Landlords will be required to give rent relief

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The real estate industry has spoken out against proposed changes to commercial leases, saying it is not targeting the most needy troubled tenants.

The government has proposed to amend the 2007 Property Law by inserting a clause in commercial leases.

“The proposal notes that when there is an epidemic and the tenant is unable to access all or part of their rented premises for health and safety reasons, the landlord and tenant must negotiate a “fair proportion” of a reduction in rent and expenses, ”says Colliers.

“The proposal indicates that this could take place from September 28 and be applied for the period of the epidemic, which in this case runs until December 19, 2021, which could potentially be extended.”

The Property Council New Zealand fears the changes will have unintended consequences that hurt both tenants and landlords.

Chief Executive Officer Leonie Freeman says the proposal as drafted has significant and widespread application beyond intended beneficiaries, amending
all commercial leases, the vast majority of which are not those to which the legislation is intended to help.

“In many cases, the businesses that will benefit have much greater financial strength than the owners that will be affected.

“The proposal as currently drafted, with its broad application to commercial leases, would allow major Australian banks to claim rental relief from their New Zealand landlords, despite pandemic restrictions having little or no impact on profitability. of these banks. “

The Property Council New Zealand is calling for proposed legislation to be changed to support businesses that need it most. They recommend these key changes:

  • Legislate on a simple two-step eligibility test to target support to vulnerable tenants:
    • “Who can get it” – including meeting criteria such as being a New Zealand-owned business; an SME (for example with less than 20 employees or with an annual turnover of less than $ 25 million for example); and eligibility for the wage subsidy showing economic loss over a period;
    • “What is” fair share of rent “- a set of considerations including an economic loss test, the impact of online sales and” click and collect “, the ability of a business to operate at distance and taking into account the potential for a rebound in sales once the physical premises reopen over a defined period of time.
  • Limit the clause to alert levels four and three only
  • Provide more financial assistance to vulnerable businesses that are not eligible for other government assistance to increase liquidity.

Freeman also points out that the market has already risen to the challenge of COVID, supporting vulnerable tenants and negotiating fairly as we ride this wave of change.

Study shows that some of New Zealand’s largest real estate owners have subsidized Kiwi businesses to the tune of more than $ 320 million during COVID-19 shutdowns. Freeman says the data provides evidence of the real estate industry’s willingness to share the burden of the pandemic.

“We understand the pain felt by the retail and hospitality sectors in particular, and we accept the intention of the proposal is that these sectors receive fair rental relief from their owners. Our members have proactively shared this pain by offering rent relief to these areas. “

Freeman says this legislation could see vulnerable tenants who previously received 100% rent relief receive less, as the landlord will have to provide “fairly” for all rentals.

“We believe that if the government had taken its time and followed a more comprehensive process which included consulting with parties such as Retail NZ, Business NZ, Hospitality NZ and the Property Council, we could have come up with a viable solution that ensures the most great need to receive the most support.

In a letter to the Prime Minister, signed by 24 of New Zealand’s top property owners, managers and developers, Freeman calls the right to freely negotiate lease terms as “a fundamental and essential part of our business and social license” and raises concerns about the lack of government consultation leading to the proposed change.

“Landlords and tenants across the country have negotiated in good faith with each other to make deals that work for their specific arrangement and lease,” says Freeman.

“The decision to impose a no-deal clause only serves to jeopardize the goodwill that landlords and tenants have created.

The Property Council New Zealand also sees a number of very serious unintended consequences resulting from the decision to deploy a holistic approach to what is a very nuanced and individualized contractual environment.

“The most obvious problem is how to interpret what is meant by ‘fair’ between two parties,” says Freeman.

“This interpretation will result in a long and costly process, which neither the tenant nor the landlord can afford. “

Hasn’t this already happened?

Colliers notes that the government sought to introduce a similar, albeit different, amendment in June 2020. It did not happen, apparently because of the coalition government of the day, with Winston Peters calling it a poorly targeted policy.

Additionally, many, but not all, landlords and tenants had or were already negotiating given that it was finally offered in June after the country entered its first Level 4 alert lockdown in March 2020, ”Colliers said.

So what are the differences this time around?

Aside from there being no coalition government this time around, Colliers points out other differences:

  • there has been a considerable period of time in place regardless of alert levels
  • there is no restriction on the size of the company, previously there were 20 full-time employees or less in the rented premises
  • government apparently leaves it to landlord and tenant to agree on what is “just the right amount”
  • suggested that if the “equitable proportion” is not determinable, the parties seek mediation or arbitration
  • the parties could agree that the clause does not apply
  • would only apply to leases that do not already include adjusted rent payment terms in the event of an epidemic emergency.

What is an “equitable proportion”?

Colliers notes that there were indications of what constituted a “fair proportion” in last year’s proposal:

  • given the income levels of the tenants lost during the period in which the company was unable to fully negotiate
  • any mortgage obligations of the owner
  • the profitability of previous years of both parties
  • any financial assistance provided
  • the ability of both parties to survive financially
  • and any other relevant factor.

The government also provided $ 40 million to access dispute resolution services, which are now complete.

Doesn’t clause 27.5 of the ADLS lease cover this anyway?

Since many agreements use an ADLS lease, which has the 27.5 “no-access clause”, Colliers points out that this could be considered a rent adjustment clause anyway.

Additionally, there will already be many current agreements in place that will potentially replace this proposal, which comes a year and a half after Covid-19 was officially declared a global pandemic by the World Health Organization.

So what now?

“The proposal has yet to go to the select committee, and there is a lot of lobbying going on given the implications of changing existing legal contracts, so some changes may still occur,” said Colliers.

“It would be fair to say that there are apparently a few shortcomings, potentially leaving a lot of people to think that the proposal is not of real help to landlords or tenants.

“With strict blockages (fingers crossed) already behind us, many will have negotiated a way forward a long time ago, so it will be less relevant.

“No indication of what a ‘fair proportion’ represents really helps, especially those who are already in dispute.

Perhaps the best way forward is to focus on how New Zealand safely and effectively emerges from current Covid-19 restrictions, so that the clause does not need to be enacted. “

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