Locked Down and Kicked Out: "No Access" clauses and cancellation of leases due to non-payment of rent during COVID-19 lockdowns

Just as during the lockdowns last year, this year's change in alert levels has highlighted the importance of "No Access" clauses in commercial leases and their impact on a landlord's right to cancel for non-payment of rent.

A "No Access" clause, such as clause 27.5 in the Auckland District Law Society Deed of Lease 6th Edition (ADLS lease), provides that during an emergency a "fair proportion" of the rent or outgoings will cease to be payable whilst the tenant is unable to access the premise to fully conduct their business.

Whilst clauses such as this are helpful for clarifying when a tenant is entitled to a rent reduction, what amounts to a "fair proportion" of that rent is undefined, leaving the parties to come to an agreement.

So, what happens then when the parties cannot agree on a "fair proportion"? Can the landlord cancel the lease when the tenant refuses to pay?

The High Court considered this very question earlier this year in SHK Trustee Company Limited v NZDMG Limited[1]. SHK leased its premise to NZDMG. The form of the lease was the ADLS lease. As a non-essential service, NZDMG were unable to access the premises during the Alert Level 3 and 4 lockdowns, so sought an adjustment to the rent under clause 27.5. Unfortunately, SHK and NZDMG were unable to reach agreement on the amount of the reduction. NZDMG's last payment of rent was made on the first day of Level 4 and no further payments were made. In August, SHK issued a notice under section 245 of the Property Law Act 2007 (PLA) requiring NZDMG to remedy its default within 30 working days[2]. NZDMG failed to comply and SHK cancelled the lease. SHK then applied to the Court for summary judgement seeking payment of the outstanding rent and outgoings in full, plus default interest (among other remedies, which are not within the scope of this article).

The Court granted SHK's claim, but only in respect to those periods when Auckland was not in Level 3 or 4 as NZDMG accepted they were able to access the premise outside of these lockdown periods[3]. NZDMG, however, did have an arguable case that they were not able to access the premise in Levels 3 and 4, and were arguably entitled to a reduction in rent under clause 27.5 during those periods; but the case would need to go to a full trial to assess how much a "fair proportion" would be[4].

Landlords will be particularly interested to hear, that the Court further found that it was arguable that SHK's notice was invalid and therefore it was also arguable that SHK was not entitled to cancel the lease[5]. The Court considered that the notice was potentially invalid as SHK had claimed the rent in full without any adjustment under clause 27.5[6]. By cancelling the lease on the basis of an arguably invalid notice, SHK has opened itself up to a claim of damages for wrongful termination from the tenant.

This case comes as a warning to landlords to be careful when issuing PLA notices and cancelling leases due to non-payment of rent during the COVID epidemic. The Court suggested that best practice for landlords in these circumstances is to either seek judgment on the amount of rent payable before issuing an notice (which could be costly and time consuming) or to restrict their claims to only those periods when access to the premise is not restricted[7].

If you are a landlord or tenant and need advice on your rights under your lease, we may be able to help, please get in touch.



[1] SHK Trustee Company Limited v NZDMG Limited [2021] NZHC 1895 [26 July 2021], CIV-2021-404-491

[2] Normally only 10 working days' notice before cancellation is required under s 245 of the PLA, however, this period has been extended to 30 working days due to the COVID-19 lockdowns. See SHK Trustee Company Limited v NZDMG Limited [2021] NZHC 1895 [26 July 2021], at [16]

[3] SHK Trustee Company Limited v NZDMG Limited, above n 1, at [38]

[4] At [38]

[5] At [46]

[6] At [46]

[7] At [47]