New COVID-19 rent abatement provision in leases passed by Parliament

1 November 2021

A new implied clause is set to be added to leases that don’t already contain a rent abatement clause, after the COVID-19 Response (Management Measures) Legislation Bill was passed by Parliament on October 28.

The Bill is now awaiting Royal Assent and likely to come into force shortly. It includes a small number of changes made in the late stages of the Parliamentary process. The most significant change is a direction that, when determining what is fair, the parties must consider any loss of income experienced by the tenant during the particular Alert Level.

We have previously outlined the issues around the Government’s plans to imply a rent abatement term (similar to clause 27.5 of the ADLS lease) into leases that currently do not contain that clause (see here), and highlighted the limited changes recommended by the Select Committee (see here).

We set out below the final changes to the Bill as passed by Parliament.

A fair proportion

In considering what is a "fair proportion" of rent and outgoings for an abatement, the matters that the parties consider must include any loss of income experienced by the tenant (during the particular Alert Level) because of the epidemic and the tenant’s inability to gain access to all or part of the premises to conduct its business.

This is different to clause 27.5 of the ADLS lease, which does not include any guidance on how the fair proportion is to be determined. However, as we have said previously, it is disappointing that Parliament did not take the opportunity to provide clearer guidance on this issue.

The guidance in the new legislation is unclear. Is the impact on the loss of income the only factor to be taken into account, or one of many?

For example, some tenants whose revenue may not be impacted by the pandemic, because their employees can work remotely. Does that mean that the tenant gets no rent abatement, or is it just one factor to be considered in determining a fair abatement?

Likewise, in the case of retailers, a tenant may argue that its revenue during the particular Alert Level is the key factor, while a landlord may say that the new wording makes it clear that other factors need to be taken into account – for example, the uplift in revenue that a tenant may experience after an Alert Level ends.

Application date and timeframes

As expected, the timing of the implied clause has been changed. It now applies from 18 August 2021 (being the date Alert Level 4 lockdown commenced), as opposed to the original proposal of 28 September 2021. However, it only applies to the period of inaccessibility after 18 August 2021.

For leases that are subject to the implied clause, the parties must now take all reasonable steps to respond to any communication regarding the application of the clause within 10 working days. This has presumably been included because some submissions to the Select Committee complained about lack of engagement (from the counter-party) on this issue.

How will disputes be resolved?

The new provisions now expressly provide that the parties may agree to resolve any disputes by some other means of dispute resolution (for example, mediation) as opposed to arbitration. However this remains optional and requires agreement of both parties, meaning that arbitration will remain the default position.

What types of leases are affected?

The Select Committee report had suggested that the implied clause might not apply to ground leases and triple net leases, on the basis that these leases afford the lessee an interest similar to that of freehold ownership. These leases have not been excluded, so the question of whether or not a tenant under a ground or triple-net lease is entitled to an abatement will need to be determined by considering what is "fair" in the circumstances.

The full text of the COVID-19 Response (Management Measures) Legislation Bill is available here.

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

Disclaimer: 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.