The element of surprise can be an effective strategy in battle, and one it seems the Government has now employed to resolve tensions between commercial landlords and tenants over rent relief where a tenant is unable to access its premises for reasons related to COVID-19.
Announced yesterday with little warning, the Government is seeking to change the Property Law Act 2007 to imply a “no access in an epidemic” clause (PLA No Access Clause) in all existing leases and licences that do not currently contain an applicable “no access in emergency” clause. If enacted, the change – which can be found in the omnibus COVID-19 Response (Management Measures) Legislation Bill (the Bill) – will have retrospective effect from yesterday, 28 September 2021.
The question many are asking: was there a battle to fight, and was this the best way to fight it? The answer, as always, depends on who you are asking. There is no question though that the proposed change, and the apparently covert nature of its introduction, has sparked spirited discussion on issues wider than the COVID-19 rent abatement landscape for commercial landlords and tenants.
We look at the application of the proposed PLA No Access Clause, and some of the wider considerations landlords and tenants will need to contemplate in negotiations.
What is the proposed “PLA No Access Clause” and when will it apply?
The PLA No Access Clause takes a similar approach to rent and outgoings abatements as the (now well-known) clause 27.5 from the Auckland District Law Society Deed of Lease – Sixth Edition 2012 (5) (the ADLS No Access Clause, which we have previously discussed here), except it is restricted to epidemics.
The PLA No Access Clause applies in situations where:
- there is an epidemic (defined by the Bill with reference to the Epidemic Preparedness Act 2006); and
- the tenant is unable to gain access to all or any part of its leased premises to fully conduct its operations because of reasons of health or safety related to the epidemic,
but it will only be implied into leases where:
- the lease does not contain a qualifying “no access in emergency” clause (also defined in the Bill) that already addresses epidemic situations; and
- the parties have not otherwise agreed (whether before, or after, the legislative change) an existing arrangement to address points 1 and 2 above (an Existing Arrangement).
The PLA No Access Clause requires the parties to agree a “fair proportion” of the rent (including any outgoings contribution) that will not be payable during any period of loss of access. It does not direct what a “fair proportion” should be, but it does require the parties to consider any agreement they have reached for a rent or outgoings abatement arrangement for the period between 18 August 2021 (i.e., the date the most recent Alert Level 4 restrictions became effective) and 28 September 2021 (the Mandatory Consideration). If not agreed, either party can raise the matter as a dispute for referral to arbitration.
As mentioned, the proposed PLA No Access Clause has taken the property sector by surprise – the concept seemed dead in the water after unsuccessful attempts to introduce it in 2020. The timing of this has raised questions as to the size of the current problem, due consultation, and even freedom of contract (see the Property Council New Zealand’s response here). It has though been generally welcomed (though still seen as insufficient support) by the likes of the Retail NZ and Hospitality NZ, who have anecdotally reported that landlords have been less willing to grant rent relief during the latest lockdown.
Regardless of views as to whether the proposed changes are necessary or appropriate, it seems likely that landlords and tenants affected by this change will have to live with it. Other than the million-dollar question – what is a “fair” proportion (which we have previously addressed here) – this means now carefully considering:
- Whether the proposed changes alter your existing contractual position: if your lease includes an unamended ADLS No Access Clause, or similar, this change is unlikely to affect you, even if your lease provides for a less generous abatement than would apply under the PLA No Access Clause.
- The precedent-setting effect of any agreement you reach: it is clear from both the exclusion of Existing Arrangements and the fact of the Mandatory Consideration that the Government does not want to encourage parties to reopen old wounds if they have already managed to agree on an appropriate abatement. However, this approach assumes that a “one size fits all” approach will always deliver a “fair” outcome, despite the fact that relevant circumstances may change with time – that is, with changes in Alert Level settings and circumstances, what’s fair to both parties for the first month of lost access may not be fair for subsequent months of lost access.
- The consequences for landlords seeking to terminate for non-payment of rent and outgoings: even though the proposed change is not yet law, its retrospective effect means that landlords should be particularly cautious if seeking to issue notices of breach in the meantime. Once it is law, landlords will need to agree on the level of abatement before seeking to terminate for any abated rent that is then unpaid over that period.
- What to do in new lease negotiations: it is possible to “contract out” of the PLA No Access Clause, although for a landlord, it might not be an easy position to justify.
The PLA No Access Clause will not be permanent – it will remain law for as long as the Epidemic Preparedness (COVID-19) Notice 2020 is in force. It may also be of limited application to applicable leases during the current lockdown, being applicable only to a rental period “all or any of which” falls between 28 September 2021 and the date the change is repealed. It is not clear, but it is arguable that the period of rent that can be abated under the PLA No Access Clause could capture rent payable prior to 28 September 2021, despite that being the stated effective date for the change. But if further lockdowns are to come, the change will see a significant change for landlords and tenants who haven’t already identified a resolution to this issue.
You can have your say on the Bill, but you will need to be in quick, with submissions due by 5 October 2021.
If you have any questions or need further advice on your situation, or need assistance with making a submission, please contact one of our experts.
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