COVID-19 - Commercial Leases - Rent Relief

Commercial leases are now under the spotlight given the current ‘lockdown’ – which of course has left non-essential businesses in a position of being unable to access their leased premises.

The most common form of commercial lease used in New Zealand is the ADLS (Auckland District Law Society) lease. Following the Canterbury earthquakes, this lease was updated (2012) to include a no access clause:

No Access in Emergency

27.5    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 property or the need to prevent, reduce or overcome any hazard, harm or loss that may be associated with the emergency including:

a)  prohibited or restricted access cordon applying to the premises; or

b)  prohibition on the use of the premises pending the completion of structural engineering or other reports and appropriate certifications required by any competent authority that the premises are fit for use; or

c)  restriction on occupation of the premises by any competent authority.

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.

This clause applies in the current circumstances. It provides that a “fair proportion” of rent and outgoings are to temporarily cease if the leased premises are unable to accessed in an emergency. (There is also provision for either party to terminate the lease if the inability to access continues for an extended period of time – check the lease for this period – but the default is 9 months.)

If your lease is an ADLS lease entered into from 2012 then you might be asking what is a “fair proportion”? Clause 27.5 has not been tested as yet (it was inserted after the Christchurch earthquakes) and there is debate amongst lawyers about it. There has however been a case which determined what a “fair proportion” means in relation to another clause in the ADLS lease (providing for abatement of a fair proportion of rent and outgoings from the date of the relevant damage when there is partial damage to premises due to an unforeseen event). In that case the Court held that a “fair proportion” was a rent abatement of 100%. I suggest that what a “fair proportion” is under clause 27.5 is going to be determined on a case by case basis. For example, if your premises are mixed use – say 50% warehouse and 50% retail – then it is likely that 50% is a fair proportion as you’re still getting use out of the warehouse. If your premises are 100% office then perhaps 100% is a fair proportion. There is of course counter arguments on both sides so the crux of the matter is that the parties will need to work together in these unusual circumstances and negotiate in good faith what a “fair proportion” is in relation to their lease. Then it should be recorded in writing.

The key takeaway is for parties to check the terms of their commercial lease closely. If you’re on an older ADLS lease or another type of lease, there may still be provisions in the lease to provide some relief in the current circumstances. This is particularly important if the tenant is a business who has applied for the wage subsidy and/or making proposals to reduce employees’ income (or redundancies) due to the financial impacts of COVID-19 as it will need to consider cost cutting across the business to be able to justify these decisions.

Feel free to reach out if you need assistance in reviewing your lease and obligations (whether you’re a landlord or a tenant).