Add a bookmark to get started

17 December 20214 minute read

Flashing traffic lights could signal the end of the statutory Covid-19 no access lease covenant

The Covid-19 Response (Management Measures) Legislation Act 2021 (Act) came into force on 3 November 2021 and amends the Property Law Act 2007.

The Act applies to leases in operation on and between 18 August 2021 and when the Epidemic Preparedness (Covid-19) Notice 2020 (Covid Notice) expires or is revoked (Affected Period), which do not already cover a no access in an emergency clause with some limited exceptions.

The Act implies a covenant into certain commercial leases providing that:

  • Where there is an epidemic and the tenant is unable to gain access to all or part of their leased premises to fully conduct their operations;
  • Landlords and tenants will agree on a fair proportion of rent, including outgoing expenses, to cease to be payable; and
  • If the parties are unable to agree, to seek alternative dispute resolution before arbitration.
Landlords can’t take or continue any action against the tenant for rent arrears in relation to the Affected Period that is inconsistent with this implied covenant.

Although the Select Committee process was short, with limited opportunities for stakeholders to make submissions, there were still several good submissions addressing the main concerns from landlords and tenants. Not all of these are reflected in the Act.

The key change is that the parties must consider the loss of income experienced by the tenant in determining fair proportion. This addresses the concerns raised by submitters that some tenants may take advantage of the implied covenant where their income has not been affected, for example where they are able to work from home. However, there are still practical issues. Firstly, it will be difficult to assess what the real loss of income is until after the inaccessibility ends. In most cases we believe parties should and will take a pragmatic approach and assess loss of income on a rolling basis. Secondly, submitters questioned whether loss of income due to inaccessibility is appropriate since the economic effects of Covid-19 are so wide ranging.

Loss of income is only one of the many factors proposed during the Select Committee Process and suggestions were made to prescribe criteria. The Select Committee ultimately felt it was best not to do so because this will allow each unique situation to be assessed in their entirety and with the appropriate discretion.

The Select Committee’s intention was for the Act to emulate the no access in an emergency clause in the Auckland District Law Society lease, which does not include criteria. This clause has been used in the market for just under 10 years, and until the Covid-19 Pandemic, it hasn’t had much focus. In many cases, parties have been able to come to an agreement between themselves on what a fair proportion is, and often agree to other variations such as an extension of lease.

With the restrictive health measures, the challenges to the businesses of both landlords and tenants can’t be ignored. There is a shift in views, compared to the early days of the pandemic, where we are now seeing both landlords and tenants recognise this and working together to come to a sensible agreement.

These changes have been made in exceptional times. Where there are leases without this clause the parties would be encouraged to agree on rent relief. Failing this, it acts as a backstop.
While these changes are temporary and will end when the Affected Period ends, the current Covid Notice will likely be renewed on 18 March 2022. Regardless, we are now in the Covid-19 Protection Framework more commonly known as the Traffic Lights System, which is less restrictive than the previous alert level system. The impact of Covid-19 restrictions on a tenant’s ability to fully conduct their business from the premises will lessen as we move through the Traffic Lights and with that, arguably the application of this implied covenant. Even at the Red Light, premises using vaccination certificates can open subject to restrictions on numbers and social distancing. It’s uncertain whether businesses choosing not to use vaccination certificates, and are unable to open during Red Light, can still benefit from the implied covenant. It seems that this legislative change will remain most impactful for the pre-Traffic Lights period, but if the Government decides that lockdowns or similar restrictive measures are reintroduced the implied covenant could again be the focus of attention.