Commercial leases and rent relief during the COVID-19 pandemic

The effect of COVID-19 on New Zealand businesses has been profound. In the wake of the initial Alert Level 4 lockdown in March 2020, followed by several periods of Alert Level changes since then, commercial landlords and tenants were left out of pocket, scrambling to negotiate to reduce or defer rent and outgoings and in some cases, resorting to cancellation. These effects will inevitably continue as New Zealand faces further lockdowns and economic disruptions, most sharply thrown back into focus with the sudden return to Alert Level 4 lockdown due to the community outbreak of the Delta variant in August 2021.

When landlords, tenants and their lawyers first encountered lockdown in March 2020, outside the Canterbury Earthquakes, there was little precedent for dealing with the consequences under commercial leases.  More modern leases generally contained the Auckland District Law Society (“ADLS”) clause 27.5 ‘no access in emergency’ provision, or a similar term, but there was little guidance about the extent of relief from rent and outgoings that would apply.  Older leases, or those not based on the ADLS lease form, often had no equivalent to clause 27.5 of the ADLS lease, leaving tenants in the unenviable position of having to continue paying rent and outgoings each month, while being entirely unable to trade.  Fortunately, most landlords saw the commercial realities and assisted tenants in bridging the gap, either with rent and outgoings abatements, deferrals or other arrangements.

However, while “being kind” was the mantra for the moment, there was never going to be agreement in all cases.  There were also thorny questions about what would happen to the viability of tenants’ businesses during lower Alert Levels, where trade was possible but almost certainly reduced due to public concern about community transmission and the growth of flexible working affecting CBDs.  Would suitable solutions be found for those situations?

The High Court in Mountfort v Cheam [2021] NZHC 1535 has now, among other things, addressed the applicable principles to lease cancellation and tenants’ relief against cancellation, with particular regard to the effect of government lockdowns and restrictions during the COVID-19 pandemic.

Mountfort v Cheam – The facts

The applicant, Mountfort (“M”), leased bakery premises to Cheam (“C”). In March and April 2020, during an Alert Level 4 lockdown, C was unable to access the premises. Despite regaining access following the lockdown, C continued to face a downturn in business, attributing this to the ongoing restrictions at lower Alert Levels and the flow-on effects on trading patterns.

Consequently, C failed to pay rent from March to late June 2020 and underpaid thereafter. M served a notice under the Property Law Act 2008 (PLA) for cancellation of the lease on the basis of the rent shortfall and applied to the High Court under section 244 of the PLA for an order for possession (and therefore cancellation) of the lease. C opposed M’s application and sought relief against cancellation under section 253 of the PLA, relying on a clause of the lease that provided for rent abatement when C is unable to gain access to fully conduct C’s business from the premises as a result of an emergency.

The High Court’s decision

The High Court discussed the effect of the rent abatement clause. The lease defined “emergency”, which included an epidemic. The Court held the COVID-19 pandemic falls within that definition.

C stated after the Level 4 lockdown she could access and operate from the premises but the effects of COVID-19 continued to impact her business and ability to pay rent. For example, C said the streets did not return to the busy level of pre-COVID-19 restrictions, many regular customers had moved to working from home permanently and elderly customers would only return once they had a vaccine. For these reasons, C argued she should be entitled to rent abatement during the Alert Level 4 lockdown and for the period of ongoing government restrictions thereafter.

The Court rejected C’s argument, finding the rent abatement clause in the lease only concerned access. It was not triggered merely by a general downturn in business caused by COVID-19. As a result, C was only entitled to abatement of rent for the period of the Alert Level 4 lockdown. M succeeded in its application for possession (and therefore cancellation) of the lease, however, C was granted relief from cancellation on the condition that C paid M all arrears of rent plus interest, all further rent payable under the lease monthly in advance and M’s legal costs.  Given C’s inability to pay rent in the first place had led to M seeking to cancel the lease, the Court’s judgment is likely of little comfort to C or tenants in her position.

What should commercial landlords and tenants take away from this?

Mountfort v Cheam has highlighted that access to commercial premises (and the Government responses to COVID-19 that restrict access) is the key consideration for activation of rent relief provisions in most commercial leases.  While general business downturn as a consequence of COVID-19 is a very real and immediate concern for tenants and landlords, the Court has confirmed that it is not grounds for rent abatement in the COVID-19 setting.

Landlords and tenants should carefully review their leases to ensure they are adequately protected and understand what circumstances will give rise to rent relief, if any. If you are a commercial landlord or tenant and would like to discuss your lease, contact Sarah, Jono, or Sean.