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last updated 09/06/2020

Rent action update: start negotiating now

last updated 09/06/2020

10 June 2020 - What do the Government's proposed measures to force commercial rent negotiation actually mean, and when can franchisees start to use them to bring landlords to the table?

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.

The proposals have been condemned as ‘too little, too late’ for many, coming as they do come after months of inactivity, despite pressure on Government from business and employer organisations including the Franchise Association. See full report here. They will also not apply to situations where a deal has already been agreed between a landlord and tenant, even if the tenant was forced to agree to a poor deal in order to get back into the premises once it was possible to trade again. However, as they will be applied retrospectively, they do give franchisees the ability to start negotiations now.

Alistair van Schalkwyk of ASCO Legal comments:

‘It is encouraging to see the proposed temporary change to the Property Law Act. The proposal will imply a clause similar to the ADLS sixth edition clause 27.5. into all commercial leases of businesses that meet eligibility criteria. It essentially requires that a fair proportion of rent and outgoings cease to be paid when a tenant’s business has suffered a material loss of revenue because of the restrictions put in place to combat Covid-19.

The proposed eligibility criteria for businesses are:

  • The business has 20 or fewer full-time equivalent employees per leased premises;
  • The business must be New Zealand based; and
  • The business must not have already reached an agreement with its landlord in relation to rent and outgoings reductions in response to the lockdown.

In determining what a “fair proportion” is, it is anticipated that the following factors will be taken into account and, in the absence of agreement between the parties, by the arbitrator:

  • The impact of the Covid-19 restrictions on the tenant business;
  • Any financial support available to the business;
  • The business’s revenue and profit levels in recent years;
  • The business’s ability to financially survive the effects of the Government’s requirements in response to the outreak of Covid-19;
  • Any mortgage obligations of the landlord in relation to the leased premises;
  • The imbalance in the size and resources available to the lessor and the lessee; and
  • Any other factor that is reasonably considered relevant.

If the parties cannot agree, then the parties are required to arbitrate the dispute in terms of the Arbitration Act 1996. The Government will contribute $6,000 inclusive of GST towards the cost of arbitration. While this will cover a significant portion of the costs incurred to arbitrate the dispute and therefore potentially remove a barrier for parties to take it to arbitration for a determination, parties will still need to cover the balance of the costs and it is hoped this will be an incentive for parties to engage in good faith negotiations.

It is important to note that the above is based on a minute by the Cabinet Economic Development Committee and the submissions of Justice Minister Andrew Little, so there is still some ambiguity around specifics and, of course, how this will apply in practice. It is anticipated that the amendments will be passed into law around the end of June. However, as it will have retrospective effect, franchisees can now on the strength of this approach their landlords and seek to enter into negotiations.’

See official guidance from the Ministry of Justice for commercial landlords, tenants, lenders and borrowers

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