How are commercial leases and mortgages affected by the response to COVID-19?
For commercial leases, the restrictions of the COVID-19 Alert Levels, especially Levels 3 and 4, meant that:
Under Alert Levels 1 and 2, some of these challenges are likely to continue to some extent. For example, many businesses may have to remain closed, take some time to re-establish their business or may not be allowed to provide the full range of their services (for example businesses catering for large conferences or other gatherings).
What are the law changes to support commercial landlords, tenants, lenders and borrowers?
On 16 May 2020, a temporary law change was made giving commercial tenants more time to catch up on overdue rent before a landlord can take steps to evict them. The Act made changes the Property Law Act 2007.
Under the Property Law Act, generally a commercial landlord can cancel a lease where a tenant fails to pay rent if:
Under the changes, the notice period is extended from 10 working days to 30 working days. This means commercial tenants have more time to catch up with rent payments before the tenant can be evicted. If the tenant is not able to catch up, the tenant has more time to approach the landlord to negotiate temporary changes to the rent or lease agreement to help the tenant get by until it can resume operating as usual.
What about the landlord’s mortgage payments?
To assist commercial landlords and others with mortgages, the law change also extends the time mortgage payments must be overdue before mortgagees can take action.
The Property Law Act sets out the process for mortgagees to take action when the mortgagor is in default, such as the power of sale. These new provisions apply to any mortgage – whether residential or commercial. However, we anticipate that mortgage holidays are likely to be the first port of call for residential borrowers.
For mortgaged land, normally, the mortgagee must give 20 working days’ notice before the mortgagee can exercise its powers to take possession of, or sell, the mortgaged property. The temporary law changes extend this period to 40 working days.
This means that, like commercial tenants, mortgagors will have a better chance to get through the COVID-19 situation and temporary financial hardship. They will still have the same payment obligations but will have more time to remedy breaches or defaults.
What are the rules for mortgaged goods?
The law changes also extend the notice timeframes in the case of mortgaged goods owned by businesses. This could be a mortgaged fleet of vehicles.
For these types of mortgages, the timeframes are temporarily changed from 10 to 30 working days before the lender can take enforcement action.
When will these law changes apply?
The law changes came into force on 16 May 2020.
The changes will, however, generally apply during the whole COVID-19 period, from 1 April 2020. This retrospective application will ensure they apply to all tenants and borrowers affected by the measures taken against COVID-19.
This is a temporary change to provide relief to tenants and borrowers affected by the response to COVID-19 and allow more time for parties to discuss how they may get through this period and resume business when the Alert Level allows for it. The law will return to the current timeframes six months after the end of the Epidemic Preparedness (COVID-19) Notice 2020. The current notice expires on 25 June 2020 (unless an earlier expiry date is notified, or the notice is renewed).
What does this retrospective application mean for existing notices or cancellations?
The new law means that, even if a notice was given or a lease cancelled before the new law came into force, the new extended timeframes would generally apply and the validity of a cancellation might be subject to challenge.
From the commencement date, notices already issued that specified a shorter period than prescribed by the new rules, will be treated as specifying the new minimum period.
From the commencement date, notices issued on or after 1 April will be assessed against the new law. This means enforcement action that is inconsistent with the new notice periods is in breach of the notice requirements and the new law.
Sections 120E, 129E and 245E of the Property Law Act provide that any decisions in existing court proceedings must not be inconsistent with the new provisions. In practice, this would mean, for example, that an application for relief against cancellation of the lease would be decided in accordance with the new law.
Under the new law, third parties who have acquired an interest in the property, for example, under the Land Transfer Act 2017 or Personal Property Securities Act 1999 are protected by sections 120D(2), 129D(2) and 245D(2) of the Property Law Act.
What is the purpose of these changes?
The changes aim to support commercial landlords, tenants, and mortgagors through the COVID-19 situation. They provide relief for businesses, to help them stay solvent through the epidemic, which will help New Zealand’s economic recovery. They are part of a wider government package of business support.
More information on the broader business support measures is available on the Government’s COVID-19 website:
Do these changes apply to residential property?
The changes to the notification periods for leases under the Property Law Act 2007 apply only to commercial leases. For leases under the Residential Tenancies Act 1986, the Government has already made changes to the termination provisions:
The changes do, however, apply to all mortgages of land, whether for commercial or for residential property. The relevant provisions do not distinguish between residential and commercial land. However, there may also be other options available for residential mortgages, such as a mortgage repayment holiday:
Can commercial tenants stop paying rent or pay reduced rent if they can’t operate as usual from their premises due to the COVID-19 restrictions?
