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These guidelines are to help commercial landlords and tenants agree to a ‘fair proportion’ of rent to deduct under the changes to the Property Law Act 2007.
They may help parties who are trying to quickly negotiate and agree to the rent themselves without going through a formal dispute resolution process.
Every lease is different, whether for retail, commercial, industrial, or a hospitality business. The parties will need to agree what is a ‘fair proportion’ for their specific situation.
The purpose of the legislation is to help tenants with their loss of income and for landlords and tenants to share the cost of the COVID-19 disruptions so that the tenant’s business remains viable.
The guidelines aim to only assist parties agreeing on what is a ‘fair proportion’ under the law changes. They may not be relevant for other rent reduction clauses in leases (for example, those which do not expressly direct the parties to consider the tenant’s loss of income).
Please note these guidelines have no legal force. If unsure, landlords and tenants should obtain their own legal advice.
‘Rent’ is defined in the legislation to include outgoings (things like rates and rubbish collection).
The fair proportion relates equally to rent and outgoings (in other words, both will be reduced by the same proportion). This is fairer for all tenants regardless of whether they have a net or gross lease.
The COVID-19 restrictions on a tenant’s business (and therefore their ability to earn an income from their leased premises) may change a number of times during the affected rental period. This means the rent reduction may also change at each different level of COVID-19 restrictions.
The rental period for which a tenant may be eligible for a reduced rent started on 18 August 2021. To be eligible the tenant must be unable to gain access to part or all of their leased premises in order to fully operate for health or safety reasons related to the COVID-19 epidemic.
Access may include access by staff, contractors, suppliers, customers and other invitees. For example, if a tenant can access their business but can’t operate fully because of COVID-19 restrictions, a rent reduction may still apply. Conversely, some businesses with larger premises may still be able to operate fully while providing for physical distancing.
Businesses that are essential businesses and have been able to access their premises throughout the COVID-19 restrictions (like supermarkets and chemists), are unlikely to qualify for a rent reduction under the law changes.
The period for a rent reduction ends when the tenant can access the premises to fully operate their business. This may be different for different tenants, depending on the impact that the COVID-19 restrictions have on their business operations.
Under the law changes the parties must consider the tenant’s loss of income in determining the fair proportion. This means a tenant can’t expect a rent reduction unless they lost income as a result of the restrictions on access to their premises. One example where a tenant may not expect a rent reduction is where the tenant has lost no income because they can operate their business from home.
A very simple starting point in assessing a ‘fair proportion’ of rent could be to take the percentage of loss of income and apply that percentage to the rent.
A rent reduction only applies where a reduction in a tenant’s ability to generate income, or their profitability, is directly connected to being unable to access the premises.
For example, a tenant may be able to access their premises but have no customers due to border closures, other COVID-19 restrictions or reduced foot traffic. Conversely, a tenant may be unable to access their premises, but may still be able to operate remotely and have no loss of income. In such cases a tenant may not expect a rent reduction.
A tenant may not expect a rent reduction if the tenant is losing income because they can't access premises other than those in the lease under which they operate their business; for example, a cleaning business that can't access their customers' premises.
If the tenant’s business operates from more than one site, only the premises to which the lease applies should be taken into account. If the tenant does not separately allocate income generated from any particular site it will be more difficult to show that being unable to access the premises has impacted their income.
The tenant’s overall financial position (as mentioned below) may also be a relevant consideration. For example, a ‘fair proportion’ of rent may be greater for a tenant that is facing financial collapse compared to a tenant for whom the premises form only part of their wider operations and who is therefore in a stronger financial position.
Only the tenant's loss of income during the relevant period (when access is limited and they can't operate fully) is considered. Any resurgence in sales that the tenant may experience after the restrictions have changed or been removed is not relevant to the 'fair proportion' of rent for the earlier period.
There could be several different periods to use to assess how much income the tenant has lost. The 3 months immediately prior to 18 August 2021 could be a realistic period to benchmark the tenant’s pre-lockdown income levels. The majority of New Zealand was at Alert Level 1 during that period.
Other periods to calculate the loss of income may be more relevant for other types of businesses. For example, seasonal businesses could refer to periods in previous years, corresponding to the affected period, as a fair comparison.
The tenant will need to give the landlord reasonable evidence of their loss of income. Information shared between the parties should be kept confidential to them, except for when they need to disclose the information to their respective professional advisors (like a lawyer).
The loss of income shown should be based on the tenant’s normal operations that were being performed during the appropriate benchmark period. For example, if a tenant leased premises for a restaurant but the restaurant had closed down and the premises were empty prior to lockdown, the tenant may not use the income levels from when the restaurant was open. Similarly, if a tenant had ceased operating temporarily before the restrictions were imposed (for example, to refurbish), then it may not use the income levels prior to ceasing its operations.
The parties are expected to have tried to reduce their losses during the affected rental period (in other words, the parties have done what they reasonably can to minimise costs and their loss of income).
For example, if a tenant could generate sales via click and collect, door sales or online sales, but chose not to, then this may be taken into account in determining a fair proportion.
Depending on which party manages outgoings for the property, the relevant party may be expected to have made reasonable efforts to cut back the consumption of outgoings, where practical.
For example, a landlord of a large building complex could limit lighting, air-conditioning, cleaners, or security guards to match reduced foot traffic. Many leases already require the landlord to only incur outgoings if it is reasonable and proper to do so. Landlords and tenants should check their leases in relation to this.
While the tenant’s loss of income is the guiding factor in determining a fair proportion of reduced rent, the parties may also consider other relevant factors.
For example, the landlord may be in a strong financial position. Their only commitments in relation to the tenancy could be the outgoings of the leased property. In that case, a greater reduction of rent could be justified, than would be the case if the landlord had substantial financial commitments under its funding arrangements for the property.
Another factor could be the tenant’s overall financial position. Any COVID-19 Resurgence Support Payment received by the tenant during the period may be relevant to the assessment of a fair proportion.