A Bill has been introduced to parliament that inserts 'fairness' changes into all commercial leases that will upend the business model of landlords during a pandemic

By Nick Kearney*

A Bill has been introduced to parliament that inserts changes into all commercial leases.

These changes essentially insert into all leases clause 27.5 of the standard Law Society lease (more or less, not verbatim), which received prominence during last year's lockdown.  Prior to that, not only had the public (those who were interested by such matters at least) not heard of it, I think it's fair to say most lawyers had never used it either.  

In summary, the law (once passed) does the following things:

• implies a clause into all leases providing for a "fair proportion" of abatement of rent and outgoings during an epidemic, if the tenant is unable to gain access to the premises to fully conduct its business.
• prevents enforcement action (usually by the landlord) that is inconsistent with that implied clause; and
• requires disputes in relation to the implied clause to initially be referred to arbitration if the parties cannot resolve matters themselves. 

As mentioned, the changes apply to all leases (or subleases).  They apply if you're a tenant or a landlord.  They apply in the event the lease is assigned.  

The Bill, or indeed the very proposal, has a number of problems, constitutionally and practically.

The process

First, it applies to leases signed years ago, but are still operative.  

The orthodoxy is that laws are meant to apply to future actions.  

Leases are contracts.  This retrospective legislation means the parties (but more likely to be the landlord) can be held liable of breaching the contract in a way that wasn’t able to be breached when it was signed.  In other words, the Bill imposes obligations on the parties that were not there when the contract was signed.   

The Bill is also being rushed through under urgency with only two weeks for the public and interested parties to make submissions and MPs to consider them. 

And finally, the law will apply from the day it was introduced to Parliament, the 28th of September. Usually, Parliament has to vote on the law for it to apply, which will only be once the Governor-General has given his or her approval.  

With the process as outlined, there is a danger that contractual freedoms are eroded and vigilance is required to ensure this does not creep into other areas, such as agreements for sale and purchase of real estate which have encountered significant issues during lockdowns.     

The practical problems

One of the problems with the current lease clause is determining what is "fair".  It goes without saying that what might be fair to the landlord, might not be fair to the tenant, and vice versa.

The only guidance the Bill gives here is that any Covid-related variations made to rent or outgoings in relation to the period after 18 August 2021 (being the date that New Zealand most recently moved into Alert Level 4) must be considered by the parties.  So again, the law is using past events as a guide to future actions.  This means that agreements reached by the parties during the lockdown of April 2020 in terms of rent relief are a guide as to what is might be perceived as fair to them now.  The problem with this is that lockdown had a different set of circumstances to this one, and in particular it was of a much shorter duration.      

Second, if the parties cannot agree, the dispute must be referred to arbitration, even if the lease contains a different dispute resolution process.

Finally, neither party (usually the landlord) can take any enforcement action before the landlord and tenant have agreed on what is the “fair proportion”. Tenants will have considerable ability to resist enforcement action by withholding agreement to abatement proposals by landlords until agreement is reached.  

Even if a fair proportion cannot ever be agreed, landlords will still need to send the matter to arbitration to get a judgment on the arrears amount before being able to take enforcement action for such arrears.  Most landlords won’t bother, which means that they will accept a proposal that is probably detrimental to their position just to avoid a complicated, and expensive, process to get an award. 

It’s often overlooked in all of this that landlords have a business too – property ownership.  A vast majority have mortgages, and other commitments that require regular income that the rent provides.  Many are superannuitants who rely on the income for their retirement income.  Their business is governed by their lease contract which is about to be changed through legislation without their agreement, and probably their knowledge.

Nick Kearney is a special counsel at Davenports Law, specialising in property law.