Compulsory And Retrospective Covid-19 Related Rent Abatements Under Commercial Leases

The Covid-19 Response (Management Measures) Legislation Act 2021 (the “Act”) became law on 3 November 2021.[1]

Despite its title, the Act contains important amendments to leasing laws which landlords and tenants ought to be aware of.

This article focuses on the key amendment; [2]  namely the addition of an implied term (which for the purposes of this article, we will call an “Automatic Abatement Provision”) to Schedule 3 of the Property Law Act 2007. Broadly speaking, the Automatic Abatement Provision says that a fair proportion of rent (which for the purposes of the Act, includes outgoings) will cease to be payable under a commercial lease where the tenant has been unable to access and fully use its premises due to Covid-19 lockdowns or other Covid-19 related rules.

In other words, the Act entitles a large number of tenants, who but for the Act, would not have been entitled to an abatement, to a rent reduction on account of (i) the Covid-19 lockdown which began on 18 August 2021 and (ii) the ongoing alert level restrictions which continue to apply throughout New Zealand. 

This article discusses the Automatic Abatement Provision and what the implications of it may be for leases which are on either an Auckland District Law Society (“ADLS”) form, or a Property Council New Zealand (“PCNZ”) form.

Does the Automatic Abatement Provision apply to my Lease?

In order for the Automatic Abatement Provision to apply to a lease, there are certain criteria which need to be met:

• The lease needs to be in operation at any time since (and including) 18 August 2021.[3]

• There must not have been an agreement by the landlord and the tenant entered into since 18 August 2021 that the implied covenants, conditions, and powers which are contained in Schedule 3 of the Property Law Act (which includes the Automatic Abatement Provision) do not apply.[4] 

• The tenant under the lease must be unable to gain access to all or any part of its premises to fully conduct its business[5] for reasons of health and safety related to Covid-19.[6]

• The lease must not already include a “no access in an emergency clause” which covers the Covid-19 epidemic.[7]

• There must not have been an agreement (whether verbal or written) by the landlord and the tenant entered into before 3 November 2021 which records what rent is payable in the event that the tenant is unable to use its premises due to the Covid-19 epidemic.[8]
   

Snap Shot of the default position under the ADLS Lease Forms[9]

• If the lease is an ADLS lease which pre-dates the Sixth Edition, then the Automatic Abatement Provision will apply (unless the lease has been entered into on or after 18 August 2021).[10]

• If the lease is an ADLS Sixth Edition lease, then the Automatic Abatement Provision will not apply and instead clause 27.5 (being the ADLS “no access in an emergency” clause) of the lease will regulate the position.

Snap Shot of the default position under the PCNZ Lease Forms[11]

• If the lease is a PCNZ lease which pre-dates the 2013 version, then the Automatic Abatement Provision will apply (unless the lease has been entered into on or after 18 August 2021).

• If the lease is a PCNZ 2013 version entered into before 18 August 2021, then whilst most people would expect the Automatic Abatement Provision to apply, there is uncertainty as to whether this is in fact the case. We discuss the reason that the law is unclear on this point next.

• If the lease is a PCNZ 2013 version lease which is entered into on or after 18 August 2021, then the Automatic Abatement Provision will not apply.10

Property Council New Zealand Lease Form 2013 Version – Why is it unclear whether the Automatic Abatement Provision applies?

The 2013 version of the PCNZ office and retail lease forms contains a clause (which we will call the “PCNZ No Access Clause”) which contemplates what is to happen if there is an emergency (such as Covid-19) and the tenant is unable to access and use the premises.[12] The PCNZ No Access Clause is similar to clause 27.5 of the Sixth Edition ADLS Lease, however, there is a key distinction in that the tenant is only entitled to an abatement under the PCNZ No Access Clause if the landlord is able to claim the lost income under its insurance policy.

Given that in most, if not all instances, landlords under a 2013 version of a PCNZ lease will not have been entitled to claim for lost income under their insurance policies, the question is, does the PCNZ No Access Clause count as a “no access in an emergency clause”? This is important to know, because if it does count, then this means that the Automatic Abatement Provision does not apply to any leases which are on a 2013 version of the PCNZ lease forms.  

Unfortunately, however, this is not a question which has a definitive answer. This is because the Act defines a “no access in an emergency clause” as meaning any clause which provides for a reduction of rent or outgoings (or both) because there is an emergency[13] and the tenant is unable to access and fully use its premises. So, the Act says that in order for the Automatic Abatement Provision to not apply, there needs to be a “no access in an emergency clause”, but the Act does not say whether the clause actually has to have responded to the scenario at hand.

