As at 11:59pm on Wednesday 25 March, New Zealand entered “lockdown” due to Alert Level 4 commencing. Many businesses are non-essential business and will not be able to access or operate from the commercial premises they lease during lockdown.
Landlords and tenants have important questions as to how this will operate and need to quickly understand their respective obligations under the lease. Ideally discussions between landlord and tenant should have commenced, if not, try to reach a fair and commercial agreement as to rent and outgoings payments. It is in the interests of both parties to assist the tenant to survive the lockdown.
In New Zealand there are common forms of leases used, however each lease is different given the parties negotiate amendments to those standard or template forms. Some of the common forms include the Auckland District Law Society Deed of Lease (ADLS Lease), Property Council Lease and Building Owners and Managers Association leases generally used by shopping centres (BOMA Leases). Large landlords such as the major shopping malls and retail precincts also have their own form of leases with associated rules that must be complied with.
There has been significant commentary in connection with a newer version of the ADLS Lease that contains provisions that deal with access and emergency events. Please note that not all ADLS Leases have those provisions, including those renewed or varied ADLS Leases signed prior to 2012. The ADLS Lease form (sixth edition) was updated in 2012 after the Canterbury earthquakes as an attempt to deal with access restrictions, including for reasons of safety of the public. The definition of emergency in that lease includes an “epidemic”, we consider that the current “pandemic” would be captured.
Where the lease contains the emergency access provisions, a tenant who is unable to gain access to their premises to conduct their business during the lockdown period, may be able to claim a full rental and outgoings abatement or at least a “fair proportion” of the rent and outgoings. This abatement would apply during the time that access to the premises is restricted.
What is a fair proportion of rent and outgoings? The answer will be specific to the relevant tenant business and premises. For example, if a business can partially operate or part of the premises are used for storage, then that may be considered when looking at the proportion to be abated.
In the event this lockdown continues for an extended period then clause 27.6 may help, and some tenants may seek to terminate their leases. The standard no access period in the ADLS lease is 9 months, after which the tenant (or landlord) can terminate the lease. You should check the period noted in your lease as it is often negotiated and can range anywhere from 3 to 12 months.
Other lease forms
Other forms of lease may have provisions that allow for suspension of rent and/or outgoings where the tenant is unable to access the premises or which may apply due to the current Government order or state of emergency declared.
Other major landlords include provisions in their lease that restrict any reduction to circumstances where the landlord has loss of rent insurance cover (such as the Property Council New Zealand office lease). The relevant provisions also generally limit the rent and outgoings suspension to the sum that the landlord can recover under its own loss of rent insurance policy.
If you have not already done so, open discussions with your landlord or tenant. You should consider the following questions:
- What type of lease have you signed? Does it contain an emergency access clause or a similar clause?
- How is this likely to affect your (your tenant’s) business and what kind of reduction do you (your tenant) need? Whether or not the lease provides for any reduction, it is useful to understand how the lockdown will affect each party and their cashflow. A reduction or other arrangement might be the best option to ensure the continued viability of the lease.
- What is a fair proportion of the rent and outgoings that should be abated? Can you use the premises at all? The landlord may consider that storage areas are being used – if so, what proportion of the floor area is storage?
- What agreement has been reached with your landlord? You should clearly document any agreement reached. This could be recorded by email or a more formal agreement could be prepared. We can assist with recording the agreement.
- Have you updated your bank? You should also talk to your bank during this time and keep them updated of any agreement reached regarding rent reduction. Note also that your landlord’s bank require them to obtain written agreement of the bank to any rent reduction.
- What other support may be available to you during this time? Look at Government subsidies and other recently announced support options.
- Do you have any insurance cover that applies? Speak to your insurance broker before you reach agreement with the landlord.
Whatever the terms of your lease, we can review your lease and help you to understand your obligations. This will inform your initial abatement discussion. Get in touch with our commercial property
Wynn Williams is a member of SCG Legal, a global network of more than 110 independent law firms with both legal and public policy practices serving businesses in all 50 U.S. state capital cities and the District of Columbia, as well as capital cities and major commercial centers in more than 50 countries. SCG Legal has developed a COVID-19 Global Resource Center, which is focused on up-to-date legal and public policy developments from more than 25 different countries and most U.S. States. To access it, visit scglegal.com/coronavirus-resources.