New Law Change: Commercial Leases and Lockdowns – What Happens to the Rent?

13 October, 2021 | Jason Hendriks

The Government is currently introducing law changes aimed at easing the impacts of COVID-19 restrictions. As COVID-19 restrictions are no longer a stranger to us we are now well and truly seeing the effects of how the related lockdowns affect commercial business. This has also heavily impacted both landlords and tenants with commercial leasing. With a number of commercial tenants unable to access their leased premises to operate, they find themselves in most cases unable to generate sufficient funds to cover rental payments. This also affects landlords, without the certainty or security of rental income, landlords find themselves short on covering their own expenses.

How to resolve the rental payment issue?

The latest version of the Auckland District Law Society (“ADLS”) precedent Deed of Lease includes a clause which provides abatement (effectively non-payment) of a “fair proportion of the rent” where access restrictions prevent the tenant from fully operating its business. This provision arose in response to the Christchurch earthquakes where tenants were prevented from accessing premises inside the red zone. However, many clients are operating with earlier versions of the ADLS lease or leases drafted on a non-ADLS Deed of Lease, which means no rental abatement clause is available to them.

What about leases which operate without a rental abatement clause?

The Government has proposed a law change to the Property Law Act which would ‘imply’ a clause into leases which do not have a rental abatement clause. This implied clause would provide that a “fair proportion” of rent and outgoings will not be required to be paid when there is an “epidemic”, and the tenant is “unable to gain access to all or any part of the leased premises to fully conduct their operations from all or any part of the leased premises, because of reasons of health or safety related to the epidemic”.

How will this law change impact commercial leasing?

• The clause will only have effect in cases of an “epidemic” where a tenant is “unable to gain access to all or any part of the leased premises to fully conduct their operations from all or any part of the leased premises, because of reasons of health or safety related to the epidemic”;
• This law change will only apply to leases which do not already have an existing rental abatement clause;
• This will apply to all relevant commercial leases in New Zealand with no exceptions at this stage;
• The amount of what constitutes a ‘fair proportion’ of rent has not been defined by the Government but has been left up to Landlords and Tenants to agree/negotiate, and this remains an area of difficulty for some clients (even those currently covered by a rental abatement clause);
• From 28 September 2021 Landlords and tenants can agree to contract out of this clause; and
• If landlords and tenants have already agreed on an abatement of rent and outgoings this clause will not apply provided a suitable rent variation agreement was entered into prior to the new law coming into force.

If you require assistance interpreting the new law in terms of your lease or negotiating the “fair proportion” of rent payable (as either tenant or landlord), please email commercial solicitor Jason Hendriks at jason.hendriks@smithpartners.co.nz or call 09 837 6843. However, if your matter has now escalated to a dispute please contact our dispute resolution team to get expert assistance in resolving the matter.