There have been some recent temporary law changes due to the COVID-19 Level 4 lockdown. These changes have the aim of compensating for certain situations that are no longer feasible given the lockdown restrictions in place. The following major changes are provided here for your benefit, as well as some information on provisions in current legal instruments that have become increasingly relevant.
Rent Freezes and Tenancy Terminations
On 23 March 2020 the Government announced a freeze to residential rent increases and greater protections for tenants against having their tenancies terminated. These measures took effect on 26 March 2020 as part of the COVID-19 Response (Urgent Management Measures) Amendment Act.
Specific changes include:
- A freeze on rent increases;
- A rent-increase notice from a landlord will not have the effect of increasing a tenant’s rent, unless the rent increase has already taken effect;
- Tenancies will not be terminated during the lockdown period, unless the parties agree, or in limited circumstances, regardless of when notice was provided;
- Tenants will still be able to terminate their tenancy as normal, if they wish; and
- Tenants will have the ability to revoke termination notices that they have already given, in case they need to stay in the tenancy during the lockdown period.
The rent freeze applies for an initial period of 6 months, and the protections against terminations will apply for an initial period of 3 months. At the end of both initial periods, the Government will evaluate whether they need to be extended.
As previously mentioned there are limited circumstances where a landlord may still terminate a tenancy during the lockdown period. The Tenancy Tribunal will act as a check to ensure that the limited and specific termination grounds are being used lawfully. These reasons are where the tenant:
- substantially damages the premises; or
- assaults or threatens to assault the landlord, their family, or the neighbours; or
- abandons the property; or
- engages in significant antisocial behaviour (defined as harassment; or any intentional act, if the act reasonably causes significant alarm, distress, or nuisance); or
- is 60 days behind in rent, which is increased from 21 days (and the Tribunal will need to take into account fairness and whether the tenant is making reasonable efforts to pay the rent)
Tenancies will also be able to be terminated upon the death of a sole tenant, or where the premises are uninhabitable. If you have a fixed-term tenancy it will automatically convert to a periodic tenancy upon expiry of the fixed term, unless the parties agree otherwise or the tenant gives notice. This means that if your fixed-term tenancy expires during lockdown, you will be able to stay in your tenancy.
If a landlord has already given a rent increase or termination notice that comes into effect after 26 March 2020, the notice is of no effect. If you are a tenant and you’ve been served a termination notice other than for the reasons set out in the Act, before the Act came into effect your tenancy your tenancy should have been allowed to continue. If the Tribunal has made an order terminating the tenancy that will come into effect after this Act came into force, that order should have been suspended until the 15th day after the time period that the protections against termination apply (initially three months).
Increasing rent within the relevant timeframe or purporting to terminate a tenancy without grounds are new unlawful acts with the Tenancy Tribunal able to order exemplary damages of up to $6,500 in each case. The Act also provides that the Tenancy Tribunal has the power to have hearings on the papers, without attendance from parties, if necessary. The Tribunal may also have hearings by telephone or videoconference.
All amendments can be found in full under Part 5 of the Act on the New Zealand Legislation website.
No-Access Provisions in Leases
The 6th Edition of the Auckland District Society’s (ADLS) Deed of Lease, which is the most widely used form of lease used in New Zealand for a wide range of tenancies, contains a no-access in emergency clause (clause 27.5). The lockdown makes it illegal for premises to be open, with the exception of essential businesses. This has prompted the ADLS to provide some clarification on how the clause should operate with the lockdown in place.
Clause 27.5 was inserted into the ADLS to cater to situations where tenants were unable to physically gain access to their undamaged buildings following the Canterbury earthquakes. The concern was that tenants should not have to continue to pay full rent for premises they could not access. It was also decided that it was appropriate to expand the situations in which clause 27.5 should apply to other civil emergencies, hence the broader definition of ‘emergency’ in the Lease.
The key limbs of clause 27.5 – emergency; inability to gain access to the premises; and inability to operate fully from them – and how they apply, vary from tenancy to tenancy. Accordingly, working out what a fair proportion of rent and outgoings that is to be suspended has not been further defined in terms of a percentage.
The clause has not been interpreted by the Courts as of yet, and the ADLS encourages parties to a lease to:
- negotiate; and
- seek to agree on a fair outcome either on:
- an interim ‘wait and see’ basis; or
- a more permanent basis, with longer term relationships in mind.
