What proposed change to commercial leases will mean for tenants and landlords

Both parties to negotiate “fair” rent reductions

A proposed change to commercial leases will entitle many businesses in need of support due to the pandemic to rent relief. The change involves negotiating a fair reduction of rent when the tenant does not have access to their premises because of lockdown and alert level restrictions.

One thing is certain, both tenants and landlords will have to negotiate in good faith at a time when many businesses are faced with reduced – or no – income.  

Most commercial leases include a process where landlords and tenants agree to a reduction in rent if access to their premises is restricted by Government imposed Covid-19 lockdowns. For example, clause 27.5 of the 2012 Auckland District Law Society (ADLS) Lease contains a “no access in emergency” clause.

As part of the Government’s Covid-19 Response (Management Measures) Legislation Bill, a similar “no access in emergency” clause will be included into leases that do not currently contain this provision.

If the Bill passes into law, the proposed clause will apply to leases that are in operation from 28 September 2021 (the Effective Date).

The other criteria where the new clause will apply are:

• If there is an epidemic and the tenant is unable to gain access to the premises to fully conduct their business
• For a rental period “all or any of which” starts on the Effective Date

The drafting of the final point is not entirely clear in the Bill. However, it suggests the clause could refer to any rental period that includes the Effective Date (i.e. if rent is paid monthly, rent relief could be sought for the entire September period).

If the criteria is met, the landlord and tenant will need to agree to reduction of “a fair proportion” of rent. The key question is: What is “a fair proportion”?

Despite submissions calling for the inclusion of specific criteria relating to what amounts to “a fair proportion”, the select committee’s view was that listing considerations risked restricting what could be taken into account when determining a fair rent reduction.

The only guidance the Bill provides is that any agreements reached by the parties for reduced rent in relation to the period since 18 August 2021, when the country went into alert level 4, must be considered.

In Haigh Lyon’s experience, working with clients to negotiate clause 27.5, and what “a fair proportion” is, depends on a range of factors including:

• Whether the business can continue to be conducted remotely without access to the premises
• Whether the premises serve any other purpose, such as equipment being able to be stored at the premises
• If there are any mortgage obligations
• If there is any financial assistance available to the parties
• To what extent the tenant’s financial position has, and continues to be affected by the pandemic

Both parties can agree to exclude the clause however this must have been agreed on, or after, the Effective Date.

The Government specifically invited submissions on the Effective Date with many submitters expressing concern about the date because it:

• Did not cover the majority of the current alert level 3 and 4 restrictions
• Should be backdated even further and apply to lockdowns in 2020 and earlier in 2021
• Should not be retrospective

The select committee did not make a definite recommendation on the Effective Date, only stating that it should be considered further by Parliament.

Understandably, dealing with complex negotiations at a stressful time for both landlords and tenants is difficult. However, if a lease is likely to be affected, the best approach is to keep the lines of communication open and to carefully consider each parties negotiating position, rights, and obligations under the lease.

Haigh Lyon can provide advice on the proposed change and potential impact on existing leases and those currently being negotiated. Contact Raj Gurusinghe on [email protected] or 09 306 0629.