Concerns over commercial rent dispute plan

Covid-19 has hit the commercial property sector hard, with many landlords and tenants struggling to come to agreement over rent issues.

There have been calls for government assistance of some sort since alert level four lockdown began back in March.

But it wasn’t until Thursday that Justice Minister Andrew Little announced its plan to get those landlords and tenants who haven’t yet come to an arrangement back to the negotiating table.

Little says he is concerned that some landlords and tenants are not coming together to make agreements that reflect the seriousness and uniqueness of Covid-19.

That includes behaviour where large commercial tenants refuse to pay rent, and landlords demanding rent from small retailers who haven’t been able to operate, he says.

“What is required is fairness between commercial tenants and their landlords. That is why the Government is moving to ensure there is appropriate rent relief, with the burden shared by landlords, tenants, and the Crown.”

To that end, the Government has temporarily amended the Property Law Act. It will insert a clause in commercial leases which requires a fair reduction in rent where a business has suffered a loss of revenue due to Covid-19.

Additionally, $40 million will be invested in subsidising the costs of compulsory arbitration between small or medium businesses and landlords who are unable to reach agreement on a fair rent.

Little says the package provides a way of helping businesses that are facing a severe loss of revenue, through no fault of their own and will provide them with some certainty around commercial rent agreements.

“The package provides for flexibility of outcomes and will provide a subsidy of up to $6,000 per arbitration. This means, in many cases, the Crown will cover about 75% of the arbitration cost.”

To be eligible businesses will need to have 20 or fewer full-time staff at each leased site and be New Zealand based. But businesses who have already reached an agreement with their landlords over their rent will not qualify for the package.

Little says the changes take effect immediately and he encourages businesses and landlords to work towards reaching a fair agreement on the payment of rent.

However, the Government’s plan has not been met with unbridled enthusiasm from commercial landlords’ representatives.

Property Council chief executive Leonie Freeman says the new rent dispute resolution process is too little, too late for a majority of landlords and tenants.

“Our members tell us that over 80% of landlords and tenants have come to an agreement over rent relief, making this proposal largely redundant.

“While the arbitration component may be helpful for those who have not concluded negotiations, in reality this decision has taken far too long and has had little (if any) industry consultation.”

Further, details of the plan – such as whether it includes large businesses who have multiple sites with less than 20 full time employees are included - need to be clarified.

Freeman says while the goal to support small businesses is understandable, the plan fails to actually target them as what they really need are cash, time and certainty.

“While it offers a path to arbitration for those who need it, we still believe that a straight rent relief package such as the one we presented to government in early April would have had greater affect.

“We hope that landlords and tenants now have the certainty needed to settle any remaining negotiations and move on to recovery mode.”

The New Zealand Council of Retail Property (NZCoRP) goes further. It has voiced its concerns over the Government’s proposal to intervene in the industries contractual relationships.

Chair Campbell Barbour says they are not aware of any other industry sector where the Government has decided to alter contracts between commercial parties.

“To legislate to retrospectively alter contractual provisions in this way is unchartered territory in New Zealand. The sanctity of commercial contracts is a cornerstone of our country’s legal system.”

He says the industry has largely got on with the job of coming to individually negotiated positions over recent months, with a recent survey showing that 75% of its members’ tenants had been offered assistance in some form.

“We are concerned the industry now faces a protracted government imposed and funded arbitration process to amend commercial contracts when our collective interests should be getting back to the difficult business of retail.”

Barbour wants more clarity on definitions within the plan and says the NZCoRP’s door is open to government with regards to refining it.

“Our members implore the Government to work with the property sector to ensure the legislation will achieve its intended purpose and target small businesses.”

One part of the plan that representatives of commercial landlords are particularly keen to have clarified is how long the new clause will be in effect.

In the Cabinet paper released with the announcement, Little says that he hopes for some flexibility around when the new clause comes to an end. But he proposes that it should apply for six months after the enactment of the amendment Bill.

Read more:

Govt considers commercial rent relief solutions 

Elephant in the room at level two