Many commercial lease arrangements in New Zealand will have been affected by the response to COVID-19. Tenants may be unable to pay their rent as their business is not fully operating. Landlords may also be unable to meet their mortgage payments.
The Government has taken steps to support those businesses.
On 16 May 2020, some temporary law changes were made to support tenants and landlords in this difficult situation. These changes make it easier to retain lease arrangements and get back to business as usual after the epidemic by giving parties more time to fulfil their payment obligations before the other side can take enforcement action. These are changes made to the Property Law Act 2007 as part of the COVID-19 Response (Further Management Measures) Legislation Act 2020. The changes relating to leases apply to commercial tenants and their landlords. The changes relating to mortgages apply to all mortgages, including residential and commercial as well as mortgages relating to goods (such as a business’s assets other than land and buildings). However, we anticipate that mortgage holidays are likely to be the first port of call for residential borrowers.
On 4 June 2020, the Government announced further temporary measures to be enacted to specifically support small New Zealand businesses through the effects of the COVID-19 epidemic. Parties to many smaller-scale commercial leases will be required to negotiate the payment obligations to ensure a fair rent is agreed. Negotiations can be conducted in any way agreed by the parties, such as through mediation. Remaining disputes must be resolved through arbitration. The Government will subsidise streamlined arbitrations with up to $6,000 including GST per proceeding and up to $40 million in total.
This guidance provides more information about the changes and should help commercial tenants and landlords find an approach that works for both. The Ministry of Justice has prepared this guidance in consultation with the New Zealand Law Society | Te Kāhui Ture o Aotearoa (Law Society).
Guidance for commercial landlords, tenants, lenders and borrowers
How are commercial leases and mortgages affected by the response to COVID-19?
For commercial leases, the impact of COVID-19 has meant that:
- many businesses renting commercial property were unable to fully operate and could not access or use their premises in the normal way (for example, because they were not essential services)
- as a result, commercial tenants may have temporary difficulty paying the rent and outgoings, and
- commercial landlords who have mortgages may, in turn, have trouble making mortgage payments.
This may require the parties to think about what happens with the lease and with mortgages. Commercial landlords or tenants may consider terminating leases. Tenants have an interest in reducing their rent. Borrowers may face the sale of their property by lenders if they cannot service the mortgage.
Some of these challenges are likely to continue to some extent. For example, many businesses may take some time to re-establish their business, may not be allowed to provide the full range of their services (for example, businesses catering for large conferences or other gatherings), or have to operate at reduced capacity, such as restaurants.
What should commercial landlords, tenants, lenders and borrowers do?
As many commercial landlords, tenants, lenders and borrowers have already done, the best approach is to work together constructively to find a solution which is sustainable and will meet all parties’ needs and interests.
The Government has made some temporary law changes and announced further changes to give commercial tenants and landlords a better chance to get through this difficult situation and help ensure that the parties will share the financial pain of the COVID-19 epidemic. You should talk to your lawyers and real estate professionals to discuss what the current situation means for you, what the law changes may mean and what to do next.
What are the law changes that have already been made to support commercial landlords, tenants, lenders and borrowers?
On 16 May 2020, a temporary law change was made giving commercial tenants more time to catch up on overdue rent before a landlord can take steps to evict them.
Normally, the law says that a commercial landlord must give a tenant at least 10 working days’ notice before cancelling a lease because of overdue rent.
Under the changes, the notice period is extended from 10 working days to 30 working days. This means commercial tenants have more time to catch up with rent payments before the tenant can be evicted. If the tenant is not able to catch up, the tenant has more time to approach the landlord to negotiate temporary changes to the rent or lease agreement to help the tenant get by until it can resume operating as usual.
What about the landlord’s mortgage repayments?
If commercial tenants are having difficulty paying rent, that may make it difficult for landlords to keep up with their mortgage payments. The law changes also give borrowers (including landlords) more time to catch up on overdue mortgage payments before a lender can take steps to enforce the mortgage.
The current law says that lenders must give 20 working days’ notice before they use their powers to take possession of, or sell, the mortgaged property. The temporary law changes extend that period to 40 working days.
This change will apply to all mortgages, including residential and commercial, and regardless of whether the mortgaged property is tenanted. However, we anticipate that mortgage holidays are likely to be the first port of call for residential borrowers.
These temporary law changes mean that, like commercial tenants, borrowers have a better chance to get through the COVID-19 situation and temporary financial hardship. They still have the same payment obligations but have more time to remedy breaches or defaults.
