How are Landlords and Tenants to a Commercial Lease affected during New Zealand's COVID-19 Alert Level 4 Lockdown?
As the first of the month approaches, many Landlords and Tenants will be wondering about their rights and obligations in respect of rent and outgoings during New Zealand's lockdown of "non-essential" businesses at COVID-19 Alert Level 4. In this email we look at issues arising in respect of rental payments and outgoings when Tenants cannot access their premises due to the Government's restrictions.
You may want to familiarise yourself with your lease agreement to see whether it contains a no access in an emergency clause which will apply to these issues. The Auckland District Law Society Deed of Lease (Sixth Edition 2012) includes such a clause at clause 27.5.
If your Lease has a "No Access in an Emergency" Clause:
At COVID-19 Alert Level 4, the New Zealand Government requires all businesses to be closed except for essential services (eg supermarkets, pharmacies, clinics) and lifeline utilities. These circumstances meet the definition of an emergency needed to engage clause 27.5 as COVID-19 is an epidemic which may cause loss of life or serious injury, illness or seriously endanger the safety of the public. The clause states that the rent and outgoings payable in respect of the premises will be reduced by a "fair proportion" for the period that the Tenant is unable to access the premises during an emergency.
In these circumstances, the issue of what amounts to a "fair proportion" of the rent and outgoings that cease to be payable arises. The answer will depend on how each individual Tenant is affected by the lockdown. For example, where the Tenant operates a retail business, the reduction of rent and outgoings is likely to be greater because the Tenant is highly dependent on operating from the premises particularly if they do not have an online presence. Conversely, where the Tenant can operate their business remotely (albeit with some difficulty), the reduction is likely to be lower because the Tenant is unlikely to experience the same disruption, and consequential financial losses, as in the retail business example.
For many businesses, there may still be access restrictions even if the Government lowers the Alert Level from 4. For example, many businesses are required to be closed during a Level 3 Alert (such as hospitality businesses and gyms). Others are required to have their staff working from home where possible. The Government has also signalled that it is possible that the current lockdown period of 4 weeks may be extended. So, access restrictions may continue beyond the current 4 week lockdown period for many businesses.
It is not possible to give general guidelines as to how the no access in emergency clause should be applied given that it depends on the Tenant's individual circumstances and also because New Zealand has not experienced an event which would trigger the clause on a widespread basis since it was first introduced in response to the Christchurch earthquakes. Consequently, we cannot draw on what happened in past emergencies for guidance.
Landlords and Tenants should try to negotiate and reach an agreement concerning the amount of rent which will be payable for the period that they are unable to access their premises in the first instance. If they cannot then most leases will provide a dispute resolution procedure to determine this amount.
If your Lease does not have a "No Access in an Emergency" Clause:
For other leases, other legal doctrines may apply, including the doctrine of frustration where both Landlord and Tenant can be released from their obligations under the lease when an unforeseen event occurs that affects the lease in a way that prevents one or both parties from being able to carry out their obligations. The threshold for the doctrine's application to leases is high and it may not apply to many long-term leases. However, this does not stop Landlords and Tenants from negotiating and reaching an arrangement for the rent payable during the period while the Tenant is unable to access their premises.
For short term leases, additional legal options may be open for Tenants wanting to terminate their lease agreements.