Covid 19 Delta outbreak: Commercial rent relief changes based on anecdotal discussions with lawyers

Justice Minister Kris Faafoi announced changes to the Property Law Act which go much further than Labour's attempts to facilitate commercial rent relief in 2020. Photo / Mark Mitchell

A move to push landlords to give rent relief to businesses unable to access their premises was based on "anecdotal evidence from discussions and correspondence with lawyers", Justice Minister Kris Faafoi says.

On Wednesday Faafoi announced the Government would "insert a clause into commercial leases requiring a 'fair proportion' of rent to be paid where a tenant has been unable to fully conduct their business in their premises due to the Covid-19 restrictions".

The move caught both the property industry and retail and hospitality groups completely unaware. A letter Faafoi sent Retail NZ just a few days before the changes gave no indication the move was in train.

In a statement Faafoi said the Covid-19 Ministerial Group - of which he is not a member - agreed to the proposals on Thursday September 9, 2021.

"Cabinet agreed to further amendments when it approved introduction of the resultant Bill on Monday 27 September 2021."

He did not say why the plans were not announced or signalled, but claimed issues related to commercial leases had "arisen again more acutely due to the longer periods of higher alert-level restrictions currently being experienced".

Property groups have claimed the abrupt move undermines the sanctity of contract law, while some lawyers have privately said the legislation put before the house appears rushed.

Faafoi said the Government's understanding of the issue "is based on anecdotal evidence from discussions and correspondence with lawyers, including members of the Auckland District Law Society and the New Zealand Law Society, and correspondence from hospitality and retail representative groups," Faafoi said.

"There has also been a range of correspondence from other types of small businesses across the country about their experiences."

Faafoi said many landlords had struck deals with their tenants, but some had not.

"Where there are lessees who have been unable to operate due to the restrictions and have no legal ground on which to negotiate their rent obligations, the changes confirmed this week offer a way for parties to reach a solution, either mutually or through mediation or arbitration."

Consultation by the Ministry of Justice had been "limited", with officials meeting New Zealand Law Society's Property Law Section twice in September to discuss the issues related to commercial leases, then again to discuss drafting.

In 2020 Labour attempted to pass legislation to insert an implied clause to lay conditions for rent negotiations for tenants that did not have existing clauses or had reached settlements voluntarily. Faafoi described the latest moves as "similar".

However, this year's proposals include no eligibility criteria, whereas last year the tenant or the landlord was a small to medium New Zealand-based business that had no more than 20 full-time equivalent staff.

There is also no criteria around how to assess what a "fair proportion" amounts to.

Lawyers have warned that the lack of guidance is likely to lead to arguments.

In a note to clients, Bell Gully partners Jane Holland and David Chisnall said it was "surprising that the Government has not taken the opportunity to give more guidance as to what is meant by a 'fair' reduction in rent and outgoings, given the number of disputes that have arisen under similar clauses in existing leases".

Property Council New Zealand chief executive Leonie Freeman said there was an obvious lack of consultation with landlords.

"The proposal completely misunderstands the intricacies of commercial leases and shows a failure to grasp standard business practice," Freeman said.

"The proposed changes create a huge amount of ambiguity and uncertainty, with the highly subjective wording of a 'fair proportion' meaning the only people to benefit from the proposed change would be the lawyers. This lack of clarity means many small business tenants or landlords will not see the intended benefits."

Freeman said she understood the Government consulted with the Auckland District Law Society because they have the industry-standard commercial lease.

"However, Property Council New Zealand hold the industry standard leases for retail and industrial yet we were not consulted. Why did the Government choose to engage with one holder of an industry-standard lease, but not the other? As yet, we have no answer."

The Property Council's submission on the Covid-19 Response (Management Measures) Legislation Bill calls for eligibility criteria to ensure tenants are assessed against need and vulnerability, suggesting New Zealand owned businesses with turnover or staff number limits.

Describing the legislation as "ambiguous and vague", Freeman said allowing all businesses to potentially qualify could lead to some vulnerable businesses receive less relief as landlords were forced to give a "fair" reduction to all qualifying businesses.

"Without clarification of what 'fair' means, this legislation merely puts the entire sector back at square one."