It depends on the terms of the lease. A widely used standard contract for a commercial lease is the Auckland District Law Society (ADLS) ‘Deed of Lease’ version 6. It contains a ‘no access in emergency clause’ (clause 27.5) which was included in response to the Canterbury earthquakes. This clause provides for a ‘fair proportion’ of the rent and the outgoings to be reduced temporarily while a property cannot be accessed in an emergency.
What proportion of rent is a ‘fair proportion’ under the ADLS 6th edition lease?
Clause 27.5 has not yet been interpreted by the courts. What proportion of the usual rent would be a ‘fair proportion’ depends on the individual circumstances of the commercial tenant and landlord.
It may take time for a landlord and tenant to reach agreement on what a ‘fair proportion’ of the rent is. Some landlords and tenants have agreed to an interim reduction to provide immediate relief for the tenant while allowing time for further discussion.
It’s also likely that what constitutes a ‘fair proportion’ may change over time as the Alert Level restrictions change.
ADLS has provided some guidance to lawyers about this clause available:
Another commonly used standard contract, the Property Council of New Zealand’s contract has a slightly different clause. The Property Council has provided some information on its website:
What if the tenant can’t afford the rent but the lease doesn’t provide for reduced rent in an emergency?
Many leases don’t contain a clause providing for reduced rent. Some leases are older versions from before the Canterbury earthquakes. Some tenants with these leases will also be unable to operate, or operate fully, and unable to pay their rent.
Even if there is no relevant clause, commercial landlords are encouraged to consider the tenant’s situation. It is usually in both the landlord and the tenant’s interest for the business to remain viable and able to resume operating once the Alert Level allows for it. Reaching an agreement is likely to be in both parties’ interests. Commercial landlords and tenants could consider some of the following options:
Lawyers are encouraged to help their landlord clients consider the position the tenant is in and the landlords’ interest in the tenant remaining viable. Equally, they should take the landlord’s position into account if they are advising tenants. When advising your client, you should consider that the measures being taken against COVID-19 and the requirements of particular Alert Levels are neither a landlord’s, nor a tenant’s, fault.
What if a commercial landlord and tenant can’t reach an agreement?
This will depend on the terms of the lease in question. For example, if the lease is the ADLS 6th edition lease, then the parties should endeavour to reach agreement by negotiation or, if they agree, by mediation. Failing this, the lease requires the matter to be determined by arbitration. However, no matter what form of lease, the parties should be encouraged to work together constructively to find a solution which is sustainable and will meet all their needs and interests. Lawyers and real estate professionals should support their clients to find this solution.
Some contracts might contain mediation or arbitration clauses. These generally apply only where the parties are in dispute as to a term of the lease. This means they will not apply, for example, where the tenant is seeking a rent abatement from the landlord but the landlord is not legally obliged to grant one under the terms of the lease.
What can you do if your client or the other party refuses to discuss new arrangements?
Most businesses can reach agreements that take into account these extraordinary circumstances and lawyers have a crucial role in supporting this. Lawyers should make sure their client is aware first of their legal position, but also of the position the other business is in.
Lawyers can provide their best advice and support to their clients but cannot prevent people from insisting on strictly enforcing their contractual rights. Where this happens, and no agreement can be reached, this could lead to legal proceedings which can be costly, unpredictable, and in current circumstances have the potential to be significantly delayed. Lawyers are encouraged to make sure their clients are aware of the risks if the parties can’t agree.
Where can I find more information?
The Law Society regularly publishes information on the impacts of COVID-19 on its website:
Information on the Government's COVID-19 economic package and business support is available on Treasury’s website and the Government’s COVID-19 website:
The Ministry of Business, Innovation and Employment (MBIE) and the Ministry of Housing and Urban Development (HUD) have information on residential tenancies:
ADLS has provided some guidance to lawyers about clause 27.5 of the ADLS 6th edition lease:
The Property Council of New Zealand has provided some information on rent payments during the lockdown:
COVID-19 response level measures apply to all of us
The purpose of the response to COVID-19 is to save lives. Everybody needs to stick to the rules of physical distancing and only operate businesses to the extent this is allowed under the applicable Alert Level.
Across the world, millions of businesses are affected in one way or other by COVID-19. Be kind, cooperate and try to find a good way forward which works for both parties considering these unprecedented circumstances.
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