1 April 2020

COVID-19 – What happens to my commercial lease?

As New Zealand slowly becomes accustomed to our new normal of COVID-19 Level 4 Government restrictions, landlords and tenants are now beginning to wonder what this may mean for their leasing arrangements.

What does my lease say?

Those who have entered into leases using the Auckland District Law Society Sixth Edition standard Deed of Lease (generally, leases entered into since December 2012) will, unless amended via negotiations at the time, have included in their lease standard clause 27.5, which provides that if the tenant cannot “fully conduct” its business from the premises because of an emergency, then a “fair proportion” of the rent and outgoings will cease to be payable from the time the tenant became unable to gain access to the premises to fully conduct its business.

Is this an emergency?

The definition of “emergency” in the standard ADLS lease includes an epidemic.  It has been generally agreed among the legal community that clause 27.5 is triggered for most businesses, with the possible exception of essential services, on the basis that the tenant is unable to fully conduct its business from the premises during the Level 4 lockdown period.

What is a “fair proportion”?

What is less certain is what constitutes a “fair proportion” by which to reduce a tenant’s rent and outgoings – and the opinion will no doubt be different depending on whether you are looking at the issue through the eyes of the tenant or the landlord.

There is no standard answer here.  What is a “fair proportion” in each case will depend on the particular circumstances of the tenancy.  As most lease disputes are resolved via arbitration or some other alternative dispute resolution, there is also no case law on this issue to guide us.

Arguably, this is a valuation issue – and a discussion with your valuer could indeed be helpful.  In our opinion, the interests and rights of both the landlord and the tenant need to be balanced when negotiating any reduction:

• Presumably the tenant is still storing items in the premises, albeit that it is not fully carrying on its business from the premises. This will be especially relevant if all or part of the tenant’s “business use” stated in the lease is warehousing, storage or similar.
• The tenant may have a specialist fit-out, and branding on the premises which remains during the lockdown.
• The tenant has the benefit of being able to immediately commence business from the premises once the lockdown ceases; the landlord cannot re-let the premises.
• The landlord still needs to pay its mortgage or similar.
• But importantly, in most situations the tenant will simply be unable to trade.

One thing is clear, whether you are the landlord or the tenant: early discussion around this issue is important.  The team at McCaw Lewis are happy to help with these discussions as needed, and are operating fully from our homes during the lockdown period.

What if my lease does not have a “no access” provision?

Your lease may not include a “no access” provision if it was prepared on an earlier version of the ADLS form (Fifth Edition and earlier) or if it was prepared on the Sixth Edition and the provision removed during negotiations between the parties.

Where a tenant is unable to trade during the COVID-19 Level 4 Government restrictions and, as a result, is struggling with its obligations under the lease, we are encouraging the parties to work together in good faith to find a solution that allows business to resume as normal as soon as the restrictions are lifted.  Solutions might include a reduction of a “fair proportion” of rent, even though the lease does not strictly provide for one, or deferring rent until the restrictions are listed.

Most landlords will not want to see their tenant’s business fail.

If you need assistance with any commercial lease issues, please contact Laura Monahan or Dale Thomas.

Laura is the Managing Associate in our Commercial Team and can be contacted on 07 958 7479.

Dale is the Managing Associate in our Property Team and can be contacted on 07 958 7428.