Arbitrating Commercial Lease Disputes: Government’s Proposal

On 4 June 2020, the Government announced that they will “legislate to ensure businesses that suffered as a result of the COVID-19 response will get help to resolve disputes over commercial rent issues”.

At a glance

  • The proposed changes announced 4 June 2020 cover commercial lease disputes that have yet to be resolved.   The details of the law has yet to pass Parliament.
  • Commercial property owners are now required to negotiate rent reductions with tenants that have suffered a loss of revenue due to COVID-19.
  • It does not matter whether your lease has cl 27.5 or not as that clause is now implied to all leases (that meet eligibility criteria).
  • The Government will provide a $6000 subsidy per arbitration, which is expected to cover about 75% of the arbitration cost (at least one party to the dispute has to be SME receiving Wage Subsidy).
  • It only applies to New Zealand-based businesses that have 20 or fewer full-time staff at each leased site.  It will not apply to businesses that have an overseas head office or are part of an overseas-based multi-national.
  • The change will apply from 4 June 2020 until six months after legislation is passed.

The package

  • implying a clause into the commercial leases of businesses that meet eligibility criteria, similar to the “No Access in Emergency” clause, which would require that a fair proportion of rent and outgoings cease to be paid.
  • providing statutory direction on how the implied clause is to be interpreted, including the factors that would need to be considered in setting the reduced rent. This would avoid the disputes that are happening now when applying the “No Access in Emergency” clause.
  • requiring that disputes about the implied clause be settled through a compulsory arbitration process.
  • supporting parties to access arbitration in a timely and cost-effective manner through a Government subsidy provided for streamlined arbitrations.

Eligibility limited to SMEs that:

  • have [20] or fewer full-time equivalent staff; [NOTE this cap may change]
  • are New Zealand based (to be defined). Businesses that have an overseas head office or are part of an overseas based multi-national would not have the term implied into their leases.

Key aspects

Exact wording to be finalised but “there is, or has been a material negative impact on the tenant’s business due to COVID-19, whether or not the lessee is able to access the premises”.

The parties are to negotiate a fair proportion of rent and outgoings that would cease to be paid. Parties could consider whether, in the circumstances, it was most appropriate for this to take the form of:

  • no rent being payable for a period; or
  • reduced rent being payable for a period, including reductions of varying levels over successive periods; or
  • a scheduled rent increase being deferred; or
  • rent continues to be paid unabated; or
  • a mix of any of these options.

Rent deferment may be an option, if it is fair in the circumstances.

NOTE: It appears that arbitration is with regards to fair proportion.  It will not make specific options compulsory.

Proposed list of factors

Main criteria in deciding fair proportion are he financial position of the lessor, the lessee, and any other relevant party, including:

  • the impact of the COVID-19 restrictions on the business, including the impact of restrictions that are no longer in place
  • any mortgage obligations relevant to the leased premises
  • any financial support available to them
  • their revenue and profit levels in recent years
  • their ability to survive financially the effects of official requirements to counter an outbreak of COVID-19
  • any difference in size and resources between the lessor, the lessee, and any other relevant party
  • any other factor that is reasonably relevant

More on arbitration

Generally, arbitral decisions cannot be appealed or reviewed in full and are final and binding.  The scope of the grounds for an appeal are very limited unless the parties agree otherwise.

Arbitration under this proposal can only be through contracted providers.  The government aims for a streamlined arbitration process, with features such as a default decision on the papers and tight timeframes for submissions and decisions.  The streamlined arbitration process will likely take 45 working days.

The Cabinet Paper suggests that the combined effect of arbitration and extended notice period (amended to 30 working days since 1 April 2020) means it would now take a total of 75 working days (over 3 months) from default notice to terminate a commercial lease.