Government Intervention With Commercial Leases

Researching this article has given me greater empathy for those tasked with writing the laws of this land, and this is to say nothing for doing so during a pandemic. There is no perfectly symmetrical approach which appeases all stakeholders; some will feel, often justifiably, hard done by. Take for example the decision to provide a wage subsidy to employers, but not intervene with the commercial leasing arrangements of landlords and tenants, as has been done in Australia.

The Government continues to attract the ire of the retail sector for the latter, and it is easy to get caught up in this sentiment, given the great number of us directly potentially affected by this decision, adversely, and maybe tomorrow. This fear will do it to us, but before we reach for our placards and pitchforks, it’s worth trying to somewhat calmly work through some of the possible reasoning for this decision, what it means in real terms for various stakeholders, and how it might play out in practice.

The Landlord-Tenant Relationship

The characteristics of the landlord-tenant relationship are firmly established: the landlord leases its premises to the tenant to use for an agreed commercial purpose in exchange for the payment of rent. The landlord is entitled to set its rent, and once agreed to by the tenant, collect this rent throughout the term of the lease (subject of course to it adhering to statutory and contractual obligations imposed on it).

The landlord is not expected to assume any of the functional trade risk of its tenant. That is, its fate shall not be affected by the fortunes of its tenant, except to the extent it will require a solvent tenant, lest it be able to continue to pay its rent.
If Government interferes with this relationship by requiring mandatory abatement of rents and / or prohibition on the landlord terminating commercial leases if tenants do not pay full rent, it is tantamount to Government altering the fundamental nature of the landlord-tenant relationship because it would require the landlord to assume some of the tenant’s trade risk. Moreover, it is an interference with the sanctity of contract, a fundamental underpinning of western liberal democracy. Perhaps Government is loathe to do so at this stage of the pandemic, given it could initiate a raft of unintended and yet to be understood future economic consequences. It will no doubt be watching the effect of this move in Australia very closely, maybe nervously.

Low Cost Government Guaranteed Loans

It is also possible Government intended its low cost guaranteed loan scheme to relieve SMEs of the burden of its lease obligations. Indeed, the specific wording in Finance Minister Grant Robertson’s press release on these loans referred to them being used to fund the ‘unavoidable fixed costs’ of businesses affected by Covid-19. This reasoning is further galvanized by the fact these loans do not appear to be available to small scale commercial landlords.

What it Means and How it May Play Out in Practice

If a landlord and tenant cannot successfully negotiate an arrangement which allows the landlord to continue to collect a portion of its rent and defer and / or abate an amount sufficient for its tenant to trade through the pandemic, there will potentially be significant uncertainty, cost, stress and anxiety for both landlord and tenant alike. Whereas the mandatory commercial tenancies code in Australia should foster negotiation by dissuading the parties from litigating in the knowledge their ‘optimal positions’ are off the table (i.e. the landlord cannot terminate the lease nor draw on the tenant’s security, and the tenant cannot expect a full abatement of rent), in New Zealand landlords with an appetite for litigation may well purport to terminate leases and draw on the tenant’s security. The position of course is unclear, with no case history to draw on, however even the perceived threat of well capitalized landlords taking these steps could well shoehorn tenants into electing to borrow funds to pay their rent, rather than assuming litigation cost and risk, not to mention the potential loss of a premises that may have considerable associated goodwill for the business. Conversely, opportunistic tenants may well refuse to pay rent and wait in the wings in the belief, mistaken or otherwise, that their landlord either will not assume litigation cost and risk, or will at least wait to see the result of the first cases heard on the matter.

While all of this could be hugely unfortunate for the individual parties embroiled in such sagas, the cost at a macro level is of course devastating for our economy. For all of the downside associated with intervening with this historically sacred contractual relationship, I cannot help but think the Australians may be right in principle to intervene, although perhaps the sheer quantum of relief it affords tenants will prove to have an overly onerous effect on landlords, particularly on small scale landlords with mortgages. On a principled basis, there seems little reason to treat these landlords any differently to other SMEs. As you can see, getting the balance right is fraught and no singular solution is without its issues.


Given this honey pot of uncertainty and confusion, the best high-level advice for landlords and tenants is that now more than ever is the best time to act in good conscience, transparently and expediently. The parties need to do their best to sort it out themselves. The cost of not doing so is too high, and much like with the Covid-19 Government Alert system, if we can’t police ourselves there may need to be Government intervention. If this article has done nothing else, it will have convinced you that this is not a simple task and intervention will present its own unique set of unintended and yet to be understood consequences.

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