commercial lease disputes

The Government has finally stepped into the fray of the free market to have a say as to how rent is to be determined between landlords and tenants in the face of Covid-19.

 

On June 4th, a $40 million package was announced. It aims to get landlords and tenants to the negotiating table over any rent disputes caused by Covid-19.

 

How has this scheme come about?

Due to Covid-19, many commercial tenants have taken a significant hit on earnings and have struggled to pay rent. Most landlords and tenants have taken a pragmatic approach, negotiating a deal which has allowed for a fair proportion of rent to be reduced during this time period. This is in line with the terms of the ADLS commercial lease.

However, in some instances, tenants (usually those tenants who run retail businesses) have simply refused to pay rent. In other cases, landlords have insisted on full rental to be paid.

 

Who is eligible?

To be eligible for the scheme, a party to a commercial lease must:

  1. have suffered a material loss of revenue because of Covid-19 restrictions;
  2. have 20 or fewer full-time staff at each leased site;
  3. be a New Zealand based business; and
  4. not have already been able to reach an agreement for an abatement of rent and outgoings.

 

Changes to the law

The Government has announced that temporary changes will be made to the Property Law Act 2007. There will be two key changes to the law.

  1. The legislation will imply a clause into certain commercial leases that meet eligibility criteria that a fair proportion of rent and outgoings cease to be paid. This amendment to the Act provides guidance on how a “fair proportion” of rent to be reduced may be decided upon by the parties.

 

  1. Should the parties fail to agree on a fair proportion of rent and outgoings to be paid, the Government will provide funding of up to $6,000 for any arbitration required to ensure an agreement is reached between the parties.

 

Are these changes in effect?

This would normally be a straight forward question to answer but in this instance, the answer is somewhat unclear.

Technically, no, the changes are not in effect. There is no current law that you can point to that shows the amendments having been made, bringing the above scheme into law.

However, the Minister for Justice, Andrew Little, has announced that this change will apply from 4 June 2020. People are expected to act in accordance with the proposed changes, even before the law is actually amended. As once the law is enacted, it will apply retrospectively to the announcement date.

 

Is this legal?

The case of Fitzgerald v Muldoon [1976] 2 NZLR 615 is analogous. The Courts looked at an instance in which the Prime Minister had announced that the Government would abolish the superannuation scheme in the New Zealand Superannuation Act 1974 when Parliament reconvened and applied its abolishment retrospectively back to the date of the announcement.

Wild CJ held that this was, in fact, a breach of the Bill of Rights Act 1990, article 1. This states, “The pretended power of suspending laws or the execution of laws by regal authority without consent of Parliament is illegal”. This issue is identified in the Cabinet paper put forward by the Minister, with the issue not being resolved.

The Minister looks instead to justify this approach, stating, “These proposals are time-dependent; they need to happen quickly and they need to apply retrospectively. If they are not made in this way, they will not achieve their intended purpose to support businesses through this time.” The Government has not provided a hard date to introduce a Bill to make these amendments.

Therefore, the law is actually not in force. It is ultra-vires – without authority.

It’s currently the government’s best guess as to how to approach Covid-19 issues with commercial leases. It assists parties to resolve matters without it possibly ever actually making it into the law books.

 

By Matt Smalberger