Commercial Leases – Ministry of Justice


Commercial Leases – Ministry of Justice

Guidance for commercial leases and mortgages during COVID-19

 

Many commercial lease arrangements in New Zealand will be affected by the response to COVID-19. Tenants may be unable to pay their rent as their business is not operating. Landlords may also be unable to meet their mortgage payments.

The Government has announced its intention to put in place some temporary law changes to support tenants and landlords in this difficult situation and to make it easier to retain lease arrangements and get back to business as usual after the epidemic. Changes relating to leases will apply to commercial tenants and their landlords. The changes relating to mortgages will apply to all mortgages, including residential and commercial. However, we anticipate that mortgage holidays are likely to be the first port of call for residential borrowers.

This guidance provides more information about the changes and should help commercial tenants and landlords find an approach that works for both. The Ministry of Justice has prepared this guidance in consultation with the New Zealand Law Society | Te Kāhui Ture o Aotearoa (Law Society).

Guidance for lawyers

Guidance for commercial landlords, tenants, lenders and borrowers

How are commercial leases and mortgages affected by the response to COVID-19?

For commercial leases, COVID-19 Alert Level 4 means that:

  • many businesses renting commercial property are unable to operate and can’t access or use their premises (because they are not essential services)
  • as a result, commercial tenants may have temporary difficulty paying the rent and outgoings, and
  • commercial landlords who have mortgages may, in turn, have trouble making mortgage payments.

This may require the parties to think about what happens with the lease and with mortgages. Commercial landlords or tenants may consider terminating leases. Tenants have an interest in reducing their rent. Borrowers may face the sale of their property by lenders if they cannot service the mortgage.

The detail of the measures that will be in place as we transition to Alert Levels 3 and 2 is still being worked out. But some of these challenges are likely to continue to some extent. For example, many businesses may have to remain closed or take some time to re-establish their business.

What should commercial landlords, tenants, lenders and borrowers do now?

As many commercial landlords, tenants, lenders and borrowers have already done, the best approach is to work together constructively to find a solution which is sustainable and will meet all parties’ needs and interests.

The Government is making some changes to support commercial tenants and landlords to get through this difficult situation. You should also talk to your lawyers and real estate professionals to discuss what the current situation means for you, what the law changes may mean and what to do next.

What changes has the Government announced to assist?

The Government has announced that it intends to introduce a Bill to give commercial tenants more time to catch up on overdue rent before a landlord can take steps to evict them.

Under the current law, a commercial landlord must give a tenant at least 10 working days’ notice before cancelling a lease because of overdue rent.

The Bill will extend the notice period from 10 working days to 30 working days. This will give more time for commercial tenants to catch up with rent payments before the tenant can be evicted. If the tenant is not able to catch up, the tenant will have more time to approach the landlord about temporary changes to the rent or lease agreement to help the tenant get by until it can resume operating as usual.

What about the landlord’s mortgage repayments?

If commercial tenants are having difficulty paying rent, that may make it difficult for landlords to keep up with their mortgage payments. The Government has announced that the Bill will also give borrowers (including landlords) more time to catch up on overdue mortgage payments before a lender can take steps to enforce the mortgage.

The current law says that lenders must give 20 working days’ notice before they use their powers to take possession of, or sell, the mortgaged property. The Bill will extend that period to 40 working days.

This change will apply to all mortgages, including residential and commercial, and regardless of whether the mortgaged property is tenanted. However, we anticipate that mortgage holidays are likely to be the first port of call for residential borrowers.

This means that, like commercial tenants, borrowers will have a better chance to get through the COVID-19 situation and temporary financial hardship. They will still have the same payment obligations but have more time to remedy breaches or defaults.

When will these law changes apply?

The Government intends to introduce a Bill to make these changes once Parliament is sitting again.

The Government has announced that the changes will apply from 10 working days after the Epidemic Preparedness (COVID-19) Notice 2020 was issued on 25 March. This will ensure they apply to all tenants and borrowers affected by the measures taken against COVID-19.

This is a temporary change to provide relief to tenants and borrowers affected by the response to COVID-19 and allow more time for parties to discuss how they may get through this period and resume business when the Alert Level allows for it. The law will return to the current timeframes six months after the end of the end of the Epidemic Preparedness (COVID-19) Notice 2020.

