Economic Recovery

Rent saga a death knell for some Auckland businesses

It could prove even harder to get landlords and tenants in Auckland to come to an equitable agreement over commercial rents this time around - now that landlords know what the endgame is - sounding a death knell for many local businesses 

The Government will be without a crucial tool for forcing commercial tenants and landlords to the negotiating table if Auckland goes into a longer lockdown. 

The city's Level 3 lockdown was extended on Friday evening until August 26.

Cabinet is also understood to be discussing financial assistance for businesses in Auckland including an extended wage subsidy and other forms of assistance like commercial rent relief.

A longer lockdown in Auckland could prove to be the death knell for many customer-facing businesses which are now locked out of their income streams, but still liable for huge rent bills.

Retail NZ CEO Greg Harford said when the issue popped up last time, many commercial landlords only came to the negotiating table after the Government warned it intended to pass legislation to force the issue.

"When they [the Government] came out and said 'Look we're going to legislate on this' that was a really effective tool to get everyone back around the negotiating table. 

"We then saw when that legislation did not proceed there were a number of landlords who walked away from conversations at that point and said 'No we don't need to be negotiating'."

Commercial rent relief legislation was scuppered at Cabinet by NZ First, which pleaded for the sanctity of contract and raised concerns about foreign franchise owners.

The Government ended up offering to provide a grant of up to $6000 so that landlords and commercial renters could go to arbitration - but with no automatic right to arbitration.

"I am worried. For some of my clients it will just be the end. They were struggling before. [Then there was] light at the end of the tunnel and then this."

It was a far cry from what Justice Minister Andrew Little proposed in June. A temporary amendment would be made to the Property Law Act that would require a fair reduction in rent where a business suffered a loss of revenue due to Covid-19.

"I am concerned that some landlords and tenants are not coming together to make agreements that reflect the seriousness and uniqueness of Covid-19," Little said at the time.

"Including behaviour where large commercial tenants refuse to pay rent, and landlords demanding rent from small retailers who haven't been able to operate."

Even with the looming threat of legislation, Harford said 20 percent of retail businesses hadn't been able to come to a new agreement with their landlord.

That earlier failure of negotiations over commercial rents means the Government no longer has any ability to bluff landlords or commercial tenants into negotiating a new settlement.

Harford said those who managed to come to an agreement last time would likely have to head back to the negotiating table to sort out another. Those earlier agreements wouldn't have covered a future lockdown.

Turner Hopkins lawyer Lizandra Bailey represents a number of small business owners in Auckland and said an extended lockdown in the region could prove to be the "straw that broke the camel's back" for many of them - especially if no commercial rent assistance was forthcoming.

"I've got tenants in the hotel industry and the hospitality industry that are really suffering because of this. And this [lockdown] is just going to double down on it if we have that same behaviour."

Some businesses she represented hadn't restarted trading because they were still trying to negotiate new rental terms.

They feared that if they restarted their businesses now without renegotiating their rents they might be seen as trading while insolvent.

"I am worried. For some of my clients it will just be the end. They were struggling before. [Then there was] light at the end of the tunnel and then this."

Many of the landlords holding out didn't appear to have good financial reasons for doing so either.

Most commercial landlords have renegotiated rents to keep their properties tenanted. Photo: Lynn Grieveson

Bailey said many landlords holding out had no mortgages against the properties they were leasing out.

"I can understand someone with a big mortgage should get some rent, but someone without a mortgage? You'd think they'd be willing to do a deal."

Some of the holdout landlords were family trusts. Others were overseas investors who had significant mortgages on the land. There were 'Mum and Dad' commercial landlords unwilling to budge on rents too.

"There are a lot of landlords who have done a lot for their tenants.

"They respect the fact that this is a long-term relationship and we're in it together, but there are a handful which aren't."

She acknowledged not all landlords were in a financial position to make big sacrifices when it came to rental income.

Tenants also shouldn't expect to be supported by landlords if their businesses were no longer viable.

"I've had a conversation with a landlord who said: 'Well this is my business, I've got a business to run and I rely on the rent to get paid.'

"He doesn't understand that long term they may not have rent being paid.

"I don't get it."

Australia avoids similar issues

Australia has not had similar trouble passing rules to help bring landlords and tenants to the table. 

The Federal Government introduced a new mandatory tenancy code for commercial landlords in April which started rolling out across states in May. It applies to tenancies where the tenant or landlord has a turnover of A$50 million or less.  

Under the code:

  • Landlords must not terminate the lease or draw on a tenant’s security.
  • Are required to reduce rent in proportion to the trading reduction in the tenant’s business through a combination of waivers of rent and deferrals of rent. 
  • Tenants must honour the lease and a material failure to abide by substantive terms of it will forfeit any protections the code offers.

Harford couldn't see how passing a code of conduct like this or the Government's proposal - which was similar to an Auckland District Law Society clause attached to many rental agreements - would interfere with the law of contract any more than other pieces of legislation governments routinely passed.

The only other alternative - if you did not want to see many more businesses fail as a result of this - would be a rent subsidy, but that would prove very costly for taxpayers, he said.

Auckland Chamber of Commerce CEO Michael Barnett said if the past was any guide, most landlords would be "extremely accommodating", but a hold-out minority of landlords wouldn't be.

"It's unfortunate that the Government didn't get its mediation ideas through.

"If there was going to be longer periods [of lockdown] this time - and in a Level 4 - I would have to say that the possibility of getting that mediation clause is going to become more critical for some businesses."

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