Lockdown News - Government makes changes to Commercial Leases

The COVID-19 Response (Management Measures) Legislation Bill was introduced to Parliament on 28th September 2021. It proposes to do a number of things, one of those is the inference of a clause into all Commercial Leases. 

In the current standard form Auckland District Law Society (ADLS) lease, clause 27.5 allows for a rent abatement of a “fair proportion” where the premises are tenantable, but the tenant is unable to access the premises for some reason. This has been applicable during COVID-19 related lockdowns. The new Bill proposes, at Schedule 6, Clauses 8 to 11, to infer a similar clause into all commercial leases whether they are older leases, leases where the clause is specifically excluded, or they are bespoke leases which do not include the clause.  

We fielded many questions about such leases that did not contain this clause during and after the first lockdown. Many goodwill stories emerged of Landlords giving abatements without such clauses in their leases, and a generous interpretation of “fair proportion”. 

The new clause will retrospectively apply from the 28th September 2021, if the law is passed. It applies to all leases that were in operation as at that date that do not contain a clause in relation to no access in an emergency situation. The fair proportion is to be agreed between the tenant and the landlord, and any disputes arising out of the clause shall be referred to arbitration under the Arbitration Act 1996.  

The Property Law Section has helpfully provided some guidance on “fair proportion”, however, have stated that situations are specific to individual circumstances of the parties. The ADLS lease excludes such a definition on the same basis. Similar such exclusions of a definition are contained within the Property Law Act 2007 for the implied rent abatement by “fair and just proportion” in relation to damage or destruction. 

So, the question remains what a “fair proportion” may be, or what mechanisms the Government expects to be employed by Tenants and Landlords. Furthermore, there is a question of whether this inferred clause may then extend to hospitality providers at level 2, who are unable to operate their businesses at full capacity or, not at all. 

As mentioned above, the Property Law Section provides a list of factors that may be considered in relation to rent abatements and what is a fair proportion. This list includes: 

1. What is fair, by definition cannot be an all or nothing approach, and shouldn’t be a strict enforcement of contractual rights. 
2. What extent are the premises being used for their specified business purpose? 
3. The balance of the term of the lease – some landlords may wish to preserve the relationship with their tenant and thus may not take such a hard line on enforcement of contractual terms. 
4. The nature of the premises to the tenant, and the essentiality of access. 
5. Whether the tenant is able to conduct their business remotely, but parties should consider the use of servers and other equipment on the premises.  
6. If the answer at point 5 is yes, then the productivity reduction of working remotely should also be considered. 
7. The value inherent in the premises, for fitout, storage and business continuity.  
8. Any rights of termination if non-access continues. 
9. Impact on the tenant’s viability if required to pay rent, whilst also taking into account government assistance that is able to be received. 
10. Financial position and commitments of the landlord in relation to debt and security over the property. 
11. Landlords cost in holding the property for the tenant and managing the property.  

Whether you are a commercial tenant or landlord – watch this space, and feel free to contact DTI Lawyers if you need assistance with your current lease arrangements on 07 282 0174.