The Government’s new commercial rent relief plan comes after its first was blocked and its second failed. Will the third be any better?
The numbers speak for themselves. Of the $40 million allocated in July 2020 to the Government’s voluntary mediation/arbitration scheme for commercial landlords and tenants, just $212,000 was used. That’s 0.5 percent.
The Government money was intended to help the two parties agree on a fair rent in a Covid pandemic, but in the end the scheme was used in precisely 10 mediation cases and the same number of arbitrations.
The problem? With a voluntary scheme, tenants just couldn’t get the most recalcitrant landlords to the table. No surprises there.
Which is presumably why the Government has suddenly and unexpectedly announced a new commercial rent relief plan – albeit one modelled on its a legislative change originally blocked by Winston Peters more than a year ago.
Submissions close today, but without changes to the plan, desperate companies say they won’t get the help they need.
Rent relief over the past 18 months has been a lottery.
The most generous landlords waived rent totally during Level 4 lockdowns, the most stubborn refused any kindness at all.
And there’s every shade in between.
The arguments continue. Many small and medium sized companies, particularly in the retail, hospitality and tourism sectors, still haven’t reached agreement with their landlords.
Some owe thousands and thousands of dollars. Some have already gone under.
The landlord lottery
Brad Jacobs knows the problems first hand. Jacobs is the director tasked with negotiating leases and contracts for almost 70 Coffee Club and Bird on a Wire franchises.
Four of the businesses he works with have already gone under, Jacobs says, with three of the failures directly related to landlords refusing to give any concessions over rent.
Two more businesses are in a precarious position.
“One landlord even sent us a notification of a 10 percent rent increase during lockdown, backdated.”
– Brad Jacobs, Coffee Club
The present situation is a lottery, he says. At the one end of the spectrum some landlords offered struggling tenants 100 percent rent relief in level 4 and 75 percent in level 3. At the other end, some landlords refused any rent relief at all.
“In three or four cases we could not negotiate any support for lockdown. One landlord even sent us a notification of a 10 percent rent increase during lockdown, backdated,” Jacobs says.
“One of the cafes in Auckland limped along for eight months and finally closed in February.
“It would have been worth $600,000 the day before lockdown; in the end the owners just had to walk away.”
The Government’s mediation/arbitration service didn’t work because it was voluntary.
“You couldn’t make the landlord go, so they just refused. The only alternative was to go through the courts, but if you are on the edge of tipping over, where are you going to find the funds for that?”
Of the 70 or so Coffee Club and Bird on a Wire franchise landlords, 5-6 were exceptionally good, and about the same number were totally intransigent, Jacobs says.
“In the middle is a range of ‘fair’, where we achieved some degree of fair.”
It’s not just tenants having a tough time. A few smaller landlords with big corporate tenants are also feeling the pressure, according to Leonie Freeman, chief executive of the Property Council..
The Government’s proposal
Six weeks after the start of the toughest lockdown yet, in Auckland at least, and with pressure mounting from business associations and the National Party, the Government last week suddenly and unexpectedly resurrected a June 2020 proposal to amend the Property Law Act to help businesses resolve rent disputes.
The proposal was shelved in July last year when Winston Peters and New Zealand First refused to back it. Remember that.
The latest plan also makes use of some of the thinking behind the much talked about “Auckland District Law Society clause 27.5”.
Clause 27.5 was put into the standard ADLS commercial lease contract after the Christchurch earthquake to cover tenants who were shut out of undamaged buildings.
It’s not clear exactly why New Zealand First – then in coalition with Labour – refused to back the legislative change last year. Leader Winston Peters cited the sanctity of contract law and said the contents of the legislation were different from what it had been told.
Nor is it clear why it took so long for the present Government to act once it had Peters out of its hair – the election was almost a year ago, and anyone looking at the mediation/arbitration numbers must have realised something was amiss.
A ‘fair proportion’
Basically the new proposals force landlords and tenants to put a clause into their commercial leases to cover the Covid-19 lockouts, if no agreement already exists.
A tenant that can’t “fully conduct their business in their premises due to the Covid-19 restrictions” should be charged a “fair proportion” of rent by their landlord, Justice Minister Kris Faafoi said at the announcement last week. “Landlord and tenant would need to agree on the amount of rent that is fair.”
If they can’t agree on what a fair rent proportion is, “arbitration will be required”.
(For more details about the proposed changes, including how they work where landlords and tenants already have an agreement around Covid rent relief, see last week’s Newsroom article.)
Bizarrely, while the initial proposal – the one blocked by Winston Peters – and the arbitration/mediation proposal that replaced it both offered $6000 to help with landlord/tenant negotiations, any financial assistance has disappeared in the new draft.
The unspent $39.8 million from the mediation/arbitration scheme has already gone back into the general Crown accounts, says the Ministry of Justice’s general manager of civil and constitutional policy Kathy Brightwell.
As it stands, the new clause will come into effect on September 28, the day of the announcement, although the Government has said it would welcome submissions on the start date.
Better than nothing
“Anything’s better than where we’ve been.” says Robyn Pickerill, chief executive at the Franchise Association of New Zealand.
“Mediation didn’t work because there was nothing to force people to go, and it was especially difficult if landlords were overseas. Many landlords have been supportive, but there is definitely a percentage that can’t be reasoned with and have made things very difficult. Those ones cause grief.
