Hospitality sector update: compulsory arbitration option announced for commercial leases

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The Government announced on 4 June 2020 that (after months of political wrangling) it will legislate to ensure businesses that have suffered as a result of the COVID-19 response will get help to resolve disputes over commercial rent issues. The detail released is included in a media release from the Justice Minister and a Cabinet Paper available here:

What is the solution proposed by Government?

The solution is: a temporary amendment to the Property Law Act 2007. This Act in general terms regulates leases, including implying some mandatory terms into leases, as well as setting out a statutory code for the cancellation of leases. The amendment is expected to be introduced to Parliament in the next few weeks, so the draft bill is not publicly available yet.

This amendment will imply a clause into commercial leases of certain businesses which will require a fair proportion of rent and outgoings to cease when a tenant’s business has suffered a material loss of revenue because of the restrictions put in place to combat COVID-19. It will apply retrospectively (that is, backdated).

This amendment will require landlords and tenants to negotiate what a “fair proportion” is in their own circumstances. The Cabinet Paper indicates that it will require that:

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

22.2.1     No rent being payable for a period; or

22.2.2     Reduced rent being payable for a period, including reduction of varying levels over successive periods; or

22.2.3     a scheduled rent increase being deferred; or

22.2.4     rent continue to be paid unabated; or

22.2.5     a mix of any of these options.

22.3        the clause should also include a list of other types of measures that could be negotiated, such as a rent deferment, if that is fair in the circumstances.

The Cabinet Paper also indicates that the legislation will contain a list of factors to be considered in determining the “fair proportion” of rent and outgoings. Detail of this will be contained in the Bill but the Cabinet Paper refers to the following factors:

24.1        The financial position of the lessor, the lessee, and any other relevant party [including any sublessee, head-lessor, any parent company for the lessor or lessee, and any other party who is reasonably relevant]; including

24.1.1     the impact of the COVID-19 restrictions on the business, including the impact of restrictions that are no longer in place

24.1.2     any mortgage obligations relevant to the leased premises

24.1.3     any financial support available to them

24.1.4     their revenue and profit levels in recent years

24.1.5     their ability to survive financially the effects of official requirements to counter an outbreak of COVID-19

24.1.6     any difference in size and resources between the lessor, the lessee, and any other relevant party

24.1.7     any other factor that is reasonably relevant.

The “any other factor that is reasonably relevant” is likely to be of wide application. In the hospitality and accommodation sectors, this will allow for arguments about the overall tenant’s situation, including the difference between say a tavern or nightclub having severe restrictions under Level 3 and also severe impacts under level 2, and a café operation which may have been able to open under Level 3 and continue under Level 2. For accommodation providers, we expect the severe impacts of having forward bookings dry up almost overnight will be relevant, but could also take into account whether there were any other options declined such as making the premises available for emergency or quarantine accommodation which could have provided some limited revenue.

What businesses will be eligible? Who won’t be eligible?

To be eligible for the implied clause a business must:

  • Have 20 or fewer full-time staff at each leased site, and
  • Be based in New Zealand.

The new process will not be available to businesses which have already reached an agreement to reduce their rent/outgoings with their landlord.

Compulsory arbitration

If the parties cannot reach agreement they will have to enter compulsory arbitration and may be eligible for a government-subsidised streamlined arbitration process. The subsidy provided is a grant of up to $6,000 including GST to approved arbitration providers. So, to be clear, there is no funding to the landlord or the tenant for their costs of arbitration, including any expert or legal costs.

Arbitration is still a formal legal process, governed by the Arbitration Act 1996. While the parties have some flexibility to a speedy process, an arbitration agreement would need to be agreed between the parties. It is still a formal process undertaken before an arbitrator. The parties are generally free to select their arbitrator, or ask an independent body to select one for them. In this scenario, an experienced arbitrator who has dealt with rent review issues could be, for example, a lawyer or a valuer. The arbitrator has wide powers to make orders determining the matters in dispute, and has powers to award costs against an “unsuccessful” party. The proposed legislation does not appear to regulate any of these aspects (other than appearing to invite some providers to suggest a default process), and that may be another flashpoint between parties already in dispute.

In short, referring the matter to arbitration will likely still require careful consideration and advocacy, both to reduce the cost of the process and to get to a workable outcome. We have been working closely with both landlords and tenants to reach workable solutions and achieve a reduction of a fair proportion or rent and outgoings throughout Levels 4, 3 and 2, and expect to continue to do so as part of any compulsory arbitration. It will remain to be seen whether the prospect of a referral to compulsory arbitration will force the parties closer to settlement. We await further details once the amendment legislation is introduced to Parliament.

For further information please contact a member of our litigation and dispute resolution or property team. 

Disclaimer: The content of this article is general in nature and not intended as a substitute for specific professional advice on any matter and should not be relied upon for that purpose. While we make every effort to ensure the accuracy of the information contained in this article, this is a rapidly changing environment and the information will be subject to change.

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