Proact Series: Implied Lease Clauses articles

Proact: Implied Lease Clauses

What is proposed?

One of the most discussed topics we’ve seen since the introduction of the COVID-19 Alert levels, at least amongst business owners, commercial property owners and commercial lawyers, is that of apportionment of rent. For those who prefer to speak more clearly, should a tenant pay rent when they can’t legally use the premises for the purpose it is rented. Putting it another way, should a landlord be able to charge rent when they can’t legally provide a premises for the use detailed in the lease.

Some firms have taken the approach that 50% is “fair”, even though the law has never been about what is “fair”. Instead, we’ve taken a contractual interpretation approach, and had a lot of success for our clients gaining large discounts, based on several elements. Our previous article on this can be read here.

Today, the government has announced a temporary change to the Property Law Act 2007. This would introduce an implied term that would amount to, according to MP Andrew Little, a “fair proportion”. Any disputes would then be handled by arbitration which the government would help fund. It isn’t clear yet what the requirements to fall under this scheme will be apart from having 20 or fewer staff at each site, and to be New Zealand-based. According to Mr Little it “will insert a clause in commercial leases requiring a fair reduction in rent where a business has suffered a loss of revenue because of COVID-19”.

Businesses who have already come to an arrangement with their landlord will not qualify, even if the new implied clause would provide further benefit. It would also look at the loss in revenue to the tenant.

Issues

We see several issues with this.

Firstly, tenants and landlords who have been proactive won’t be included. A tenant may not have been in a financial position to fight the landlord, and had agreed to a lesser discount than they should have deserved. In other words, they will miss out for being ProActive. Tenants who did nothing will receive the benefit, effectively punishing those who were doing their best to operate their business to the benefit of shareholders and creditors.

Secondly, we don’t believe it should matter about the loss of revenue. A business that had a lease, but had little turnover as it was a new business, would still have the same rental outgoings for the same property as an established business. The established company may have a greater ability to sustain themselves during the period, especially as they would be able to borrow money more readily as they will have a financial history. Their costs could be exactly the same but, when looking at change in revenue, the established company would get a greater benefit. We believe that apportionment should be based on the landlord’s inability to provide a premises for the business purpose, not on how a business has been impacted. Being based on turnover would also require the tenant to provide what could be confidential financial records to the landlord.

Many landlords and tenants have already agreed to how they are going to handle this period. In most cases they have been reasonable, and legal involvement often isn’t required. We believe that the government’s approach, on what details have been provided so far, take the wrong approach in determining harm, and shouldn’t exclude those who were proactive. It shouldn’t be the government’s job to run people’s businesses for them, and to get involved in contracts. This legislation appears to be a step in that direction.