What are the rules for mortgaged goods other than real property?
The law changes also extend the notice timeframes in the case of mortgaged goods owned by a business. This could be a mortgaged fleet of vehicles.
For these types of mortgages, the timeframes are temporarily changed from 10 to 30 working days before the lender can take enforcement action.
When do these law changes apply?
The law changes in the COVID-19 Response (Further Management Measures) Legislation Act 2020 came into force on 16 May 2020.
The changes have, however, been backdated so that they apply from 1 April 2020. This will ensure they apply to all tenants and borrowers affected by the measures taken to respond to COVID-19. If you have any questions about what this means for your specific lease or mortgage, you should consult your lawyer. This means that, even if a notice was given or a lease cancelled before the new law came into force, the new extended timeframes would generally apply and a cancellation might not be fully effective.
This is a temporary change to provide relief to tenants and borrowers affected by the response to COVID-19 and allow more time for parties to discuss how they may get through this period and resume business when the Alert Level allows for it. The law will return to the current timeframes six months after the end of the Epidemic Preparedness (COVID-19) Notice 2020. The current notice expires on 25 June 2020 (unless an earlier expiry date is notified, or the notice is renewed).
If your lease or mortgage is affected by COVID-19, you may like to talk to a lawyer about how the law changes apply to your circumstances. This is particularly important if you are a tenant who has been given notice of overdue rent payments, or a borrower who has been given notice of overdue mortgage payments.
Landlords and lenders who are considering taking action to enforce leases and mortgages should also consider first getting legal advice.
What is the purpose of these changes?
The changes aim to support commercial landlords, tenants and borrowers through the COVID-19 situation. They provide relief for businesses, to help them stay solvent through the epidemic, which will help New Zealand’s economic recovery. They are part of a wider government package of business support.
More information on the broader business support measures is available on the Government’s COVID-19 website:
Do these changes apply to my residential lease or mortgage?
The changes in the Bill do not apply to residential tenancies. For those leases, the Government has already made changes:
These changes to the Property Law Act apply to all mortgages over land, whether for commercial or for residential property. However, there may also be other options available for residential mortgages, such as a mortgage repayment holiday:
What are the further changes the Government announced on 4 June 2020?
The Government has announced further amendments to the Property Law Act. A temporary law change will insert into many smaller-scale commercial leases a clause requiring a fair reduction of rent if a business has suffered financially due to COVID-19. This clause will apply to all contracts involving New Zealand based tenants where there are 20 or less full-time equivalent staff employed for the leased property. It will also apply where the landlord is New Zealand based and has 20 or less full-time equivalent staff.
If the parties cannot agree on new rent arrangements, they will need to settle their dispute through arbitration. This does not preclude them from pursuing other alternative dispute resolution mechanisms, such as mediation, in the first instance if both parties agree. The Government will support the parties by providing a subsidy for a streamlined arbitration process that the Ministry of Justice will be setting up through external providers. Each eligible arbitration will be subsidised by up to $6,000 including GST, which is approximately 75% of a standard streamlined arbitration. The Government has set aside up to $40 million for this subsidy.
What is the purpose of these changes?
Many commercial leases already contain a clause requiring an adjustment of the rent in the case of an emergency. For example, one standard lease provides for a ‘fair proportion’ of the rent and outgoings to be reduced temporarily while a property cannot be accessed in an emergency. However, many leases do not contain such a clause which means tenants would usually be required to pay rent even though they cannot legally access or use the premises.
These changes aim to ensure that landlords and tenants come to fair and reasonable agreements about rent obligations that reflect the uniqueness of the current situation. If they cannot agree, the Government will support a swift dispute resolution through subsidised arbitration. This will help more businesses get through the COVID-19 epidemic and continue to operate.
Will these changes apply to your contract?
The clause will apply to all commercial leases involving New Zealand based tenants or landlords and that are smaller-scale businesses. Specifically, it will apply to all contracts involving New Zealand based tenants where there are 20 or less full-time equivalent staff employed for the leased property. It will also apply where the landlord is New Zealand based and has 20 or less full-time equivalent staff. Where, however, the parties have already come to a binding agreement about rent adjustments prior to the announcement of the law changes on 4 June 2020, the clause will not apply. In this case, the parties’ agreement will take priority. This exclusion of application is irrespective of whether the agreement is based on an existing clause in the lease or based on a renegotiation beyond the terms of the lease.
What is a fair reduction of the rent?