Given the origins of the Automatic Abatement Provision, we expect that many people would say that surely the PCNZ No Access Clause does not count as a “no access in an emergency clause” and that therefore the Automatic Abatement Provision applies. Furthermore, as the Property Law Act as a whole tends to be interpreted with a “tenant friendly” flavour, we would also not be surprised if this issue came before the courts and the courts found in favour of the Automatic Abatement Provision applying.

However, for argument’s sake we suggest that the PCNZ No Access Clause can be likened to a lease which contains a bespoke “no access in an emergency clause” which says that a tenant is entitled to a reduction of rent and outgoings where the tenant cannot access and fully use the premises and the tenant’s income reduces by 40%. Here, if the tenant’s income only reduces by 39%, then the bespoke clause is not triggered. So would this mean that the lease does not include a “no access in an emergency clause” (for the purpose of the Act) and that therefore, the Automatic Abatement Provision applies? If not, then why should the position regarding the PCNZ No Access Clause be any different?

In our view, the question of whether or not the Automatic Abatement Provision applies to leases which are on a 2013 version of the PCNZ lease forms poses a serious question to be decided.  

The Automatic Abatement Provision Applies, what next?

If the Automatic Abatement Provision applies, then a fair proportion of rent (which, for the purposes of the Act includes any outgoings) ceases to be payable for the period from and including 18 August to the earlier of (i) the date on which the tenant is able to fully access and use the premises (ii) the date on which the Epidemic Preparedness (Covid-19) Notice 2020 expires or revokes (which, we can probably safely assume will be after the tenant is able to fully access and use the premises).

That begs the question, what is a “fair proportion”?

On this point, the Act is limited and merely says that any loss of income suffered by the tenant during the period to which the rent abatement applies must be considered. This means that tenants will need to disclose their income position for the relevant period to landlords. We note that in some cases tenants may not suffer a loss of income until after the relevant period, or tenants may experience a “rebound” of income following the relevant period. We would expect those factors to also be relevant in considering what a “fair proportion” might be.

It is rumoured that further guidance regarding how to assess what a “fair proportion” is will be published on the Ministry of Justice’s website, however that remains to be seen.

It is worth noting, however, that the Automatic Abatement Provision has been modelled on clause 27.5 of the ADLS Sixth Edition lease. So, we expect that it is likely that the Automatic Abatement Provision will be interpreted and applied in similar ways to which clause 27.5 of the ADLS lease has been.

We have discussed a number of factors in the context of clause 27.5 of the ADLS lease which we consider may be relevant to an assessment of a “fair proportion” in an article which is available here:  https://srblaw.co.nz/what-fair-proportion-rent-abatement.

The Act contemplates that landlords and tenants will ultimately reach an agreement as to what is fair. However, should the parties fail to do so, then the point may be referred to arbitration.

For more information:

If you have any questions about the matters discussed in this article, please get in touch with one of the contacts listed below, or your usual SRB adviser.

Disclaimer: Please note that this article is general information only and the terms and circumstances of each lease should be considered on a case-by-case basis. The information in this article does in no way constitute legal advice and all readers should contact a law firm for advice relating to their specific circumstances.

[1] The full text of the Act can be accessed here - https://www.legislation.govt.nz/act/public/2021/0042/latest/LMS558089.html

[2] The Act also includes amendments relating to the rights of landlords to take enforcement action. However, this article does not discuss those amendments.

[3] Section 245F(1)(b) of the Property Law Act (as amended by the Act).

[4] Section 245G(4) of the Property Law Act (as amended by the Act).

[5] This raises interesting questions as to what constitutes “access”. Such questions are beyond the scope of this article. However, by way of example, social distancing rules may be interpreted as limiting access despite the fact that a tenant remains able to operate its business.

[6] Clause 4A(1)(a)(ii) of Schedule 3 of the Property Law Act (as amended by the Act).

[7] Section 245F(c) of the Property Law Act (as amended by the Act).

[8] Clause 4A(1)(b) of Schedule 3 of the Property Law Act (as amended by the Act).

[9] This snapshot assumes that the leases are in their standard form and that no special provisions regarding what is to happen if there is a Covid-19 related lockdown have been added.

[10] If the lease is an older edition or version which is entered into on or after 18 August 2021, then whether the Automatic Abatement Provision applies will depend upon the particular wording and interpretation of any clauses which purport to exclude the implied covenants, conditions, and powers which are contained in Schedule 3 of the Property Law Act.

[11] There are two commonly used forms of PCNZ lease; an office lease and a retail lease.  The most recent versions of those lease forms are dated 2013. In both of those forms, there is a clause which contemplates what is to happen if there is an emergency (such as Covid-19) and the tenant is unable to use the premises. As such, our comments regarding the PCNZ lease forms apply to both the office and retail forms.

[12] See clause 7.5 of the 2013 PCNZ standard office lease and clause 7.4.1 of the 2013 PCNZ standard retail lease.

[13] Covid-19 is classified as an “emergency”.