By Vanessa Dew and Andrea White - 7 Nov 2021
The COVID-19 Response (Further Management Measures) Legislation
Bill obtained Royal assent on 2 November 2021 and the COVID-19
Response (Management Measures) Legislation Act 2021
(Act) is now in force.
The Act makes amendments to various matters arising from the
Covid-19 Pandemic, however the purpose of this summary is to
discuss the changes relating to the Property Law Act 2007
(PLA).
Implied no access in emergency clause
New sections 245F to 245I and new clause 4A of Schedule 3 are
inserted into the PLA. These new provisions imply a "no access"
covenant into certain leases and licences that are in operation
during the affected period, including leases that expire or
commence after that date. For convenience in this article, we
describe both leases and licences as "leases", as they are treated
the same in the Act.
The affected period begins on 18 August 2021 and ends on the
date on which the Epidemic Preparedness (COVID-19) Notice 2020
expires or is revoked (the notice currently expires mid December,
but is subject to three (3) monthly renewals).
The covenant will be implied into any lease that does not
already include a no access in emergency clause covering an
epidemic, and which is in operation at any time during the affected
period only if, in a rental period all or any of which is in the
affected period:
- there is an epidemic; and
- the lessee is unable to gain access to all or any part of
the leased premises to conduct fully their operations in all or any
part of the leased premises, because of reasons of health or safety
(as defined in new section 245F(2)) related to the
epidemic; and
- only to the extent that no pre-commencement rent
variation agreement (as defined in new clause 4A(5)) has
been made that determines the rent that is payable by the lessee
for that rental period.
The implied covenant ensures (new clauses 4A(2) and (3) of
Schedule 3 of the PLA) that a fair proportion (as agreed by the
lessor and lessee), of the rent otherwise payable by the lessee for
that rental period will cease to be payable for the period starting
on the date when there is an epidemic, and the lessee is unable to
gain access to all or part of the premises to conduct its business
fully, because of reasons of health or safety related to the
epidemic, and will end when the inability ceases.
Rent payable by a lessee for a rental period includes any
contribution to the outgoings on the leased premises payable by the
lessee for that rental period.
Those of you familiar with the ADLS form of lease, will
recognise the similarities between this wording and that provided
in clause 27.5 of that lease, which was the Government's intention
when introducing the legislation. It follows that the new implied
covenant will not affect ADLS leases where 27.5 has essentially
been left as published by ADLS.
Determining a "fair proportion"?
The Act does not provide a definitive list of factors to
consider when determining a "fair proportion" of rent. However new
clause 4A(4A) of Schedule 3 of the PLA provides that, when
determining the fair proportion, the lessor and lessee must
consider any loss of income experienced by the lessee in respect of
that rental period because, for all or any of that rental period,
there was an epidemic and the lessee was unable to gain access to
fully conduct their operations in all or any part of the premises
because of reasons of health or safety related to the epidemic.
Unfortunately this provision considers only the lessee's income
(not the lessor's), and further, by considering the lessee's income
only during the no access period, ignores any upside to sales
following the lockdown period. However, arguably these issues can
be taken into account in the wider consideration of the lessee and
lessor determining a "fair proportion".
During last year's lockdown period, there was plenty of
commentary and discussion as to what factors should be considered
when determining a "fair proportion". It was generally accepted
that when making such a determination both the lessee's and
lessor's circumstances should both be considered, such as:
- The financial position and commitments of both parties,
including historical and forecast positions and mortgage
obligations
- The impact of COVID restrictions on the business and its
ability to generate income
- The financial support available to the parties
- The difference between the parties in size/resource
availability
- The balance of the term of the lease
- Rights of termination if the non-access continues
There is also a proposal that (non-binding) guidance as to a
fair proportion will be provided by the Ministry of Justice which
will be helpful in determining which factors may be considered.
Disputes
Any dispute arising under the implied covenant (for example, a
dispute about whether new clause 4A applies to a lease)
will be referred to arbitration under the Arbitration Act
1996. Where the amount in question falls within the Disputes
Tribunal jurisdiction (up to $30,000) the Disputes Tribunal will
hear the matter.
The new provisions also include an obligation on both parties to
take all reasonable steps to respond to communications about the
operation of the implied term or about a dispute under the clause
within 10 working days.
Which leases are affected?
As outlined above the implied no access clause will apply to any
lease in operation after 18 August 2021 which does not already
have a no access clause. A no access clause is defined as any term
of a lease that expressly provides for a reduction in rent and/or
outgoings payable because:
- there is an emergency and
- the Lessee is unable to gain access to its premises to conduct
fully its operations because of a health or safety restriction on
occupation by an authority.
Unlike the ADLS lease, the Property Council of New Zealand lease
will be impacted by the Act and will be subject to the implied
covenant. Section 7 of that lease does allow for abatement where
premises are inaccessible but only where the lessor is able to make
a loss of rents claim, which almost all insurance policies disallow
in the case of an epidemic.
Clauses that simply defer rent, or provide for the parties to
consult to determine if a reduction in rent is in order, or
otherwise deal with the access issue without expressly providing
for a reduction in rent (such as force majeure clauses) may not on
the plain wording of the provisions be a "no access in an emergency
clause" for the purposes of the new provisions and may mean the
implied covenants must be read into the lease.
The implied term applies only to the extent that no
pre-commencement rent variation agreement has been made. A
pre-commencement rent variation agreement is:
- any agreement made about the rent payable during the affected
period
- which is made before the commencement of the clause
- and is made because there is an epidemic and the Lessee has
restrictions on occupation of the premises for reasons of health or
safety
The intention seems to be to ensure any agreement that was in
place before the commencement of the clause, relating to rent
payable during this Covid-19 lockdown period, will not be undone by
the new implied provision. However it is unclear as to whether or
not a pre-commencement rent agreement includes any agreement made
in a lease in place prior to the commencement of the clause, such
as a clause where the lessee agrees to pay full rent during
lockdown periods. The provision refers only to having reached
agreement about "what rent is payable by the lessee", and does not
require expressly any "reduction" of a fair proportion or similar.
This is one of a number of issues with the drafting of the bill
that we consider may give rise to further disputes, and not just
about the amount of rent payable.
Contracting out
For leases made or agreed to before the start of the affected
period (18 August 2021), an exclusion of the implied term must be
by express reference to the (new) implied covenant, not a general
exclusion of all Schedule 3 implied terms, which many leases
contain. For leases made after 18 August 2021 it is possible to
contract out by agreement, but it will be important to get the
wording right.
The Property
Team at Martelli McKegg has significant leasing experience,
with a particular focus on retail. Over the last 18 months our team
has represented both landlords and tenants from numerous shopping
centres and privately owned properties in the negotiation and
preparation of agreements for COVID-19 rent relief. If you need
assistance or advice regarding your commercial lease and how these
changes will affect you, contact our team today.
Contacts:
Vanessa
Dew
Andrea White
Phil
Blank
Vina
Singh