Changes to the Property Law Act 2007 following the enactment of the COVID-19 Response (Management Measures) Legislation Act 2021

By Vanessa Dew and Andrea White - 7 Nov 2021

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:

1. there is an emergency and
2. 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