COVID-19: Lease in default?  Rent not paid on time?

Intended PLA Law Changes during COVID-19

The Government has announced it intends to change parts of the Property Law Act 2007 (“PLA”) that set out the process for terminating a lease for non payment of rent, and the process a mortgagee (e.g. a bank) must follow if mortgage payments are not made on time.

The changes will cover all notices issued on and after 5 April 2020 and continue until the date 6 months after the end of the government issued COVID-19 Notice period (which is currently 24 December 2020 but this may be extended).

The Government say these temporary changes are part of its wider support package “to support commercial landlords, tenants, and mortgagors through the COVID-19 situation.  They will provide relief for businesses, to help them stay solvent through the epidemic, which will help New Zealand’s economic recovery.” 

Cancelling a lease for non-payment of rent – landlord’s default notice period

  1. Currently the default notice period that a landlord must provide to tenants is 10 working days.  This will be increased to 30 working days.
  2. The changes only apply to commercial leases and not to residential tenancies.

Exercise of mortgagee powers (e.g. power of sale) for failing to make repayments – mortgagee’s default notice period 

  1. Currently a mortgagee must give 20 working days notice to a defaulting mortgagor (usually a borrower) before the mortgagee (usually a bank or other lender) can call up the full loan or exercise the mortgagees power of sale. This will be increased to 40 workings days notice.
  2. A similar extension will apply for the sale of mortgaged goods, which will require a 30 working days notice period (as opposed to 10 working days).
  3. The changes will apply to both residential and commercial mortgages.

It is important to note the changes do not release the tenant or mortgagee from continuing to comply with all of their lease and mortgage obligations.  Rent and interest continue to accrue during the notice period, with penalty interest being chargeable in many cases.  All the changes do is increase the notice period a landlord must give before terminating a lease for non payment of rent, and the notice period a mortgagee must provide before calling up the mortgage and selling the mortgaged property.

In our view the changes will have limited, if any, impact.  In our experience, most landlords and mortgagees already give the tenant or mortgagee time to pay the arrears before a notice is issued.  We anticipate the only impact of the above is to cause the notices to be issued earlier.

The Courts have shown a willingness to protect mortgagors faced with their property being sold during COVID-19.  In March the High Court granted an injunction preventing a mortgagee selling a property during the Alert level 4 lockdown period as it would be impossible reach the best price reasonably obtainable if people were not able to view or attend the auction.

We believe the best option is for the landlord and tenant, and mortgagee and mortgagor to communicate and seek to find a mutually acceptable resolution without the need for formal enforcement action or court proceedings.  Both can be costly, and with court proceedings there is always uncertainty over the outcome.

We are experts in insolvency and property law and have internationally recognised litigators.  We act for landlords and tenants, lenders and borrowers. If you need assistance due to a lease or mortgage being in default, or you have other insolvency issues please contact our team or your usual contact at Hesketh Henry. 

Our comments are based on the Ministry of Justice article and is subject to changes issued by the New Zealand government.

Disclaimer:  The information contained in this article is current at the date of publishing and is of a general nature.  It should be used as a guide only and not as a substitute for obtaining legal advice.  Specific legal advice should be sought where required.

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Contact the expert team at Hesketh Henry.
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