A fair reduction is one that reflects that both parties share the financial burden of COVID-19. The temporary law will provide criteria to determine what a fair proportion of the rent to be paid is. The assessment must, for example, take into account the financial positions and the impacts of the COVID-19 restrictions on both parties. This includes the impacts of restrictions that are no longer in place, whether under Alert Levels 2, 3 or 4.
Your lawyer will be able to provide advice on these criteria.
How should the fair proportion be determined?
It is preferable that the parties and their lawyers discuss amended rent arrangements. This will be the fastest and least costly way to find a mutually acceptable agreement. This approach will also allow the parties to find solutions beyond a simple rent adjustment, for example, a flexible approach which takes specific COVID-19 restrictions into account or a payment plan for outstanding rent. The parties also have the ability to agree on a different alternative dispute resolution mechanism such as mediation to come to an agreement.
What happens if the parties cannot agree?
If the parties cannot agree, the dispute will have to be resolved through arbitration according to the Arbitration Act 1996. Arbitration is a private dispute resolution process commonly used for commercial lease disputes. The process can be faster and cheaper than court proceedings and parties can benefit from arbitrators with experience and expertise specifically for the type of dispute in question.
You do not have to be represented by a lawyer for arbitration, however, it is advisable to talk to your lawyer about the arbitration process.
How is the Government subsidising the resolution of disputes through arbitration?
The Government wants to ensure that parties settle their disputes quickly and efficiently so that business, as usual, can resume as quickly as possible. This can be achieved through arbitration that is streamlined and uses specific process rules to this effect. For example, these rules would exclude a broad ability to appeal any arbitrator’s decisions and would have to follow strict timelines for submissions and decisions.
To support this, the Government has set aside up to $40 million to subsidise such streamlined arbitration processes to help commercial lease parties resolve their disputes about the rent. Each arbitration proceeding can be subsidised with up to $6,000 including GST. This covers approximately 75% of the cost of arbitration proceedings excluding any lawyers’ fees or similar cost for the parties. This subsidy will only be available if the parties use the specific providers that have been approved by the Ministry of Justice. These processes are being set up and more information will be available on the Ministry of Justice website later in June.
Do I have to use these arbitration providers?
No, you do not have to use the streamlined arbitration subsidised by the Government. However, you will need to use arbitration to resolve disputes about the rent adjustment clause if you cannot reach an agreement with the other party. These pre-arbitration negotiations could include mediation if both parties agree. Your lawyers can provide advice on arbitration processes in general.
What period will these changes cover?
This will be a temporary law change. It is expected that the law change will come into effect in early July if enacted by Parliament. Once enacted, the implied clause will apply retrospectively from the time the announcement was made by the Government, on 4 June 2020. This ensures that parties are aware of the proposed law change when negotiating after this date.
While not applying to rent obligations before this date, the criteria to be taken into account when determining the rent adjustment include past impacts of the COVID-19 restrictions on businesses, such as those under Alert Levels 2, 3 and 4 which continue to affect the parties.
The implied contractual clause will cease to apply six months after the law change is made, approximately at the end of 2020. This ensures that there is enough flexibility to agree to rent reductions following the end of formal restrictions on businesses to acknowledge that things may take time to get back to business as usual for some types of businesses.
Where can I find more information about the existing and proposed law changes?
The main contact for parties having issues with commercial leases or mortgages should be their lawyers.
Commercial landlords and tenants can also ask their real estate professionals, such as real estate agents or property managers, for support when discussing new arrangements.
The Real Estate Authority is the regulator for agents facilitating commercial leases:
The Ministry of Justice is responsible for real estate laws, in particular the Property Law Act 2007 and will provide further information on the arbitration subsidy later in June.
The Law Society regularly publishes information on the legal impacts of COVID-19 on its website:
Information on the Government’s COVID-19 economic package and business support is available on Treasury’s website and the Government’s COVID-19 website:
The Ministry of Business, Innovation and Employment (MBIE) and the Ministry of Housing and Urban Development (HUD) have information on residential tenancies:
COVID-19 response level measures apply to all of us
The purpose of the response to COVID-19 is to save lives. Everybody needs to stick to the rules of physical distancing and only operate businesses to the extent this is allowed under the applicable Alert Level.
Across the world, millions of businesses are affected in one way or other by COVID-19. Parties to commercial leases are expected to share the financial burden of the COVID-19 impacts. Be kind, cooperate and try to find a good way forward which works for both parties considering these unprecedented circumstances.