Commercial Leases - Covid-19 and No Access to Premises
The spread of COVID-19 in New Zealand and the Government’s response of introducing a nationwide lockdown has meant that all non-essential businesses have closed for the initial 4 week period, preventing many businesses’ access to their premises. The unprecedented circumstances have left tenants and landlords scrambling to assess their obligations under leases, especially in relation to rent and outgoings payments.
Given the speed at which the alert levels escalated, many parties are turning to the ‘no access’ provision in the current Auckland District Law Society (“ADLS”) form of Deed of Lease, being subclause 27.5. This clause was included in the ADLS Sixth Edition 2012 Deed of Lease as a response to Christchurch-earthquake issues, so any leases pre-dating this period cannot rely on the clause (but the lease may include similar provisions or ‘force majeure’ clauses – landlords may use other lease forms or bespoke leases. We recommend you check your lease carefully in full). However, there is an opportunity for tenants and landlords to negotiate the same given the circumstances.
Under the ‘no access in emergency’ provision in subclause 27.5 of the current ADLS Deed of Lease, a fair proportion of rent and outgoings ceases to be payable by the Tenant in certain circumstances.
Elements of subclause 27.5 – no access in emergency
The key elements of subclause 27.5 of the Deed of Lease are:
Occurrence of an emergency – broadly defined in subclause 47.7(d) of the Deed of Lease to be:
o the result of any event, and specifically including an epidemic; and
o which causes or may cause loss of life or serious illness, or in any way seriously endangers the safety of public; and
o is not caused by any act or omission of the Landlord/Tenant;
The Tenant is unable to access the premises to fully conduct its business from the premises;
Lack of access is because of reasons of public safety or the need to prevent, reduce or overcome any hazard or harm associated with the emergency, including:
o a prohibited or restricted access cordon applying; or
o a restriction on occupation of the premises by a competent authority.
How it applies if this is in your lease
In our view:
o The national lockdown is clearly an emergency as defined in the Deed of Lease (noting both the Epidemic Notice issued on 24 March 2020 and the declaration of State of National Emergency made on 25 March 2020);
o The Government’s orders are for the express purpose of public safety/to reduce the risk of harm from COVID-19;
o As a result, under subclause 27.5, a fair proportion of the rent and outgoings has ceased to be payable;
o The date the fair proportion ceased to be payable is at the earliest Tuesday 24 March 2020, being the first full day after the COVID-19 Alert Level 3 order was made, or at the latest Thursday 26 March 2020, being the first day of Level 4 lockdown. This commencement date will depend on the type of business being considered. Any earlier voluntary closures of premises would not be eligible for rent/outgoings reduction for the voluntary closure period;
o The reduction of a fair proportion of rent and outgoings continues until such time the COVID-19 Alert Level has returned to Level 2 or 3 (depending on the nature of your business). All businesses can legally operate at Level 2 or below, so are not barred from access to business premises; and
o Even if you or your staff are working remotely from home (or from other premises), subclause 27.5 will still apply. This is because the emphasis is on whether you are able to fully conduct your business from the business premises. Something less than full business operation from the premises is all that’s required (provided the other essential elements are met).
Unfortunately, the ADLS Deed of Lease does not provide any guidance on what a “fair proportion” of rent and outgoings is. There is no mechanism in the Deed of Lease for working that out, and the Property Law Act 2007 is also silent, other than referring to “fair and just in proportion to degree of damage or destruction” when considering a similar provision where a premises is actually damaged and rent is to be reduced.
Ultimately, the degree of reduction of rent and outgoings is a matter of negotiation between tenant and landlord. While tenants should anticipate paying a proportion of their rent and outgoings during this period, landlords should also anticipate the reduction of rental income and outgoings payments from tenants, and seek advice from tax and accounting advisers regarding avenues such as mortgage holidays and depreciation on buildings. More information on these matters can be found on MBIE’s business.govt.nz website.
We recommend tenants and landlords start discussions immediately and work constructively to agree an outcome on rent and outgoings reductions. You may also find alternative solutions are betters suited to individual circumstances, such as full or partial rent and outgoings holidays, payment of rent arrears spread over time when businesses are operating again at pre-COVID-19 levels and so on. The context of an ongoing landlord/tenant relationship should also be borne in mind, to ensure both parties can continue their business and commercial relationships beyond the lockdown period.
You will need to regularly check the list of essential services on the Government’s covid19.govt.nz website, as this is updated frequently. If your business’ status changes from a non-essential service to an essential service, this will impact your rights under your lease.
Finally, on 1 April 2020, Finance Minister Grant Robertson stated that the Government is considering what the position should be for commercial tenancies, particularly as comments have been received from smaller tenants with landlords who are not offering any abatement or suspension of rent. Given the range of approaches being followed, it may be that the government does issue guidance on commercial leases in the near future, which we will be keeping a very close eye on.
Whether you are a commercial tenant or landlord, if you have any questions about your existing lease and the impact of COVID-19, or other lease queries generally, please contact Sarah, Mark, or Jono.