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Leasing in the time of Covid-19
Published in
April 2020
The leasing of commercial property in the time of natural disaster or government lockdown can pose challenges for both tenants and landlords alike.
Since the Christchurch earthquakes, the Auckland District Law Society form of lease has included “No Access in Emergency” clauses. These clauses aim to relieve tenants from the hardship of being bound at market rental rates to continue leasing premises that they cannot utilise to raise revenue. At the time of the Christchurch earthquakes (when the No Access in Emergency” clauses didn’t exist) tenants found themselves in an invidious position where they still had to pay rent and outgoings even though they could not access their premises due to the building being cordoned off, whereas those tenants that leased premises that had been destroyed or partly destroyed were able to terminate their tenancies and/or obtain a reduction in rent.
The key clauses under the Auckland District Law Society lease are:
Clause 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 the need to prevent, or reduce any hazard, harm or loss that may be associated with the emergency including restriction on occupation of the premises by a 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.
Clause 27.6:
Where the tenant is unable to gain access for the period recorded at clause 15 of the First Schedule (the default is 9 months but is often amended) then the landlord or the tenant may terminate the lease on giving written notice to the other party.
We believe these clauses apply while New Zealand is in lockdown as a result of the Covid-19 Alert Level 4 and clause 27.5 is able to be invoked for the following reasons:
1. There is an “emergency” since an emergency is defined in the lease as a situation that is a result of any event, whether natural or otherwise, including plague, epidemic that causes or may cause loss of life, illness or in any way seriously endangers the safety of the public.
2. The government, as a competent authority, has declared a state of emergency and placed the country under Alert 4 level lockdown as well as issuing an Epidemic Preparedness (Covid-19) Notice granting the Governor General wide-ranging powers with regards to altering and suspending legislation to allow the government to operate in times of epidemic. The result of these actions is that almost all businesses, excluding those deemed to be essential services, are restricted from entering their premises and not able to operate their businesses from their premises.
If you have entered into a lease post-2011, then there may be options for you to consider to relieve some of the hardship in the current lockdown circumstances, where the government has prohibited using the premises unless the operation of essential services is being undertaken.
Tenants:
Where the premises have become partly or completely unusable the clauses provide two options:
1. a rent and outgoings abatement where the premises are inaccessible in the short term; and
2. the ability to cancel the tenancy if access is not available for the period recorded in the First Schedule of the lease (clause 15).
At this stage, the first option above is relevant and any negotiations will centre around what the amount of the fair proportion of rent and outgoings that ceases to be payable will be, as this is not defined in the lease.
Landlords
Any negotiations as to fair proportion of rent and outgoings should be conducted under the premise of fairness in the circumstances, after all it is in the interests of most landlords to have a financially viable tenant.
Where there is loss of rent, property owners could consider the terms of their loss of rent policies, however in most circumstances cover from loss as a result of the Covid-19 epidemic is likely to be excluded (because it is a pandemic).
Other Forms of Lease
If your lease predates this period or is in a different form than the Auckland District law Society deed of Lease, and does not contain any similar clauses please get in touch with us to discuss your options.
If you would like us to review your lease to advise you on your options, please contact us as follows: