Little's commercial rent solution 'too little, too late'

Business

Neither retailers nor commercial property owners satisfied with where the Government landed on how rent relief should be negotiated

4th Jun 20, 6:42pm by Jenée Tibshraeny

Image sourced from Flickr

The Government is being criticised by both commercial property owners and retailers for taking too long to provide too little assistance to businesses struggling to pay rent.

Justice Minister Andrew Little on Thursday announced commercial landlords and tenants that haven’t already made arrangements to consider the impact of COVID-19, will have to do so.

The Government will temporarily amend the Property Law Act to require landlords to provide a fair reduction in rent to New Zealand businesses with 20 or fewer staff that have taken a hit due to COVID-19.

Property owners and tenants that fail to reach agreement will have to go to arbitration. Taxpayers will cover up to $6000 of this cost.

Little was “disappointed” he couldn’t implement the policy when it was first proposed five weeks ago.

NZ First supports property owners' view

New Zealand First held things up over concerns the proposal went against the legal principle of sanctity of contract by adding contractual terms and obligations to leases that parties don’t mutually agree to.

This view was shared by the Council of Retail Property, which represents the owners of over 100 retail properties and shopping centres including Scentre Group, Kiwi Property and Oyster Property Group.

Its chair, Campbell Barbour, said: “We are not aware of any other industry sector where the Government has decided to alter contracts between commercial parties…

“To legislate to retrospectively alter contractual provisions in this way is unchartered territory in New Zealand. The sanctity of commercial contracts is a cornerstone of our country’s legal system.”

Barbour said the Government’s solution comes “far too late after the industry has largely got on with the job of coming to individually negotiated positions”.

With Little expecting the Government to fork out $40 million to cover the cost of arbitration, one can assume it’s expecting about 6,667 businesses/landlords to take up the offer.

Retailers: Large, overseas-based businesses should be included too

Retail NZ CEO Greg Harford said the industry body had been calling for Government action on commercial rent relief for some time.

He welcomed the Government’s move but wanted it to go further by not limiting it to businesses with 20 or fewer full-time staff on a particular site, saying larger firms were equally at risk due to COVID-19.

Little said his initial proposal didn’t include this cap.

“Having been deprived of almost all revenue for nearly two months, many retail businesses are unable to meet rent payments that would have accrued in April and May,” Harford said.

“Throughout the COVID-19 crisis, some landlords have come to the party and been very supportive of their retail tenants. Others, however, have been intransigent, insisting that retailers meet the full costs of rent…

“Rents need to move in proportion to revenue declines, no matter the size of the retail business.”

Harford also wanted overseas-based businesses to be eligible under the law change, saying it doesn’t matter where you’re based if you do business in New Zealand.

He said some retailers were stuck, with it being unusual for commercial leases to allow early exits. In many cases, liquidation is the only way out.

However Barbour said: “We [retail property owners] have concerns surrounding the definitions within the proposal which we understand to be tightly focused on small New Zealand businesses.

“While a business with 20 full time equivalent employees or less might be a small office, in retail - a sector made up of largely part time employees - a single store with less than 20 full-time staff encompasses nearly all retail tenants.

“The industry needs more clarity on what constitutes a ‘New Zealand based business’ and how long landlords would be expected to provide relief to commercial tenants.

“We are not aware of any consultation with our industry surrounding the proposal and reconfirm that our door is open to government with regards to refining it.”

National would've considered rent subsidies

National’s commerce spokesperson Andrew Bayly likewise criticised the Government for doing too little, too late.

He said National would’ve acted earlier, and one of the options it would’ve considered was subsidising tenants’ rent payments.

Bayly said the solution presented by the Government simply gives money to lawyers to manage dispute processes.

Neither Bayly, Harford nor Barbour mentioned the cushion lower mortgage rates was providing landlords.

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21 Comments

by Noncents | 4th Jun 20, 8:29pm 1591259355

I love the arbitrary numbers. Employers with less than 20 staff.

Oh well, number 21 - If I make you redundant. I not only save on your wages, I get a discount on the rent.

And to those with 25+, no discount for you. In fact you will now be subsiding the rest.

by Zack Brando | 4th Jun 20, 8:47pm 1591260455

A cynical view but valid. I stand with Winston and NZ First's view.

The tax payer would be better served by giving businesses $6000 towards moving costs and changing the law to allow commercial businesses to exit tenancies easier .. if rent/leases are up-to-date.

I know my idea isn't perfect, but it's better lol.

by Noncents | 4th Jun 20, 9:00pm 1591261246

Definitely a better idea.

But My concern is that the Govt is still interferring in private contracts. At what point does a contract become worthless?

by Good Samaritian | 5th Jun 20, 2:53pm 1591325588

There's bullies both ways here, and if either party is being unreasonable in their approach I think independent arbitration seems a way to resolve the situation.

I agree it could have been too late for some. Just hope its retrospective so that justice can be served.

by The_4th_estate | 4th Jun 20, 9:25pm 1591262710

Love the socialist pleadings from the landlord class...what ever happened to the free market? It got real and someone doesn't liie that!

by Houseworks | 4th Jun 20, 9:34pm 1591263271

The solution is to not dole out any cash at all but then people would be hurting and not re-elect the govt. So this is about the election as much as anything else. Ardern badly wants a sparkling record like a medal so the cash compensates for keeping the lockdown levels. Me cynical?

by RickStrauss | 5th Jun 20, 5:04pm 1591333446

Nothing unique to the current politicians. The last decade saw their opposition pumping the market like no one's business too, and with 3.4 houses per MP they'd be doing so now if it was their choice...and more.

by Brutus Iscariot | 5th Jun 20, 7:16am 1591298168

Thank God the Nats aren't in because their proposals are far worse than Labour.