If your lease or mortgage is affected by COVID-19 you may like to talk to a lawyer about how the changes will apply to your circumstances when the Bill is passed. This is particularly important if you are a tenant who has been given notice of overdue rent payments, or a borrower who has been given notice of overdue mortgage payments.

Landlords and lenders who are considering taking action to enforce leases and mortgages should also consider first getting legal advice.

What is the purpose of these changes?

The changes aim to support commercial landlords, tenants and borrowers through the COVID-19 situation. They will provide relief for businesses, to help them stay solvent through the epidemic, which will help New Zealand’s economic recovery. They are part of a wider government package of business support.

More information on the broader business support package is available on the Inland Revenue and Business.govt websites:

IRD website(external link)

Business.govt.nz website(external link)

Do these changes apply to my residential lease or mortgage?

The changes in the Bill will not apply to residential tenancies. For those leases, the Government has already made changes:

Changes to the termination provisions.(external link)

The changes will apply to all mortgages, whether for commercial or for residential property. However, there may also be other options available for residential mortgages, such as a mortgage repayment holiday:

More information about the mortgage holiday scheme(external link).

Can commercial tenants stop paying rent or pay reduced rent if they can’t operate from their premises?

It depends on the terms of the lease. There are many different arrangements.

For example, one standard lease provides for a ‘fair proportion’ of the rent and outgoings to be reduced temporarily while a property cannot be accessed in an emergency. That clause (or a similar one) has been used in some leases since the Christchurch earthquakes. If a lease contains that clause, both landlord and tenant will need to agree what a “fair proportion” is.

A lawyer is the best person to provide advice about what a fair rent reduction may be and help you reach agreement with the other party.

What if the tenant can’t afford the rent and outgoings but the lease doesn’t provide for reduced rent in an emergency?

Many leases don’t contain a clause providing for reduced rent or outgoings. Some leases are older versions from before the Christchurch earthquakes. Some tenants with these leases will also be unable to operate and unable to pay their rent.

Even if there is no relevant clause, landlords are encouraged to consider the tenant’s situation. It is usually in both the landlord’s and the tenant’s interest for the tenant to remain viable and able to resume operating once the Alert Level allows for it. Reaching an agreement is likely to be in both parties’ interests. Commercial landlords and tenants could consider a rent payment holiday or a reduction in rent and/or outgoings.

A lawyer is the best person to help landlords and tenants find a sustainable approach that works for both landlord and tenant. When considering these matters, it is important to remember that the measures being taken against COVID-19 are temporary and they are neither the landlord’s, nor the tenant’s fault.

What if a commercial landlord and tenant can’t reach an agreement?

As many commercial landlords and tenants have already done, the best approach is to work together constructively to find a solution which is sustainable and will meet all parties’ needs and interests. A lawyer is the person to help you reach an agreement. Some leases may also contain a mediation or arbitration clause, which could be used.

Both landlord and tenant should bear in mind what will happen if they can’t agree. For example, a landlord may want to consider:

  • whether they would be able to access their property to evict tenants given the current Alert Level
  • whether they are likely to be able to find new tenants and have them move in.

There may also be a risk of legal proceedings which can be costly, unpredictable, and in current circumstances have the potential to be significantly delayed.

Where can I find more information?

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.

The Real Estate Authority is the regulator for agents facilitating commercial leases:

Real Estate Authority website(external link)

The Ministry of Justice is responsible for real estate laws.

The Law Society has information on the legal impacts of COVID-19:

Law Society latest news(external link)

Information on the Government’s COVID-19 economic package is available on Treasury’s website:

Treasury’s website(external link)

The Ministry of Business, Innovation and Employment (MBIE) and the Ministry of Housing and Urban Development (HUD) have information on residential tenancies:

What landlords and tenants need to know(external link)

Rent freezes and tenancy terminations(external link)

COVID-19 response level measures apply to all of us

The purpose of the response to COVID-19 is to save lives. Everybody needs to stick to the rules of physical distancing and only operate businesses allowed under the current Alert Level.

Across the world, millions of businesses are affected in one way or other by COVID-19. Be kind, cooperate and try to find a good way forward which works for both parties considering these unprecedented circumstances.