as expected, landlords with a newly included rent abatement covenant may want to keep watch for the next opportunity to negotiate a specific set of terms to apply during lockdowns.

Tenants, on the other hand, now have the leverage many have wanted during the pandemic to negotiate some relief from their landlord. Moving forward, it is in both parties’ interests to have lease terms which leave the minimum possible room for dispute. As such, a clear mechanism for determining what is a ‘fair proportion’ is ideal. Whereas most risks in a commercial lease transaction can be covered by insurance, the pandemic is one that hits the parties themselves directly in the pocket.