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Impact of COVID-19 on Commercial leases

April 9, 2020

Impact of COVID-19 on Commercial leases

The COVID-19 Level 4 lockdown has presented us all with a very unusual set of circumstances and has seen us receive countless questions from both landlords and tenants in relation to their rights and obligations under their lease arrangements. Not surprisingly, the majority relate to rent abatement.

The most common form of lease used is the Auckland District Law Society 6th Edition Deed of Lease (the “ADLS Lease”). This version underwent a major revision in 2012 after the Canterbury earthquakes when many businesses found themselves unable to access their premises because they were located within the red zone.

COVID-19 and the Level 4 lockdown has effectively created the same restriction on occupation of premises however this time on a national scale.

The ADLS Lease now includes a “no access in emergency clause” (Clause 27.5). Emergency is defined to include an epidemic which may cause loss of life or illness. Clause 27.5 operates where a Tenant is unable to gain access to the premises to fully conduct their business because of, among other things, a restriction on occupation of the premises by any competent authority. COVID-19 and the subsequent order issued by the Director-General of Health on 25 March 2020 undeniably fits these criteria.

It is important to note that even if a tenant has not executed an ADLS Lease but has executed an Agreement to Lease then the parties (subject to the terms of that Agreement to Lease) are likely to be bound by the terms of the ADLS Lease as if the ADLS Lease had been signed. Therefore, Clause 27.5 would still apply.

Where Clause 27.5 can be applied, a fair proportion of the rent and outgoings shall cease to be payable from the date the tenant became unable to access the premises until that inability ceases.

The question then becomes, what is a fair proportion? The ADLS Lease does not define a fair proportion as the authors recognised that each tenancy would vary from another. Nor is there any case law in relation to this matter, simply because New Zealand has not faced an emergency significant enough to invoke Clause 27.5 since it was included in the ADLS Lease.

There is a lot of commentary on how a fair proportion should be calculated. Some would argue that a 50/50 share of the burden is the only fair way to proceed but that solution may not fit every tenancy arrangement.

Some things to consider might be:

  • Are the premises still utilised in some way? For example, for the storage of stock, equipment or machinery?
  • What has the impact been on the tenant’s business?
  • Is the tenant’s business still able to function remotely, even in part, perhaps due to an operating server at the premises?
  • Is the landlord still liable to pay rates and insurance and/or loan repayments?
  • Is the landlord and/or the tenant receiving Government assistance or a loan or mortgage holiday?
  • While probably unlikely, it may also be worth checking if the Landlord’s insurance assists in any way.

Failing an agreement being reached, the ADLS Lease does provide further mechanisms to obtain resolution by way of mediation or arbitration. The Auckland District Law Society also provides a disputes resolution service which can be convened on very short notice should it be required and will likely be a swifter and more cost-effective solution for most. The goal is to reach an agreement that works for both parties during this challenging time and as quickly as possible.

A landlord/tenant relationship is an important one. If it is to survive the coming months of recovery it is in the best interests of both parties to come up with an arrangement that is as fair as it can be to both sides. Remember to record any agreement reached in writing.

Whether operating under the ADLS Lease or not, ideally a landlord and tenant will apply a logical approach, exercise some commercial kindness, and be able to negotiate the terms of any abatement between themselves.

Our team are also available to provide any assistance we can during this challenging time.