Who's eligible for the Government's new $40m commercial rents disputes package

Thursday, 4 June 2020

Many businesses, especially in retail, have called on Government to help over rents disputes with landlords during lockdown.

The Government has brought in a new $40 million package of measures to get landlords and tenants to the negotiating table over rent disputes caused by Covid-19.

The Government is intervening in the commercial property marketing saying it will insert a temporary amendment to the Property Law Act requiring a fair reduction in rent where a business has suffered a loss of revenue during the Covid-19 lockdown.

Many businesses, especially in retailing, have been calling on and waiting for Government help over rent disputes while in lockdown when they had little or no access to their premises for two months.

The amendment would be 'implied' in certain commercial leases and the Government package would provide guidance on applying the clause about a ‘fair proportion’ of rent reduction.

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The $40m will be used to subsidise the costs of compulsory arbitration for landlords and tenants who cannot reach agreement over rent relief themselves.

Leonie Freeman, chief executive of the Property Council, says the majority of office and industrial property landlords and tenants have reached agreement over rents during lockdown.

Justice Minister Andrew Little said it would ensure that businesses that suffered as a result of Covid-19 got help to resolve disputes over commercial rents. The burdens resulting from Covid-19 should be shared fairly between landlord and tenant,

Who is eligible to use this package?

Businesses with 20 or less full-time staff at each leased site are eligible and the business must be New Zealand-based. They cannot have already agreed a rent reduction with the landlord.

The Property Council of New Zealand chief executive Leonie Freeman said 20 full-time employees per leased site would include big businesses and almost every retail premises in New Zealand when the council thought the Government's intention was to help small businesses struggling to pay rent and small landlords burdened with mortgages and rates.

A lot of detail about how the initiative would work was missing, she said.

She thought the government meant small business with not more than 20 full-time staff in total, not per site, but that needed to be clarified.

She had received many calls from small landlords 'beside themselves' over large tenants refusing to pay any rent from the beginning of the lockdown in late March. They were the landlords under pressure.

Who is not eligible?

Businesses with more than 20 full-time staff at each leased site are not eligible, nor businesses who are not New Zealand-based.

Businesses who have already reached agreement with landlords over rents during Covid-19 disruptions are not eligible either.

Freeman said the definition of New Zealand-based needed to be clarified. She said Cabinet papers released with the announcement said businesses not eligible were those that had already agreed on rent abatement with their landlord. But the Government's press release said ineligible businesses were those that had reached agreements in response to Covid-1 with no mention of 'abatement'.

The property council is worried tenants might try to relitigate agreements already reached.

How big is the subsidy for arbitration?

The Government said it would provide a subsidy of up to $6000 per arbitration, which would cover about 75 per cent of the cost. That implies the total cost of arbitration would be about $8000.

Retail NZ chief executive Greg Harford estimates about 10,000 retailers are in disputes over rent with landlords.

It will provide $40m to help pay for the cost of arbitration. At $6000 per arbitration the $40m would cover 6,666 arbitrations.

Freeman said she would be surprised if the cost of arbitration could be kept to $8000. It was a complex process and commercial leases were complicated documents. It would require legal representation and written submissions.

Chief executive of Retail NZ, Greg Harford, said he hoped the temporary amendment to the Property Law Act would persuade tenants and landlords to get back to the negotiating table and not end up in arbitration.

How widespread is the problem of rent disputes between landlord and tenant caused by Covid-19 restrictions?

It's not clear exactly how widespread it is and there are different views on this.

Tenants with 'no access' clauses during an emergency, like a pandemic, in their leases already are entitled to a reduction of a fair proportion of rent.

The 'no access'' clause is in the Auckland District Law Society Deed of Lease which is commonly used. However, it is unlikely to be part of retailers' leases as shopping centres have their own lease forms.

Greg Harford said the number of disputes between landlord and tenant were significant.

He estimates that 30 per cent of the roughly 35,000 retail tenancies in New Zealand - around 10,000 - are embroiled in an unresolved rent dispute since the onset of lockdown restrictions on businesses and residents to prevent the spread of Covid-19.

The New Zealand Council of Retail Property (NZCoRP) polled its members, large mall and large format store owners, in April, and found that over 75 per cent of their 5000 retail tenants had been offered some sort of rental assistance.

But less than half of all tenants had accepted the offers made by landlords for rental assistance, with many indicating they were waiting to see if the Government would offer some help, particularly for smaller to medium-sized businesses.

More than 50 per cent of tenants had not paid a cent under their lease in April, and early indications showed that was likely to continue into May, the council of retail property said.

But Leonie Freeman said from the feedback provided by property council members the vast majority of landlords and tenants had resolved the rent issues.

Probably 80 per cent of commercial and industrial landlords and tenants had come to some agreement.

In retail about 75 per cent of tenants, the council understood, had been made offers of some assistance and about half had accepted.

'A lot of people have been trying to get on and sort this out and do the right thing,' Freeman said.

Will it solve the problem of unresolved rent disputes?

Greg Harford said the Government's proposal was a good start.

'It sets some clear expectations around the need for fair and proportionate rent relief and it creates a clear avenue with funding support for managing anything that can't be resolved.'

'I think the big issue with it is actually the way it has been restricted to very small businesses.

'The issues relevant here are about cashflow and survivability, and they are equally applicable to medium and large retail businesses as well as small ones.'

'We would like to see the support be extended to all tenants.'

Freeman said the proposal was very late and the majority of landlords and tenants had resolved rent disputes.

'But I think perhaps for a small tenant or a small landlord where they haven't been able to resolve it, and I think there's only a small numbers of these, this could be helpful.

'Because if you're a small landlord and you've got a big Australian international retailer in your shop, and they've paid no rent since lockdown, and I know some of those have been really stressed out, to my mind this might help them provide a way to get it resolved.'