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Commercial lease obligations and COVID-19

7 April 2020

What are your rent obligations under your commercial lease due to COVID-19?

As the forced closure of offices, shops, restaurants and bars, continue to impact commercial operations, businesses should be turning their minds to the key provisions in their commercial leases and be proactive in their response to the COVID-19 Pandemic.

If your commercial lease is drafted using the sixth edition of the Auckland District Law Society Deed of Lease (released in 2012), your lease should include a “No Access” clause in relation to rent abatement in an emergency, contained in clause 27.5 of the Lease. Your lease may not include clause 27.5, but it may have a similar clause. You should read your lease carefully, or seek your lawyer’s advice, as the financial benefits in getting this right could be significant.

The No Access provisions contained at clause 27.5 of the ADLS lease states that if there is an emergency and the Tenant is unable to gain access to the premises to fully conduct the Tenant’s business from the premises because of reasons of safety of the public or the need to prevent and reduce or overcome any hazard/harm that may be associated with the emergency, then a fair proportion of the rent and outgoings shall cease to be payable for the period commencing on the date when the Tenant became unable to gain access to the premises to fully conduct the Tenant’s business from the premises until the inability ceases.

The definition of “emergency” includes a “plague or epidemic” that causes or may cause loss of life or serious injury, illness or in any way seriously endangers the safety of the public. The Alert Level 4 lockdown due to COVID-19 is clearly an “emergency”, given a pandemic has been declared and the Government is utilising emergency powers in response.

If you are a Tenant, you will be wondering how this clause will apply to you. If you are a non-essential business and have clause 27.5 in your lease, or something similar, this means a “fair proportion” of rent and outgoings will cease to be payable from the date when you became unable to gain access to the premises to fully conduct your business from the premises. This is likely to be as of 11:59pm, Wednesday 25 March 2020, when the Alert Level 4 lockdown commenced. 

If you operate an essential business and are therefore able to continue to conduct the business from your premises, then the No Access Clause is unlikely to apply.

What a “fair proportion of rent and outgoings” actually is will depend on the circumstances. Even though the Tenant cannot access any part of the premises, it won’t necessarily translate to a reduction of all of the rental or outgoings payable. 

As a starting point, the parties should communicate and there should be a negotiation around what is a “fair proportion”. Relevant factors to take into account may include:

  • How much a Tenant should be charged for being able to “store” its property in the premises?

  • Whether the Tenant has any computer equipment in the premises which is able to be accessed remotely to assist with conducting their business; 

  • Whether the Tenant’s business can continue to be conducted without a physical operating premises (e.g. online sales);

  • What financial impact is the lockdown will have on the Tenant’s business; and

  • Whether the Tenant has the benefit of financial assistance from the Government if their business is experiencing downturn in revenue due to COVID-19.

The question of what is “fair” should be decided on reasonable and objective considerations, not what one or the other party subjectively believes is fair.

If your commercial lease does not contain the “No Access” clause, then it is our recommendation that you still approach your Landlord to investigate if a rent abatement is available. We are still seeing Landlords in these circumstances offer rent abatements to their Tenants, because:

  • It’s in a Landlord’s interests to try and help their Tenants see it through this period;

  • The government has introduced depreciation on commercial buildings from 2020/2021, which will have a significant financial advantage to Landlords;

  • Landlords may be able to access the mortgage principal and interest holidays being offered by the banks; and 

  • It’s the right thing to do.

All parties should remain mindful of the long-term relationship between them, and negotiate in good faith to reach a solution together. Arbitration is available if the parties cannot agree, but is an expensive and potentially time consuming process.

Parties should contact their Landlords or Tenants and discuss the impact of Covid-19 on their commercial lease. Harris Tate’s Commercial Property Team can advise and assist you with reviewing your lease and/or negotiating with the other party.

Harris Tate are able to assist with any Commercial Law advice required in relation to Commercial leases and tennants under the COVID-19 lockdown.

We are working remotely and our direct dial phone numbers are being diverted to our cell phones. Please contact Michelle Carabine on 07 571 3664, or email michelle@harristate.co.nz