Lockdown Offer to Arbitrate Commercial Rent Abatement Disputes

MWIS Lawyers’ Associate – Juliet Golightly – is a Fellow of the Arbitrators’ and Mediators’ Institute of New Zealand (FAMINZ (Arb)) fellowship, being the highest credentialed status for arbitrators within the institute. She is also a senior commercial lawyer and litigator, experienced in the area of commercial lease disputes.

Juliet is well placed to arbitrate binding decisions between parties to commercial leases on rent abatement during the Covid-19 lockdown.

Why is arbitration the right way to go?

1. In addition to (or instead of) the default terms for abatement implied by the Property Law Act 2007, commercial leases often contain express provisions for the abatement of rent and outgoings.
2. As a response to the Canterbury earthquakes, the 2012 edition of the ADLS lease form was amended to provide for abatement of a “fair proportion of the rent and outgoings”, where the tenant is unable to access the premises to fully conduct the tenant’s business in an emergency. An “emergency” includes a plague, epidemic, or illness which seriously endangers the safety of the public.
3. Landlords, tenants, and their legal advisors are generally accepting that the Coronavirus pandemic and consequent lockdown qualify as an “emergency”, triggering this rent abatement clause.
4. However, “fairness” is subjective. We are finding continuing disputes between landlords and tenants over what proportion of the rent and outgoings to be abated is “fair”.
5. Many commercial leases contain arbitration clauses. For example, the disputes resolution clause in the ADLS form provides for resolution by agreement (including, if agreed, by mediation), but unless there is resolution within 30 days, submission to arbitration.
6. The advantages of arbitration in this situation is that it is fast, relatively inexpensive compared to court proceedings or the ongoing costs of arguing through lawyers, binding on the parties, and can be undertaken remotely.

How to appoint an arbitrator

Many leases with arbitration clauses, such as the ADLS form, provide for appointment of an arbitrator by agreement, or if the parties are unable to agree, an arbitrator appointment by an independent body (e.g. the New Zealand Law Society or AMINZ). Unfortunately, the costs of arbitrators appointed in this way can sometimes be more than the value of the dispute, and the person appointed may have no particular familiarity with the arbitral issues. There can be significant advantages to the parties in terms of cost and trust in agreeing a known arbitrator.

If the lease does not provide otherwise, then (unless the parties otherwise agree) the default provisions for domestic arbitrations in clause 1 of Schedule 2 to the Arbitration Act 1996 provide for the appointment of a sole arbitrator in the following way:

• The parties shall agree on the person to be appointed as arbitrator (one or both parties nominate an arbitrator, and attempt to agree);
• If they are unable to agree, this is a “default”. Either party may send a default notice to the other party, stating that unless the default is remedied within seven days, their suggested arbitrator will be appointed;
• If the party receiving the notice does nothing, the first party’s suggested arbitrator is appointed;
• Even if the party receiving the notice suggests an alternative arbitrator, the first party’s suggested arbitrator is appointed (this is because the receiving party has not “remedied the default”).

(n.b. there is some judicial comment that parties are supposed to make a genuine attempt to reach agreement on the appointment for an arbitrator before issuing a default notice).

Costs of arbitration

Unless the lease provides otherwise (the ADLS form does not), or the parties otherwise agree, the costs and expenses of an arbitration, including the legal and other expenses of the parties and the arbitrator’s fees, are fixed and allocated by the arbitrator in the award (clause 6 of the Schedule 2, Arbitration Act 1996).

Our view is, most disputes over abatement in these circumstances should proceed on the basis that the arbitrator’s fees and expenses are met equally by the parties, with the legal expenses of parties to lie where they fall.

If parties agree to truncated procedural steps, Juliet is prepared to be appointed as an arbitrator to determine abatement disputes on the following terms:

Rent less than $50,000 per annum plus GST

• MWIS fees – $2500 plus GST and disbursements (if any);
• Payment on appointment;
• Procedure:
  • Within 5 working days of appointment, landlord to provide to the arbitrator and tenant;
    • Copies of instrument(s) of lease
    • An unsworn statement of issues and evidence, setting out the term of the lease; annual rent; term; outgoings; any capital investments into the premises made specifically for the benefit of the tenant; nature of the tenant’s business; how the tenant’s access to the premises may (in the Landlord’s opinion) be prevented in the event of Level 1, 2, 3 or 4 alerts; to what extent the tenant has continued to pay rent or outgoings; any other relevant matters
  • Within 7 working days of appointment, tenant to provide to the arbitrator and landlord;
    • Any lease instruments(s) of lease not provided by the landlord
    • An unsworn statement of issues and evidence setting out the extent to which the landlord’s statement is accepted or not, and any other relevant matters
  • Within 10 working days of appointment, parties to provide and exchange a short summary of legal submissions (if any)
  • Within 12 working days of appointment, arbitrator to request any additional documents relevant in the arbitrator’s sole discretion
  • Remote hearing as soon as practicable at a time determined by the arbitrator after consulting with the parties, which may be by Zoom or other remote platform, and which may be attended by counsel for the parties
  • No orders for security for costs, discovery or interrogatories, or post-hearing submissions
  • Arbitrator to use best endeavours to issue an award within 10 working days of the hearing
  • Legal expenses of the parties to fall where they lie, unless there are Calderbank offers, in which case the arbitrator will issue a costs award on application by either party on payment of her fees and expenses charged at her usual charge out rate ($400 per hour, plus GST).

Rent less than $100,000 per annum plus GST

 MWIS fees – $5,000 plus GST and disbursements (if any);

• Payment on appointment;
• Procedure – as above.

Rent over $100,000 per annum plus GST

• MWIS fees – $400 per hour plus GST and disbursements (if any);
• Procedure – by agreement and in accordance with Schedule 2 of the Arbitration Act.

Contact Juliet on julietg@mwis.co.nz to discuss any of the above.