If the parties cannot agree on the application of the clause or what a fair proportion should be for their specific circumstances, the dispute resolution by mediation or arbitration in clause 43 of the Lease is available. There are other alternatives to mediation or arbitration, such as the low-cost option of seeking a determination of the ADLS Disputes Committee, which can be convened on short notice.
While the current ADLS Lease is being revised, it is unlikely that it will include a blanket percentage rent reduction formula into its provisions, given the wide range of different circumstances facing each landlord and tenant relationship. Parties to a lease should be mindful of this as they try to negotiate a fair reduction during this difficult period of time.
Insolvency Relief for Businesses Impacted by COVID-19
The Government is introducing amendments to the Companies Act 1993 to help businesses facing insolvency due to COVID-19 to remain viable. The temporary changes include:
- giving directors of companies facing significant liquidity problems because of COVID-19 a ‘safe harbour’ from insolvency duties under the Companies Act;
- enabling businesses affected by COVID-19 to place existing debts into hibernation until they are able to start trading normally again;
- allowing the use of electronic signatures where necessary due to COVID-19 restrictions;
- giving the Registrar of Companies the power to temporarily extend deadlines imposed on companies, incorporated societies, charitable trusts and other entities under legislation; and
- giving temporary relief for entities that are unable to comply with requirements in their constitutions or rules because of COVID-19.
Some of the most important changes are those to directors’ duties. Under sections 135 and 136 of the Companies Act, a director of a company:
- must not agree to the business of the company, or cause or allow the business of the company, to be carried on in a manner likely to create substantial risk of serious loss to the company’s creditors; and
- must not agree to the company incurring an obligation unless the director believes at the time on reasonable grounds that the company will be able to perform the obligation when it is required to do so.
The newly created safe harbour provides that decisions by a director to keep trading, as well as any decisions to take on new obligations, over the next six months, will not result in a breach of sections 135 and 136 of the Companies Act if:
- in the good faith opinion of the directors, the company is facing or is likely to face significant liquidity problems in the next six months as a result of the impact of the COVID-19 pandemic on them or their creditors; and
- the company was able to pay its debts as they fell due on 31 December 2019; and
- the directors consider in good faith that it is more likely than not that the company will be able to pay its debts as they fall due within the next 18 months (for example, because trading conditions are likely to improve or they are likely to be able reach an accommodation with their creditors).
This safe harbour will not apply to licensed insurers, registered banks and non-bank deposit-takers on the basis that those classes of entities are prudentially regulated by the Reserve Bank of New Zealand.
The second major change that introduces temporary Business Debt Hibernation allows for a suspension on the payment of debts. For a company to be placed into Business Debt Hibernation, the directors of that company must first assess whether they meet a newly introduced threshold test. If the threshold test is met, the company directors may give notice to its creditors for a proposal that the company be placed into Business Debt Hibernation. This test is yet to be officially defined but will allow for:
- a 1 month suspension on the enforcement of debts from the date the proposal is notified; and
- a further 6 month suspension if the proposal is passed.
Creditors will have a month from the date of notification of the proposal to vote on it, with the proposal going ahead if 50% (by number and value) agree that it should be adopted. During the 6 month suspension period the company can continue to trade, subject to any restrictions agreed with creditors as condition of entering into it. All other rights of enforcement against the company will be suspended. Please be aware that if the creditors do not place the company in Business Debt Hibernation then they may enforce debts as usual, and the existing compromise, liquidation or administration provisions under the Companies Act are available.
During the 6 month suspension period, directors will be able to further assess whether:
- the company can resume trading as normal;
- to propose a further normal compromise to creditors; and
- enter into administration or decide to liquidate the company.
Presumably during the Business Debt Hibernation period the obligations of the company (not otherwise dealt with in the compromise) are only temporarily switched off and, unless the company will be in a position to perform them, the company will need to settle or renegotiate such terms prior to the expiry of the Business Debt Hibernation period.
It is also proposed that any further payments, or dispositions of property, made by a company in Business Debt Hibernation to third party creditors (but not related parties) would be exempt from the voidable transactions regime, subject to the transaction having been entered into in good faith by both parties, on arm’s length terms and without the intent to deprive the existing creditors of the company.
The Business Debt Hibernation regime will be available to all forms of entity with legal personality, and other entities such as trusts and partnerships, but will not extend to licensed insurers, registered banks and non-bank deposit takers and sole-traders.