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The Government has made amendments to the Property Law Act 2007 to provide a rent adjustment mechanism for commercial leases that don’t already include any similar provision that covers the impacts of COVID-19 restrictions.
The law change inserts a clause into some commercial leases requiring that, where a tenant has been unable to fully conduct their business in their premises due to COVID-19 restrictions, a fair proportion of rent won’t have to be paid.
The inserted clause is clause 4A, Schedule 3 of the Property Law Act.
If the parties cannot agree on new rent arrangements, they will need to settle their dispute through arbitration. Arbitration won’t preclude parties from pursuing other dispute resolution mechanisms, such as mediation, in the first instance if both parties agree.
Many commercial leases already contain a clause requiring an adjustment of the rent in the case of an emergency. For example, one standard lease commonly used in the commercial sector provides for a ‘fair proportion’ of the rent and outgoings cease to be paid temporarily where a property cannot be accessed in an emergency. However, some leases do not contain such a clause. This means tenants would usually be required to pay full rent, even if they cannot legally access or use the premises, unless they can come to an agreement with the landlord.
These changes aim to ensure that landlords and tenants come to fair and reasonable agreements about rent obligations that reflect the uniqueness of the current situation. This will help more businesses get through the COVID-19 epidemic and continue to operate.
The clause applies to all commercial leases unless there is already a similar clause in the lease to cover non-access in an epidemic, or an agreement to vary the rent has already been made by the lessor and lessee for the period when access was, or is being, impacted by the restrictions. Parties to the lease can agree to opt out of the clause and establish their own arrangements.
A fair proportion is one that reflects that both parties share the financial burden of the impacts of the COVID-19 restrictions. This assessment is designed to be flexible enough to be applied in the range of circumstances that tenants and landlords find themselves in under the COVID-19 restrictions.
The parties would need to agree among themselves what a ‘fair proportion’ is for their specific situation. The law specifically provides that to determine the fair proportion of the rent, the parties must consider any loss of income experienced by the tenant during the time when access to the premises was affected by the epidemic restrictions. Other factors are also likely to be relevant to assessing what is fair; these are not excluded by the clause.
It is preferable that the parties discuss amended rent arrangements. This will be the fastest and least costly way to find a mutually acceptable agreement. This approach will also allow the parties to find solutions beyond a simple rent adjustment; for example, a flexible approach that takes specific COVID-19 restrictions into account, or a payment plan for outstanding rent.
The Ministry has developed guidelines to assist parties to agree a ‘fair proportion’ of rent, which can be found at:
The parties should consider seeking legal advice on negotiating the fair proportion of rent, or on the specific terms of their proposed agreement.
The parties also can agree to use a dispute resolution mechanism, such as mediation, to come to an agreement.
If parties cannot agree, the law change requires them to seek arbitration to resolve a dispute about the implied clause, unless they agree to an alternative dispute resolution process such as mediation.
Arbitration is a private dispute resolution process commonly used for commercial lease disputes. The process can be faster and cheaper than court proceedings. The parties can benefit from arbitrators with experience and expertise specifically for the type of dispute in question.
You do not have to be represented by a lawyer for arbitration; however, we recommend you talk with your lawyer about the arbitration process.
The law change takes effect from 3 November 2021, but the implied clause applies retrospectively from 18 August 2021. This means it applies from the start of the most recent COVID-19 restrictions in response to the Delta outbreak of COVID-19.
The implied clause ceases to apply once the Epidemic Preparedness (COVID-19) Notice 2020 is no longer in force. The principal notice was issued under the Epidemic Preparedness Act 2006 by the Prime Minister on 24 March 2020 and has been regularly renewed since then. The notice will expire on 19 December 2021, unless the Prime Minister cancels it on an earlier date. However, it is expected that the notice will stay in place for some time while the response to the COVID-19 epidemic continues to be required.
The main contact for parties having issues with commercial leases or mortgages should be their lawyers.
Commercial landlords and tenants can also ask their real estate professionals, such as real estate agents or property managers, for support when discussing new arrangements.
The Real Estate Authority is the regulator for agents facilitating commercial leases:
Real Estate Authority website(external link)
Law Society latest news(external link)
Information on the Government’s COVID-19 economic package and business support is available on the Government’s COVID-19 website:
Government COVID-19 website(external link)
Tenancy Services has information on residential tenancies: