fair proportion of rent and outgoings cease to be paid when a tenant’s business has suffered a material loss of revenue because of the restrictions put in place to combat COVID-19.
The Cabinet Minute says that clear rules will be provided to determine what a fair proportion of rent is, with the intention that the financial burden from the COVID-19 lockdown be fairly apportioned between landlord and tenant. The financial position of the parties, impact of the COVID-19 restrictions, mortgage obligations and financial support options are just some of the factors that are suggested as being relevant to determining what a fair proportion is.
The Cabinet Minute anticipates that a wide range of outcomes might result – not just a simple rent abatement, but also rent deferral or perhaps banded reductions over successive periods. The parties will be able to negotiate a fair proportion of rent and outgoings between themselves.
Dispute resolution by arbitration
If the parties don’t come to any agreement, any disputes under the implied clause must be settled by arbitration. The Cabinet Minute records that the Government will support access to arbitration by providing a Government subsidy for streamlined arbitrations at a rate of $6,000 per arbitration.
Details awaited
The Cabinet Minute is an indication of the Government’s policy on this matter, but it is far from the final product. The Cabinet Minute anticipates that the implied clause might be similar to the No Access in Emergency clause found in the Auckland District Law Society lease 2012 Edition. However, it also acknowledges that parties have found that clause difficult to apply, and in particular, found it difficult to determine what a fair proportion of rent means. Modifications to provide greater certainty are expected, but just what form those modifications might take remains to be seen.
We also don’t know yet what it means for a business to be based in New Zealand, how full-time equivalent employees per lease site will be measured, or what it means for a business to have suffered a material loss of revenue as a result of the COVID-19 restrictions. Nor is there any detail about how the implied clause will work with leases that already have the No Access in Emergency clause or a version of it. It appears that parties who have an express abatement clause but have not yet come to an agreement on how much rent to abate will be able to access subsidised arbitration by operation of the implied clause, but it is unclear as to what extent the two clauses might be reconciled or need modification.
The Cabinet Minute also provides no detail on the arbitration process itself, other than to confirm that appeals of an arbitral decision would be allowed under the grounds established in the Arbitration Act 1996. Will there be any requirement to publish decisions, or make outcomes known? Arbitration is usually a private process, but there is a public interest in the initial decisions under this regime.
Arbitration
In the Cabinet Minute, the Government noted a concern that parties were not reaching a fair resolution and that there is no one size fits all solution. Arbitration is an appropriate and sensible resolution process to address these issues.
NZDRC already has a reduced cost and fixed fee arbitration and mediation service available specifically to help commercial lease parties. This is a fast and cost-effective means of resolving a rent review dispute. You can find more information on that service at https://www.nzdrc.co.nz/expertise/property-disputes/covid-19-lease-disputes/
Specific lessons highlighted by these cases include:
• The need to ensure that any body which is to appoint an arbitrator, mediator or expert is still in existence, willing and able to do so – check first if there is any doubt.
• The clause should make clear the nature of the dispute resolution process involved, e.g. mediation, arbitration or expert determination.
• The clause should specify clearly any required qualifications of the person to be appointed to resolve the dispute.
• The clause should have clear timelines for steps involved in the dispute resolution process, e.g. by what date a party has to object to a valuation, or how long valuers have to try and reach agreement before a party can submit an issue to arbitration.
[1]Tumatatoro Limited v HJS AG Limited & Ben Vanderkolk [2019] NZHC 1047
[2] The parties’ conduct and Federated Farmers’ refusal to appoint a farm management consultant meant that clause 48 was unworkable as an expert determination, and abandoned as an arbitration agreement.
[3]Burri v Schuler Brothers Limited [2019] NZHC 1169 at [4]
www.nziac.com 6
ReSolution | June 2020
End Notes