Government is proposing a new “fair proportion” of rent test as a result of Covid-19. Unless contractually agreed, the new test will apply to all leases where tenants are unable to gain access to their premises in an epidemic.
The change has come as a surprise to most, with very little consultation with the property sector. The new law is proposed to come into effect from 28 September, however the Minister has invited submissions on the effective date. While we wait for certainty from Government, landlords and tenants should take this opportunity to reach out to each other and begin immediate negotiations.
What does this mean for you?
While you can contract out of this clause, this will require agreement from both parties. Failing that, a “fair proportion” of rent and outgoings will cease to be payable. The key points to take away are:
1. The clause is automatically triggered during an epidemic and where a tenant is “unable to gain access to all or any part of the leased premises to conduct fully their operations from all or any part of the leased premises, because of reasons of health or safety related to the epidemic”. In most cases this will be a level 4 and level 3 lockdown.
2. If triggered, parties are required to consider any abatement arrangements made on or after 18 August 2021 when negotiating a “fair proportion” abatement for the relevant period. This may cause issues, as circumstances can change.
3. Landlords should take care in issuing notices for breach for non-payment given that the law is retrospective.
4. If your lease currently provides for a “contracting out” provision excluding implied terms in Schedule 3 of the Property Law Act, it will have no effect. Any exclusion of the new change must be agreed after 28 September 2021.
5. The new law will not affect leases already containing a “no access” clause nor where parties have agreed to a variation addressing this (whether before or after the legislative change).
Difficulty in assessing what is “fair proportion”
There is no definition or guidance on what is classed as a “fair proportion”. The meaning is up for interpretation. Difficulties could arise as each situation is unique and what is fair for the landlord may not be fair for the tenant. Particularly so as circumstances change and past arrangements may be no longer applicable.
Landlords may query the obligation to carry rent and outgoings in circumstances where a tenant is able to fully conduct its operation from home, or has continued to use the premises for storage such as network servers and stock.
On the contrary, a tenant may feel that this is not a fair position to take, and that an assessment of what is a “fair proportion” should entirely consider the tenant’s ability to access and fully utilise the premises.
If a dispute arise under the new clause, arbitration will be required. Arbitration can be costly and time consuming, and add a level of risk for both parties.
Where appropriate, parties can agree to contract out of this process, and agree on a suitable dispute resolution process.
In the absence of any guidance on what is a “fair proportion”, landlords and tenants should work together to reach a commercial decision. If your lease has a no access clause, parties should get in contact now and commence negotiations. Although we believe it will be difficult for landlords to justify contracting out of the implied terms, agreeing on terms suitable for both parties may be more appropriate for some landlord/tenant relationships.
For assistance in facilitating negotiations or to discuss your situation, please contact one of our team.