In the aftermath of Auckland's second "lockdown", there has been significant media attention regarding the breakdown of rental negotiations between commercial landlords and tenants, which in many cases has resulted in disputes and subsequent cancellations of leases by landlords.
The New Zealand Government, unlike the Australian Federal Government, has been reluctant to interfere with existing commercial arrangements between landlords and tenants and has only recently brought in subsidised arbitration and mediation services for eligible small to medium sized businesses who have been affect by COVID-19.
In contrast, early in the pandemic the Australian Federal Government introduced a set of good faith leasing principles for commercial tenancies, including that landlord must not terminate leases due to non-payment of rent during the COVID-19 pandemic period (or reasonable subsequent recovery period). The code acts as a guide to state governments implementing their state-specific legislation.
It is important both tenants and landlords understand what avenues may be available to resolve rental disputes and their legal rights and obligations with respect to cancelling a lease for a tenant's failure to pay rent, especially where there is an existing dispute.
Eligibility for COVID-19 Commercial Lease Dispute Service
The COVID-19 commercial lease dispute services are arbitration and mediation services subsidised by the Ministry of Justice to resolve commercial leasing disputes for eligible small to medium sized businesses arising from COVID-19. The services are available for 6 months from 25 September 2020 to end of March 2021.
To qualify for subsidised arbitration the lease must include a clause that allows for a rental reduction in an emergency and both parties must agree to use the subsidised service.
To qualify for mediation the relevant lease need not include a clause that allows for a rental reduction, however, both parties must agree to use the subsidised service.
In the case of both subsidised mediation and arbitration:
- parties must have previously been unable to agree about rental arrangements during Alert Levels 3 & 4;
- the tenant must have experienced a material loss of revenue during the lockdown period due to Government COVID-19 restrictions; and
- at least one party must be New Zealand based and have 20 or fewer full-time staff per leased site.
If eligible, the arbitration services will be subsidised up to $6,000 (including GST) per dispute, with the parties funding any remaining costs of the service up to a maximum of $2,000. Mediation services will be fully funded, up to a value of $4,000 (including GST).
If the parties do not agree to use the service, or are not eligible for it, the parties will need to rely on the disputes clauses in the lease.
Cancellation of lease by landlord for non-payment of rent
Landlords must comply with the code for cancellation of leases set out in the Property Law Act 2007 (PLA). To cancel a commercial lease for non-payment of rent:
- the rent must have been unpaid for not less than (now) 30 working days;
- the landlord must have served a notice of the breach of the covenant to pay rent on the tenant and allowed the tenant a period of not less than (now) 30 working days to remedy such breach; and
- the breach must not have been remedied at the expiry of the period specified in the notice.
The default period and remedy period can run concurrently, such that landlords may serve a notice of breach before the tenant has been in default for 30 working days.
The default and remedy periods were extended from 10 working days to 30 working days by the Government as part of its COVID-19 response. These extensions end 6 months after the Epidemic Preparedness (COVID-19) Notice 2020 (Epidemic Notice) expires or is revoked. As at the date of this article, the Epidemic Notice is set to expire on 23 December 2020 and is subject to further renewal(s) by the Government.
If there is a dispute over how much rent is payable (for example, a dispute over the correct level of rent reduction during the emergency period), this will be relevant to the sums that are able to be pursued under the PLA.
If you are a landlord
When cancelling a lease, it is critical that you serve the notice of breach correctly in order to ensure your cancellation is effective at law. You may need to apply to the court for an order under the PLA to cancel the lease and grant you possession of the land. If you instead wish to effect cancellation of the lease by peaceable re-entry, there are a number of matters you must keep in mind in order to avoid unwanted (and potentially serious) consequences.
If you are a tenant
It is important that your landlord follows the cancellation procedure set out in the PLA. If they do not, you may have recourse against them or at least a claim that the cancellation is ineffective.
You have the right to remedy your default by making good the non-payments, and you have at least 30 working days to do so. You may also have the right to apply to the court for relief against cancellation under the PLA.
If you are a landlord looking to cancel a lease, or a tenant facing a lease cancellation, or you would like further information with respect to the subsidised COVID-19 Commercial Lease Dispute Service or the disputes clauses under your lease, get in touch with our team for expert advice.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.