COVID-19 – Leases what does it mean for Landlords and Tenants
Due to the country-wide lockdown of all “non-essential” businesses, many are questioning what this will mean for the rent obligations under commercial leases.
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.
The No Access Clause 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 utilizing emergency powers in response.
Tenants that operate an essential business may be able to conduct their business from the premises, in which case the No Access Clause may not apply.
However, the No Access Clause is likely to apply to Tenants that operate a non-essential business and are unable to fully conduct that business from their premises because of the need to reduce the harm COVID-19 may cause by spreading through community transmission.
Accordingly, a fair proportion of rent and outgoings shall cease to be payable from the date when the Tenant that operates a non-essential business became unable to gain access to the premises to fully conduct their business from the premises. This is likely to be as of 11:59pm, Wednesday 25 March 2020, when the Alert Level 4 lockdown commenced. The reduction of rent and outgoings payable is likely to apply until such time as the COVID-19 Alert Level is reduced.
What “a fair proportion of rent and outgoings” actually is will depend on the circumstances. It won’t necessarily translate to all of the rental or outgoings payable, even though the Tenant cannot access any part of the premises. Relevant factors 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; and
- whether the tenant’s business can continue to be conducted without a physical operating premises (e.g. online sales).
Some Tenants may also have the benefit of financial assistance from the Government if their business is experiencing downturn in revenue due to COVID-19, which could also be relevant to the question of “fair proportion”.
If the level 4 alert for COVID-19 applies for the duration of the “No Access Period” specified in the First Schedule of the Deed of Lease (the standard period being 9 months), then either party may terminate the lease by giving 10 working days written notice to the other.
Meanwhile, under some leases, Landlords can have an obligation to insure for cover for a 12 month indemnity in respect of loss or rent and outgoings.
Landlords may therefore be covered for the loss of a fair proportion of the rent and outgoings during the lockdown period. However, some insurance policies exclude business interruption due to outbreaks of disease. Landlords should contact their insurance brokers if they have not already to determine what their particular policy covers.
Whether a Landlord has the benefit of any insurance to cover the rent abatement period, could potentially also be relevant to the question of what will comprise a “fair proportion” of the rent and outgoings.
Landlords who use rental income to service loans may also wish to discuss the possibility of a suspension of their mortgage repayments (repayment deferral) with their bank, and should keep their banks informed over any agreed rent reductions or other concessions.
Landlords and Tenants need to be discussing/negotiating what constitutes “fair proportion” in their particular circumstances. 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.
Any agreements should be recorded in writing to give each party certainty as to the scope of what has been agreed, and how long the arrangement will continue
Prior to offering or agreeing to any rent reduction or relief to their Tenant, Landlords should first seek information from their Tenant in relation to:
- the extent to which the Tenant’s business has been impacted by the lockdown;
- whether the Tenant is eligible for any income assistance by the Government;
- the financial position of the Tenant’s business; and
- anything else which might be relevant.
This advice is general in nature. The specific terms of each lease and each Tenant’s circumstances should be considered on a case-by-case basis. In particular, leases which are in other forms, or an earlier version of the Auckland District Law Society Deed of Lease (i.e. prior to 2012) (or where the No Access clause set out above has been modified) will involve different considerations.