last updated 02/11/2021
New rules on rent relief – 5 key aspects for franchisees
last updated 02/11/2021
3 November 2021 – A new Bill has seen commercial lease abatements implied into leases as a way of requiring landlords and tenants to agree fair rent relief during periods affected by Alert level restrictions. Paul Turner of Goodwin Turner Commercial Lawyers outlines the changes and comments on 5 key aspects and what they could mean for affected franchisees
A little over 18 months ago, the first Covid-19 lockdowns were imposed. It quickly became apparent that the insurances taken by both landlords and tenants would be of little use due to exclusions buried in the relevant policies.
Given that, both landlords and tenants quickly turned to their leases (and/or lawyers) to clarify how the lockdowns affected lease rights and obligations – and it became apparent that some leases offered more protection than others for tenants.
There were immediate calls from affected tenants for Government action to resolve the perceived power imbalances. For various reasons, however, nothing happened – until now.
New rules apply
On 28 October 2021, the Government passed the COVID-19 Response (Management Measures) Legislation Bill – see summary. Among many other things that the Bill does, it implies a ‘fair abatement’ clause into many commercial leases that otherwise never addressed these issues or had no such rights for tenants.
Notably, these new provisions have been backdated so as to apply from 18 August 2021 (thereby allowing claims for affected periods from the start of the last Level 4 lockdown).
As a result, numerous extra tenants who previously couldn’t persuade their landlord to engage in discussions or offer any sort of rent concession may now have the means to force the issue and extract a rent abatement with backdated effect.
Landlords or tenants who think this new legislation might apply to their lease should, of course, seek their own legal advice.
Things to think about
Here are some thoughts regarding the content and potential effects of the new rules. These should not be considered ‘legal advice’ but simply general observations.
The new legislation provides that unless the parties agree otherwise, these types of disputes will be resolved by arbitration.
The Government is no longer subsidising these sorts of arbitrations, so there will be a cost. Some specialist arbitration services have been offering fixed costs for this sort of dispute, however, and some base their fees on the level of rent under the particular lease. As a result, parties might find that arbitration is relatively inexpensive (compared to other legal options). It can also be dealt with fairly quickly, and possibly just ‘on the papers’ without anyone actually having to appear in person or have lawyers too involved.
One tenant client of mine who went through the process found it fairly easy, and the cost involved was easily outweighed by the significant abatements they were awarded. If no other agreement can be reached, the parties may want to consider arbitrating just to bring matters to a head and get certainty.
2. Other forums for resolving disputes
Although the legislation gives arbitration as the default option, it leaves open the option for the parties to agree on other ways to resolve their disputes. Specific wording was added to clarify that the Disputes Tribunal jurisdiction is not excluded by the Bill. As such, it would be possible for the parties to refer disputes under $30,000 to the Disputes Tribunal should they both agree. The parties can also agree to use other methods such as ‘non-binding mediation’ or ‘expert determination’ if they wish.
If the value of the dispute is under the $30,000 threshold, the Disputes Tribunal might be worth considering, and would help to keep costs down further since no lawyers are allowed to appear and the filing cost is very low. Rightly or wrongly however, there may be a perception in some eyes that the Disputes Tribunal could be more tenant friendly, so it may depend on whether the landlord is open to using that option in order to minimise costs.
I suspect the other options may see less uptake, however. It may be difficult to agree on an expert both sides are happy with, and if there was enough goodwill to resolve the dispute through non-binding negotiation, the parties probably would have resolved the dispute already.
3. What is ‘fair’
The ADLS clause 27.5 referred to in many agreements deliberately didn’t include any formulas or guidance about how to determine what was ‘fair’. That left room for lots of debate about what can or should be taken into account. In the implied clause under this latest legislation however, the Government resisted adding a number of other proposed guidelines, but did expressly require that any rent abatement considerations ‘must include any loss of income experienced by the lessee in respect of that rental period’. This will likely put that issue to the forefront of any abatement claims relying on the new legislation.
As such, tenants who want to claim abatements should expect that they’ll be asked to justify their position as to what is fair, and details of their income in the relevant period (and earlier comparison periods) will need to be shared.
Tenants might also want to consider basing their requests for abatement on those effects, and giving supporting information, right from the outset. I have dealt with many landlords who were suspicious that the tenant was claiming more abatement than they’d actually lost in income, and so would be ‘winning’ at the landlord’s expense. If the landlord can be shown that the tenant will still be suffering even with the abatement, they may be more likely to agree to ‘share some pain’. That is, after all, the stated aim of the new legislation.
4. Timeframes and the need to be pro-active
The legislation includes an obligation for landlords and tenants to ‘take all reasonable steps to respond to a communication from the other’ about rent abatement claims or disputes under this clause, within 10 working days after receiving the communication. Because any parties wanting to rely on the clause will necessarily already be in a position where they haven’t been able to reach an agreement, and no doubt need to get these issues resolved asap, they may wish to start these timeframes now.
The timeframe seems to only be triggered by reference to this new clause, so even if there have already been other communications about requests for rent relief, an email sent now which specifically refers to the new legislation and clause, and the need to resolve the related claims, should suffice to start the timeframe. Any party who receives such a communication has an obligation to engage from that point and, presumably, any failure to do so will be noted and used against them in subsequent arbitration claims.
5. New clause only applies if no agreement already reached
The new rules only apply if the parties haven’t already reached an agreement regarding rent for the period in question. As a result, both landlords and tenants will want to be very clear in their discussions and correspondences about what is actually being agreed to, and which periods or circumstances it covers.
Caution should be taken on both sides to ensure that any proposal or agreement doesn’t unintentionally also set the terms for other periods or circumstances that weren’t anticipated.
For instance, I have seen a number of landlords in recent times (possibly knowing these changes were coming) who proposed very specific clauses in new leases that would essentially prevent the tenant from ever getting any abatement unless there was an ‘Alert Level 4’ restriction in place. Arguably that leaves room for the landlord to argue that no abatement applies under any of the new ‘traffic lights’ system levels, even if they have similarly harsh effects on the tenant’s ability to trade.
As another example, I’ve seen one clause which would only give any abatement after at least a year of continuous level 4 lockdown (during which the tenant has to pay full rent). Because it isn’t always clear at the time how things will play out, and leases run for a long time, I would recommend getting any wording closely checked to avoid regrets later!
Back to the table
Even though it has come a lot later than many tenant parties would have liked (and perhaps too late for some), and will infuriate many landlord parties, I believe the new law changes will be a useful step. I’m expecting that with the benefit of these new provisions, a few previously-stalled negotiations will soon be recommencing!
Paul Turner is a Director of Goodwin Turner, specialist franchise lawyers. Based on Auckland’s North Shore, they service clients all over New Zealand.
Disclaimer: The above does not constitute legal advice, and is intended just to provide general and non-specific information and opinion. Anyone with an actual lease dispute, or who is entering into lease related agreements, is strongly advised to get their own legal advice tailored to the specific circumstances.
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