New Legislation Prescribing Mandatory Rental Abatement Comes Into Force
NEW LEGISLATION PRESCRIBING MANDATORY RENTAL ABATEMENT COMES INTO FORCE
The measures imposed by the Government to mitigate the health risks of COVID-19 have included restrictions as to the extent to which commercial premises can be used for business purposes. During Alert Level 4 these restrictions applied to most premises and during the current Alert Level 3 have continued to apply to many premises. This has left many landlords and tenants wondering what their rights are regarding the payment of rent and other amounts in respect of these unutilised or underutilised premises.
For those tenancies which are under an edition of the Auckland District Law Society deed of lease published since 2012, the answer lies in clause 27.5 which provides for a “fair” reduction in the amount of rent and outgoings to apply in such circumstances. For further information on the application of clause 27.5 of the ADLS deed of lease please see our previous article here or get in touch with us. Other forms of lease may also include a provision on similar terms to clause 27.5.
The Government now appears to have looked on with concern at the tenants under leases which do not include any provision to abate the tenant’s obligation to pay rental and outgoings while COVID-19 restrictions are preventing the tenant from the full utilisation of their premises. The consequence of this concern has been to pass legislation to essentially codify the approach taken under clause 27.5 of the ADLS deed of lease and imply it into the leases of all tenants who would otherwise have no contractual entitlement to any reduction in liability to pay rental and outgoings during periods of COVID-19 related access restrictions.
COVID-19 RESPONSE (MANAGEMENT MEASURES) LEGISLATION ACT 2021
This Act was introduced into Parliament as a Bill on 28 September 2021 and came into force upon the granting of Royal Assent on 2 November 2021. Originally the measures to be introduced by the Bill were only to apply as from 28 September 2021 but during Select Committee the effective date was backdated to 18 August 2021 in order to cover the whole of the current lockdown.
The effect of the Act is to imply into leases (except for those noted below), a covenant that a fair proportion of the rental and outgoings payable under the lease will cease to be payable for so long as the following criteria are met:
- there is an epidemic; and
- the tenant is unable to gain access to all or any part of the leased premises to conduct fully their operations from all or any part of the leased premises, because of reasons of health or safety.
In order to avoid conflicting with arrangements already agreed to by landlords and tenants, this implied covenant will not apply to any lease which already contains a clause to allow for a reduction in rental and/or outgoings because in the same circumstances. For example, a lease which contains an unamended version of clause 27.5 of a recent edition of ADLS deed of lease will be unaffected by the passing of this legislation.
It is also possible that the parties to the lease may agree to exclude the application of this implied covenant but such an agreement must be express and have been entered into on or after 18 August 2021.
If the implied covenant does apply, its effect will be that a “fair proportion” of the rent and outgoings otherwise payable will cease to be payable while there is an epidemic and for so long as the tenant is unable to gain access to all or any part of the leased premises to conduct fully their operations from all or any part of the leased premises, because of reasons of health or safety related to the epidemic.
The parties are to endeavour to agree between themselves as to a fair abatement and in reaching this agreement have a mandatory obligation to take into account “any loss of income experienced by the lessee in respect of that rental period” because of the epidemic and the reduced access to the premises by the tenant. For what difference it may make, this mandatory consideration is not prescribed in clause 27.5 of the ADLS deed of lease however it is reasonable to assume that any consideration of fairness would have to take into account the financial loss suffered by tenant in any event.
It is important to note that, aside from the mandatory consideration, the legislation gives no further guidance as to how “fairness” in the relevant circumstances is to be determined. This was obviously an intentional approach to ensure maximum flexibility is available in order to take into account an unlimited range of circumstances but will inevitably lead to a reasonable degree of uncertainty for each party as to what a reasonable position may be in any negotiation. Presumably disputes have already occurred in the application of clause 27.5 but because the ADLS deed of lease prescribes arbitration as a mandatory dispute resolution mechanism, these disputes will not have been resolved through the Court and therefore we are yet to see any judicial guidance as to the interpretation of “fairness” in the context of clause 27.5 which could have assisted in the interpretation of that term under these new legislative provisions.
As with the ADLS deed of lease, the new legislation prescribes that any dispute as to a fair reduction is to be resolved by arbitration if a negotiated agreement is unsuccessful.
Any landlords and tenants in respect of premises for which access has been limited due to COVID-19 related legal restrictions at any time since 18 August 2021 should consider the extent to which any agreement has already been reached as to a reduction in the rent and outgoings payable by the tenant on account of that limited access.
If this issue remains to any extent not fully resolved, the parties are advised to obtain legal advice as to the implications of these new provisions. Anderson Creagh Lai will be more than happy to assist.
ANDERSON CREAGH LAI
Article written by Paul Chambers and Kathryn Palmer
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