“If people aren’t prepared to go to the negotiating table, why would they go to mediation?”
The recent announcement was a “surprise and a good signal” Pickerill says. But she’s concerned the proposal offers no definition of “fair amount”, and no financial support from Government if landlords and tenants end up being forced to go to arbitration.
“People still have disputes from last year.”
– Robyn Pickerill
Tenants would also like to see the new rules backdated beyond September 28.
“The legislation needs to go back at least to August 18, but we’d like to see it go back to the previous lockdown. People still have disputes from last year.”
“Can of worms”
The Franchise Association was one of five business groups which got behind a rental support package proposed by National Party Shadow Treasurer Andrew Bayly last month.
Under Bayly’s package, small businesses which had seen revenue fall at least 40 per cent would get 50 per cent of their rent and associated building operating costs paid by the Government, “on the proviso that the landlord contributes a 25 per cent discount.” This would leave just 25 per cent of the rental costs to be paid by the tenant.
“It is important that business owners and landlords have a clear process to reaching an outcome quickly,” Bayly says.
He says the Government’s bill opens up a can of worms for the Finance and Expenditure Committee which will consider the whole Covid support bill (of which rent support is just a small part) under urgency.
“We are going to spend the next two weeks talking about what’s fair.”
And the problems won’t stop there.
“Imagine being an arbitrator. You’ll get one saying ‘In my view, fair is paying, say 50 percent’, then the next arbitrator will say the tenants won’t have to pay anything.”
Bell Gully partner Jane Holland says the new legislation is less clear than its predecessor.
“The Government’s proposals last year set out a number of factors that were required to be taken into account in assessing a “fair proportion”, including the impact on the tenant business, the landlord’s mortgage obligations, the parties’ respective profits in recent years, and the parties’ ability to survive financially.
“None of these factors are repeated in this year’s proposed new clause, which instead leaves a “fair” abatement for landlords and tenants to work out,” she says.
There’s no guidance from the courts either because any disputes involving the ADLS clause 27.5 have been dealt with through arbitration.
“Although the meaning of clause 27.5 has been considered in arbitrations, those decisions are not publicly available,” Holland says.
The landlord perspective
The Property Council’s Leonie Freeman worries the lack of clarity will impact not just on tenants, but on landlords. She says the post-lockdown boom actually benefited some companies; others where staff can work from home haven’t been much affected.
“If there is no loss in income, is it fair to get rent relief?”
She knows of some businesses, including big international companies, that pushed their landlords for rent concessions, despite making good profits for the year.
“The draft is ambiguous and uncertain, and when you have uncertainty around contracts it just gives people an opportunity to have a go,” Freeman says.
“If it was more targeted – say just for SMEs, or just for New Zealand businesses, or just for the private sector and not for profits, or for companies eligible for the wage subsidy – it would be fairer.
“As it is, there’s just going to mean a lot of expenditure for lawyers to sort it out, and it’s going to take ages. And the people that really need arbitration won’t be able to afford it.”
Freeman says the majority of landlords are doing the right thing by tenants. When the Property Council surveyed its members recently, it found they had provided $320 million in rent relief in the past 18 months.
Meanwhile, Finance Minister Grant Robertson said the Government had paid out close to $1 billion to businesses under the resurgence support payment to help businesses meet fixed costs, including rent.
The Australian model
The Franchise Association’s Robyn Pickerill points to a commercial tenancy relief scheme adopted in late July by the Australian state of Victoria as a clear-cut model. Any business with less than $50 million turnover which can prove turnover is down at least 30 percent, qualifies automatically for proportionate rent relief.
So, for example, a business where turnover has fallen to 40 percent of pre-pandemic levels can only be charged 40 percent of its rent, according to the state government website.
“Of the balance, at least half must be waived, with the remainder deferred.”
Victoria also offers “free and impartial” mediation, and 25 percent reductions in land tax for landlords who give their tenants rent relief.
The Coffee Club’s Brad Jacobs says a set formula around rent would help New Zealand businesses.
“Other support is based on a reduction in revenue, whether it’s the wage subsidy or the resurgence support payment. Why not this?”
Jacobs is one of many industry players who spent last weekend putting together submissions, after being given just seven days to put their views across. Submissions close today and a report will go to the Finance and Expenditure select committee next week as part of the omnibus Covid-19 Response (Management Measures) Legislation Bill.
“You could whinge that it’s 18 months too late, but it is positive, now it just needs to be cleaned up a bit, so it’s helpful.”
– Robyn Pickerill
Everyone Newsroom spoke to said they couldn’t understand why the Government didn’t consult with industry players before announcing its revamped rent relief plan.
Jacobs says he’s written half a dozen letters to ministers Robertson and Faafoi over the past few months, asking for help on rents, and he knows many other businesses and organisations have done the same.
Yet the move was a surprise to everyone.
“I had received a response from Kris Faafoi’s office literally the day before – a cut and paste letter advising us we could get free legal advice from the Citizens Advice Bureau – like we didn’t have lawyers of our own. We were infuriated, and then the next day he dropped this.”
Robyn Pickerill is pragmatic.
“You could whinge that it’s 18 months too late, but it is positive, now it just needs to be cleaned up a bit, so it’s helpful.”
