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Rural Leases

Published: 4th August 2020

Author: Neil Dent, Gifford Devine

Published in: Rural eSpeaking

More on COVID and access issues to land

In the Autumn edition of Rural eSpeaking we discussed the situation that COVID had caused with leases where tenants were unable to access their premises due to lockdown restrictions. Potential issues for the rural leasing sector arose from this problem, particularly given that rural leases are often in a different form to urban commercial property leases.

The article pointed out that the main lease issue due to COVID was the inability of tenants to access their premises. Since we published the Autumn edition, the government has announced that it proposes further changes to the Property Law Act 2007 where it would imply in certain leases a clause similar to that in the latest version of Auckland District Law Society (ADLS) lease, section 27.5, where a tenant has:

• Twenty or fewer full-time equivalent staff per lease site
• A New Zealand-based business, and
• Not already come to an agreement for a rent abatement with their landlord.

Of interest to rural tenants is that the government’s proposals indicated that the clause would have a wider effect than the ADLS ‘no access’ clause in section 27.5. It would particularly apply ‘where there is, or has been, a material negative impact on a Tenant’s business due to COVID-19, whether or not the Lessee is able to access the premises’.

As you can see, a tenant’s ability to access the premises is not the only criteria in the proposal. The more important criteria would appear to be whether or not COVID has had a materially negative impact on a tenant’s business. Therefore, if the proposed legislation is enacted, it would mean that where, in the rural lease setting, a tenant may still have been able to actively access, and farm or crop the land, if the business has been affected by COVID they could still take advantage of this implied clause. An example of this is where a lettuce supplier for a fast food chain has still had access to their growing crop, but the demand for salad leaves had disappeared as takeaway outlets had been closed during Level 4.

There have been instances where supply chains have been disrupted (see the example above) or ordinary ‘on account’ or prepayments for supply have not been made and cash flow problems have arisen. It would appear that, in these circumstances, the ability to require a good faith negotiation for a rent abatement (or other measures) would be available under the proposals.

Clear guidelines needed

The other point to note about the government’s proposal is that the Cabinet paper made it clear that it would implement clear statutory guidelines for interpreting the implied clause. The weakness of the ADLS clause is that there is nothing surrounding the clause to give guidance as to what factors should be considered when determining what is a fair (our italics) proportion of rent to abate, etc. As a result, it would appear that the proposed legislation would be fairly prescriptive as to what factors should be taken into account when interpreting and applying the implied clause.

The New Zealand First party, that had supported the proposed legislation, has now withdrawn its support. As a result, it has just been announced that rather than proceeding with these changes right now, the government will establish a fund ($40 million) to help pay arbitration costs for tenants and landlords.

Post-election, given the current polling trends, it may well be that the changes proposed by this government will be back on the agenda.

In any event, there are other avenues for a tenant to explore if their leased property is damaged to the extent that it becomes unfit for use – storm or earthquake damage are prime examples.

The Property Law Act 2007 implies, in all leases of land, for rent and outgoings to abate ‘in a fair and just proportion’ if the premises are destroyed or damaged by certain causes; those causes include flood, storm, earthquake or volcanic activity (not pandemic, unfortunately). The specific terms of a lease can, however, negate this implied term.

Ability to terminate a lease

Also implied in all leases of land is the lessee’s ability to terminate their lease on reasonable notice to the landlord if it is an express or implied term of the lease that the leased premises may be used for one or more specified purposes and at any time during the lease the premises can’t be used for those purposes. Therefore, the lease terms will be very important when considering whether or not a tenant could terminate their lease for this reason. However, most leases include a clause where the landlord expressly states that there is no warranty or representation that the premises are suitable or will remain suitable for the tenant’s use rendering this option unavailable to many tenants.

COVID and damage situations both show the importance of considering unexpected events when negotiating leases. Landlords and tenants tend to concentrate on rent and term when negotiating on the basis other obligations are ‘standard’. Thought should be given to those wider issues as once a lease is signed, it constitutes a binding commitment for, sometimes, quite an extended period of time.

Please contact the author direct for any further comments.

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