Commercial Leases during COVID19 Alert Level 4

The announcement made by the New Zealand Prime Minister on Monday 23 March to prepare to move to Alert Level 4 – Eliminate, by midnight Wednesday, made an immediate impact on the New Zealand business landscape. Projected revenue, projects and financial forecasts went out the window for the majority of businesses.

One of the first questions we were asked from our commercial tenant and landlord clients’ was “How does this affect me?”

It depends on the terms of your lease agreement. Some agreements simply do not have any terms that refer to a situation like the COVID19 Alert level 4 lock down. If this is the case, the tenant is likely to feel the brunt of the commercial pressure the restrictions are having. One example is the reported situation of the shop owners at Sylvia Park Mall where their landlord Kiwi Property Group Limited, is said to have told tenants “we wish to remind our tenants that their obligation to pay rent and other usual charges continues throughout this period unless the lease expressly states otherwise.”

Luckily, since the Christchurch Earthquakes the Auckland District Law Society (“ADLS”) Standard agreement (6th edition) does have a clause that refers to the current situation. Clause 27.5 states that:

“If there is an emergency and the Tenant is unable to gain access to fully conduct the Tenant’s business from the premises… then a fair proportion of the rent and outgoings shall cease to be payable…”

The definition of Emergency includes an “epidemic” so clearly Level 4 COVID-19 qualifies as such an Emergency. The effect is that a “fair proportion of the rent and outgoings ceases to be payable”. What “fair” means is for agreement by the Landlord and Tenant.

The Courts have not yet had to decide any cases that relate to this clause so there are no authorities to assist people with the interpretation of this clause. ‘Fairness’ is a subjective concept – what is fair for one may not be fair for another.

What may help people to understand how a Court may look at the clause is to think about the situation of the Christchurch earthquakes and why this clause made its way into the ADLS commercial leased agreements. During the Christchurch earthquakes the army and Police were deployed to enforce a complete restriction on any access whatsoever into the red zone. If the premises were in the red zone, the premises may well have not existed – it was a fait accompli.

During the COVID19 lock down, there is arguably the ability to utilise the premises to a greater extent than those affected by the earthquakes.

Therefore in assessing ‘fairness’ some suggested factors to look at are:

  • What is the business “use” of the premises?
  • Is the business “use” considered an essential service?
  • If so, what proportion of the business is considered an essential service?
  • If not, is the tenant still receiving any benefit from the lease while the lock down is in effect (i.e. warehousing, storage, cool stores, remote access to computer servers/telephone systems, etc.)?
  • What are the respective financial positions of both the tenant and landlord?
  • What are the outgoings of the premises?

The financial effects of the agreements you reach now can have long-lasting affects to your business.

Ultimately, every situation is fact specific. It is important to seek advice early and ensure that you have put forward your best position while negotiating an outcome. A negotiated agreement now will definitely reduce the level of uncertainty your business faces and will mean that you are not paying legal costs when the outcome is uncertain. Finding yourself as a “test case” for the interpretation of this clause will undoubtedly be an unenviable position to be in.

If you need advice about this issue then call one of the Barter Law team now.

Chris Hallowes
[email protected]