The Government's Commercial Rent Relief Proposal - Will it help?

Will it really help those who need it most?

Like most lawyers we were relieved to see that the government had finally taken some action in relation to rent relief which is badly needed in some sectors and in particular the retail, hospitality, and tourism sectors.  These are 3 sectors which contain a large number of franchise businesses.  The government’s recent announcements that there would be a clause implied into leases which would be inserted into leases to require a fair reduction of rent if a business has suffered financial due to COVID-19 (“the Implied Clause”) and if the parties could not agree on the reduction that they would need to settle the dispute via a streamlined arbitration process which would be subsidised by the government. 

These proposed changes seemed like a reasonable option and a review of the minute of decision of the Cabinet Economic Development Committee (‘the Cabinet Paper”) seemed to confirm that the Implied Clause would force both landlords and tenants to act fairly.  It was hoped that the threat of arbitration (even with the government subsidy) would force the parties to a lease to reach an agreement on rent relief badly needed due to the effects of the COVID-19 restrictions which are proving to have a long term effect on many tenants especially those in the hospitality and tourism sectors.

Unfortunately, it appears our relief was short lived.  Information recently added to the government website justice.govt.nz and which provides “Guidance for Commercial Leases and Mortgages during COVID-19” appear to indicate that the implied clause will have a much more limited application than first indicated in the media statements by the Government and the Cabinet Paper.  This information appears to indicate the following :

1. The Implied Clause will only be implied into leases where the landlord is New Zealand based and has less than 20 full-time equivalent staff. There are many premises which are owned by overseas interests (including some malls which will not meet this criteria) and are leased to New Zealand businesses.  Why should these tenants not have the benefit of the implied clause?  We fail to see the logic in this.
2. If the parties have come to an agreement prior to the announcement of the law changes on 4 June 2020 the clause will not apply. But what if this agreement was only for a limited time, for example, during COVID-19 Alert Level 1?  What about those businesses that continue to suffer the effects of COVID-19 restrictions (for example the long term closure of the borders) and will continue to do so in the future?  Why is the fact that they may have reached an agreement with a landlord for a short period of time mean that they cannot avail themselves of this clause?  Further we believe that many tenants (and landlords) may have agreed to rent relief packages that they felt they were forced to accept and in hindsight do not believe they are fair at all?
3. That the law change will come into effect in early July, “if enacted by Parliament”. This creates very little certainty to either landlords or tenants.
4. That the implied clause cannot apply to rent obligations prior to 4 June 2020. This seems to indicate that even if the tenant and the landlord have not reached an agreement, that the implied clause cannot be used to deal with rent obligations between 25 March 2020 (when Alert Level 4 took effect) and 4 June 2020 (when the Implied Clause will apply).  Surely this cannot be correct?  It seems unbelievable that the Implied Clause cannot be used by those tenants who have been unable get any form of rent relief from their landlords despite taking all steps to do so.

We are concerned that the proposed changes to Property Law Act 2007 by way of the Implied Clause will not be what was originally anticipated when the original announcements were made by government.  The most recent information put out by the government appears to provide some serious limitations to the application of the Implied Clause.  We are all yet to see the actual wording of the changes to the Property Law Act (to accommodate the temporary application of the Implied Clause).  Let us hope this does not turn out the way of the Government’s Business Finance Guarantee Scheme – sounds good in theory but of limited application to most businesses.  They say that the “devil is in the detail”, fingers crossed this will not be the case here!