Some businesses have been obliged to keep paying their rent and outgoings throughout the lockdown, irrespective of whether they are delivering an essential service from the premises. Others have been entitled to reduce their rent and outgoings by a “fair proportion" during that same period. The distinction has often depended on whether the lease provides for rent to be suspended in circumstances such as the closure of premises under Alert Level 4. More details about whether a tenant may be entitled to a reduction in rent and outgoings are in our earlier update.
Many landlords and tenants have been working together to find solutions, but today the government announced that it proposes to make changes to the Property Law Act 2007 in order to support commercial tenants and landlords. Announcing the changes, Justice Minister Andrew Little said many tenants may be finding it difficult or impossible to pay rent, and that if landlords are not receiving rent, they may be unable to meet their mortgage obligations.
The government has said that it will introduce a Bill on 27 April 2020 to effect the changes that it has announced. A draft of the Bill has yet to be released, and so this update is based on the details released by the government today.
The changes will apply to all notices to cancel a lease, or exercise powers under a mortgage, served from 10 days after the Epidemic Notice issued by the government on 25 March. The changes are temporary and the law will revert to the current time periods six months after the Epidemic Notice expires.
Section 245 of the Property Law Act sets out the process a landlord must follow to cancel a lease for nonpayment of rent. Before a landlord can cancel:
- the rent must be at least 10 working days overdue, and
- the landlord must have served a notice of intention to cancel, allowing the tenant at least 10 working days to pay the rent that is overdue. This is commonly referred to as a PLA notice.
If payment is not made within the time period provided for in the PLA notice, the landlord can then cancel the lease. To cancel the lease the landlord will usually “re-enter the land peaceably" by entering the premises and changing the locks. Alternatively, a landlord is entitled to an order for possession from the Court.
For breaches other than non-payment of rent, section 246 of the Act again requires that the landlord serve a PLA notice before cancelling. The section does not stipulate a minimum timeframe, but instead says that the notice must give the tenant a period that is “reasonable in the circumstances" to remedy the breach.
If, after a lease is cancelled, a tenant wishes to continue leasing the premises and cannot reach a new agreement with the landlord, the tenant must pay the outstanding rent and costs and apply to the court for relief against cancellation.
The changes announced today will mean that the 10 working day time periods in section 245 of the Property Law Act will each become periods of 30 working days. At present these time periods can run concurrently, so that a landlord can serve a notice on a tenant as soon as the tenant fails to pay the rent on time, as opposed to having to wait until the rent has been unpaid for 10 working days. We expect that this will continue to be the case.
The process for a landlord to recover non-payment of outgoings (as distinct from rent) will continue to depend on the wording of the lease. Many leases will provide that outgoings are to be treated in the same way as rent, so that the time periods in section 245 of the Property Law Act will apply. However, if that is not the case, then section 246 will apply. That section requires the PLA notice to give the tenant a reasonable period to remedy the breach. The changes that have been announced do not appear to change this requirement, and what is a reasonable period will continue to depend on the particular circumstances.
How does this affect disputes over rent suspension?
Where the landlord and tenant disagree as to what constitutes a “fair proportion" reduction to rent and outgoings during Alert Level 4 (under a rent suspension clause), then the dispute resolution provisions of the lease apply. The dispute does not entitle the landlord to serve a PLA notice and then cancel. However if the lease does not contain a rent suspension clause and the tenant fails to pay the rent, the landlord is entitled to serve a PLA notice and then cancel in accordance with the notice.
Changes to enforcement of mortgages
The government has also announced changes to the timeframes specified in sections 120 and 128 of the Property Law Act, which allow a mortgagee to exercise its power of sale and other powers if the owner defaults. Under the changes, the owner will need to be given 40 working days to remedy the default in the case of a property (increased from the existing 20 working days), and 20 working days in the case of goods (increased from the existing 10 working days). These changes relate to both residential and commercial mortgages, although the government has said that it expects that residential borrowers will rely (at least initially) on the mortgage payment deferral scheme.
If you have any questions about the matters raised in this article, please get in touch with the contacts listed, or your usual Bell Gully adviser.
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This publication is necessarily brief and general in nature. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.