Paying tenant's rent is just a direct subsidy to leveraged landlords, similar to the accommodation supplement. At least Labour's method makes landlords take the hit. A class of investor that has been so coddled and privileged over this investment cycle. I'm actually in favor of a proper default cycle for commercial property - would help reset/suppress the bubble that we've had.

by The_4th_estate | 5th Jun 20, 9:00am 1591304433

So it turns out capitalists DO like socialistic policies after all! So much for property loving ACT party supporters!

by RickStrauss | 5th Jun 20, 9:47am 1591307257

When the tide goes out they show that they've never really been capitalists at all, despite advocating it for others.

by nigelh | 5th Jun 20, 8:56am 1591304167

Taking this from square one for commercial landlords and renters. Renter defaults and shuts down business, maybe declares bankruptcy. Vacates premises. A sufficient number in a given complex do this. Landlord/owner has debt an cant't pay mortgage and rates and taxes and defaults as well. Bank/s re-possess and sell. The bank/s take a haircut depending on the sale price. Someone new gets a bargain. Attracts new renters at lower rents and the cycle carries on. Too simple perhaps?

by Boatman | 5th Jun 20, 9:25am 1591305940

Its not just commercial property investment that is in trouble , residential property is too .

Take our personal case , as an example . Our 3 adult children , all the their 20's have all moved back home !

The two boys were renting ( separate ) houses in shared flatting arrangements , and the third staying with her partner in a large rented house in Takapuna

All 3 shared households experienced job losses , and flatmates moved out leaving the rest to pay all the rents.

As a result, two of the 3 have given their houses back to the landlords by mutual agreement ...........those two houses are empty .

There is no rent coming in for the landlord , and they both are likely to have mortgages to be serviced.

The third shared arrangement in Takapuna , on which my daughter has no financial obligation, is problematic .

The Landlord is a foreign non-resident and wants his rent . His local agents are from the country as the owner, and they are being aggressive about getting paid . The rent of $1,200 per week are 3 months in arrears and he refuses to agree to cancelling the lease and take the property back.

Most of the flatmates of the Takapuna property have simply left the property , some ( 3 Pommies ) have moved to a holiday park north of Auckland , and some, like my daughter and her partner have moved back to Mum and Dad .

So in our small nuclear family , we are aware of 3 empty or about to be empty houses on the shore .

I just wonder how widespread this is ?

How are investors going to cope with these "hits "

Either way you look at it , the only people who have taken no hits are our most profitable businesses ........ the Banks

by CN | 5th Jun 20, 10:00am 1591308033

Boatman,

Thank you for sharing your story.

Remember how some residential landlords who were experiencing cost increases (rates, insurance) believed that they could simply pass on the cost increases to their tenants by raising the rent?

Residential landlords may now realise that is not the case and now be forced to accept market pricing if they want to attract new tenants or not lose existing tenants who have expiring leases.

One place with dramatic rent declines that comes to mind is Queenstown.

by CN | 5th Jun 20, 10:17am 1591309069

"those two houses are empty .

There is no rent coming in for the landlord , and they both are likely to have mortgages to be serviced."

If heavily mortgaged, the landlords may have been able to buy some time due to the six month mortgage payment deferral programs by the banks. What do they do when that expires and:
1) they are still unable to find tenants or
2) they find tenants where the rent is insufficient to meet debt service payments and other property ownership costs (& the property becomes negative cashflow).

by my2c | 5th Jun 20, 9:57am 1591307825

How about you stop a business from earning you cover the cost of there lease ?
The govt has to be accountable, if you can't earn you can't pay.

by RickStrauss | 5th Jun 20, 10:04am 1591308241

People might ultimately then need to take the CCP or a virus to court to cover their costs if they haven't planned with a cash buffer or insurance, one would assume.

by my2c | 5th Jun 20, 10:08am 1591308516

A prudent business will of course account for risk in budgets but risk would not account for the govt blocking you from trading out right.
If your going to do that and prevent companies and private people from earning a living you have to take that decision with some accountability.
So you block them earning you must cover the other side i.e. expenses.

by CN | 5th Jun 20, 11:13am 1591312417

"So you block them earning you must cover the other side i.e. expenses."

Does anyone know what 3 months of commercial rents for every business in NZ would cost? What percentage of GDP would that be?

If they did that for every business in NZ, would that then make the finances of the government unsustainable? & lead to an unsustainable level of government debt for the government to service or even finance? And potentially increase the risk of other unintended consequences in the future?

Government debt to GDP is already projected to rise to 47% in 2022.

There is a limit on the amount of money available from the government.

by redcows1 | 5th Jun 20, 1:07pm 1591319226

Or you accept that part of the market value on a property or business or job or any commercial transaction is the risk of something coming out of left field and screwing you over.
Last 30-40 years so much much policy has been about protecting everyone from risk. Had to end sometime.

by RickStrauss | 5th Jun 20, 5:06pm 1591333583

Notwithstanding that not locking down and allowing the virus to run rampant would likely have slayed business just as much. So perhaps it's not all on the government, but on the virus. As Taleb notes, this is a white swan...an event that could have and should have been anticipated. It's what we have income protection insurance for, and cash buffers.

by Carol | 6th Jun 20, 11:39am 1591400344

Time the government realized there is no low interest relief for commercial building loans as banks charge a much higher interest rate because of the perceived risk ... How does this help?