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Rent Relief Hits Stumbling Block

A clause inserted into commercial property leases forcing landlords to offer rent relief to all tenants during lockdowns has stepped on the toes of tenants and landlords, Sally Lindsay writes.

By: Sally Lindsay

1 December 2021

The Government has rushed through legislation amending the Property Law Act 2007 by inserting a retrospective clause into all commercial leases requiring a “fair proportion of rent and outgoings relief to be negotiated between landlord and tenant where a tenant has been unable to fully conduct their business in their premises due to pandemic lockdowns”.

The announcement was dropped on commercial landlords by Justice Minister Kris Faafoi without consultation or notice and only a few days were allowed for submissions before the legislation was passed under urgency.

The law change applies without exception to leases which do not already have an existing rental abatement clause. If landlords and tenants have already agreed on an abatement of rent and outgoings the clause does not apply provided a suitable rent variation agreement was entered into prior to the new law coming into force.

Arbitration will be required where landlords and tenants are unable to come to an agreement about fair rent proportions. That’s unless they agree to an alternative dispute resolution process like mediation.

Pidgeon Judd Law principal Joanna Pidgeon says 85-90% of commercial tenants will have an Auckland District Law Society (ADLS) lease, which includes the clause.

“It affects mainly a number of retail malls, landlords who have their own leases and Property Council leases which don’t contain the clause and could cause conflict.”

The biggest stumbling block, says Pidgeon, is what constitutes a “fair proportion” of rent.

“It has not been defined by the Government but has been left up to landlords and tenants to agree/ negotiate, and this remains an area of difficulty – even for those covered by a rental abatement clause. Some landlords just refuse to come to the table and negotiate.”

The New Zealand Property Council has stepped into the breach left by the Government and issued draft guidelines on what fair rent relief would look like and how it should be negotiated, with input from landlords and tenants.

Council chief executive Leonie Freeman says the guidelines are advisory only and are not legally binding in the case of a dispute.

“They are not intended to replace the need for the parties to seek their own legal advice, as the final determination of what is ‘fair’ will very much depend on the particular circumstances.”

Poor Behaviour On Both Sides

Freeman says there has been poor behaviour from landlords and tenants; with some large international tenants using the Government’s intervention as an excuse to halt all rent payments and some well-to-do landlords refusing to compromise - both positions the council vehemently opposes.

It is hitting smaller commercial property owners hard. Freeman received an email from a couple in their 80s, whose only income is their pension and the rent from their small commercial property. The professional tenants requested a 50% reduction in rent, despite their business not suffering any financial stress due to lockdown.

“This couple simply cannot afford a rent reduction, nor can they afford to drag the issue through arbitration in the tens of thousands of dollars. What does the Government propose they do? How will this legislation support people like them?” says Freeman.

To avoid the clause’s ‘fair proportion’ pitfall for her clients, Pidgeon phoned those with leases that don’t carry the clause, informed them of the negotiation process and how to calculate a fair proportion of rent abatement.

This included discussing with their landlord their income and cashflow. “If they are able to work away from their premises and earn an income, the rental abatement would naturally be smaller.”

Most of her clients are carrying out rental abatement negotiations with their landlords without involving huge lawyer or arbitration expenses.

She believes the Government did the right thing in not giving guidance on rental abatement percentages, although she is often asked if she has any idea what would be reasonable in different levels of lockdown for different businesses.

“It is difficult because hospitality and retail are the hardest hit and if they don’t get any trade before Christmas, it is going to be difficult for them to carry on business. Most landlords are sympathetic but they also have to run a business.”

Precinct Properties Has Given $10M In Relief

As a sector, property employs 9% of New Zealand’s workforce and contributes more than $41.2 billion to GDP.

The country’s biggest commercial property owners have come to the party and subsidised commercial businesses to the tune of more than $650 million in rent relief since March.

For example, listed Precinct Properties, which owns a 15-building portfolio valued at $3.3 billion, has given $10 million in rental relief to its struggling retail and restaurant tenants – about $500,000 a week since mid-August, or 3% of its total rental income.

Most of the relief has been in 100% abatements to “thinly capitalised” fashion retailers at Commercial Bay, it’s new mall on Auckland’s waterfront, which houses 100 retail and restaurant tenants.

However, the majority of tenants in the attached 41-level glass office tower have continued to pay rent.

Some tenants at Commercial Bay have succumbed to the lockdowns and closed and Precinct Properties expects more if there is no trade before Christmas.

Freeman says the clause is like taking a “sledgehammer” to a nuanced and complex lease environment, particularly as most landlords and tenants had been able to negotiate equitable adjustments to rent when necessary.

“The Department of Prime Minister and Cabinet noted in the bill’s disclosure statement that ‘the size and scale of this problem is not clear’.”

Precinct Properties chief executive Scott Pritchard says commercial rent abatements are being negotiated regardless of whether inaccessibility clauses are in place, but while landlords want to keep tenants in place and support them, they also need to consider “commercial reality”.

“There seems to be this idea that landlords have endless amounts of capital they can support people with and the Government has chosen this industry to help support the occupier base.”

Freeman says under the clause as it stands, a business which has suffered no financial loss during lockdowns can seek rent relief; Government departments and other public sector entities can seek a renegotiation of their terms, and we can have small New Zealand landlords subsiding large multi-national and international retailers producing record profits. This did not seem fair.

She says that professional services, lawyers and banks over the past five years have re-engineered their businesses to be able to work remotely and there is evidence that can be seen in publicly disclosed documents that financial results have improved during this period.

“It is clear they have not suffered a loss as a consequence of not being able to access their premises.”
“The clause completely misses the intricacies of commercial leases. Where is the bespoke response for hospitality or retail? Why isn’t there a focus on where the need is the greatest,” says Freeman.

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