COVID-19 Alert Level 4 and Commercial Leases
As the country entered into an Alert Level 4 “lockdown” at 11:59 on Wednesday, 25 March, landlords and tenants of commercial properties are asking questions about what this means for their leases.
Under Alert Level 4, many tenants will be unable to run their businesses from their commercial premises. Some offices may be able to continue to function from home. Others, like those involved in non-essential retail, will not be able to operate at all.
We set out here some general information for landlords and tenants under commercial leases in New Zealand. Every lease is different however and your rights as a landlord or a tenant will be governed by the particular terms of your lease and by your particular circumstances.
We find ourselves in unprecedented times. The Canterbury earthquakes have provided some lessons for landlords and tenants to draw on, but a global pandemic and a nationwide “lockdown” is entirely new territory. Landlords and tenants alike are facing uncertainty and the situation is changing daily. We encourage you to keep in contact with us. We will be available whatever hours are necessary to ensure you are supported in the creation of strategies and implementation of solutions during this time
Q: Will a tenant be required to pay rent and outgoings on the premises during a “lockdown”?
This will depend on the terms of the lease document.
Generally speaking, a tenant will be required to continue to pay rent and outgoings on the premises unless the terms of the lease provide otherwise, or they reach an agreement with the landlord.
Lease documents in New Zealand differ. We recommend that landlords and tenants seek advice on the specific terms of their lease.
Some leases may, for example, contain clauses specifically dealing with situations where a tenant cannot access their premises to conduct their business during an “emergency”. The most commonly used commercial lease document in New Zealand, the Auckland District Law Society Deed of Lease (ADLS Deed of Lease), contains such a clause. This is discussed in more detail below.
Other leases may contain what is known as a “force majeure” clause. Force majeure clauses are less common in commercial leases but cover situations where a party to a contract cannot perform its obligations due to specific circumstances beyond its control (for example, a natural disaster). Depending on how the force majeure clause is drafted, it may apply where a tenant cannot fulfil its obligations on time, or at all, due to an “epidemic” or “pandemic”.
ADLS Deeds of Lease entered into after 2012
Following the Canterbury earthquakes, the ADLS Deed of Lease was updated to include clauses which provide for a “fair proportion” of rent and outgoings to cease if there is an “emergency” which results in the tenant being unable to gain access to their premises to fully conduct their business. Importantly, this includes being unable to access premises because of an “epidemic”.
The government has issued an order placing the country at Alert Level 4. This means New Zealanders not working in essential services must stay at home. Only businesses that are essential to the provision of the necessities of life may remain open during the Level 4 Alert period.
Under the emergency access provisions of the current form of ADLS Deed of Lease, a tenant who is unable to gain access to their premises to fully conduct their business during the Level 4 Alert period, may be eligible to claim a reduction of a “fair proportion” of the rent and outgoings payable under the lease. This would apply during the time that access to the premises is restricted.
If these clauses apply, the question in each case will be: what is a “fair proportion” of rent and outgoings? And the answer will depend on the specific circumstances. For example, is the business an “essential service” that can continue to operate from its premises? Or is the tenant unable to operate their business at all during Alert Level 4? What is “fair” will differ in each case.
Q: What should landlords and tenants be doing?
Landlords and tenants should seek advice on the terms of their lease and fully understand what other support may be available. They should talk to their banks and, perhaps most importantly, talk to each other before entering into any agreement.
Alert Level 4 will be in place for a minimum of 4 weeks. Beyond that, we simply don’t know what will happen. It is possible that Alert Level 4 will be extended for a longer period or that the country (or particular regions within the country) will move between the various alert levels for some time.
The emergency clauses in the current ADLS Deed of Lease provide that a "fair proportion" of rent and outgoings ceases to be payable for the period the tenant is unable to access the premises to fully conduct their business from it. Landlords and tenants will therefore need to review any agreed rent abatement as the Alert Level changes. Some tenants may, for example, be able to regain access to their premises under Alert Levels 2 or 3.
For other leases, we recommend that landlords and tenants don't act hastily to agree rent reductions which may have long-term implications. It may, for example, be sensible to agree things on a month-by-month, or even a week-by-week basis and to ensure that any agreement reached can be reviewed as and when the alert levels change.
To avoid any disputes, the parties should clearly document any agreement reached. This could be as simple as an exchange of emails or a more formal agreement could be prepared and signed electronically. Seek advice and discuss your options.
Landlords and tenants should also talk to their banks during this time and keep them updated of any agreement reached regarding rent reduction. A landlord’s banking arrangements may, for example, require them to obtain the bank’s consent to a rent reduction.
Landlords and tenants should also ensure they understand what other support may the available to them during this time. See below for further information.
Q: What other support may be available?
The Government has made a number of announcements about financial support measures over the past week, including (among other things):
- A wage subsidy and leave entitlement scheme;
- Changes to provisional tax for small businesses;
- Depreciation deductions for commercial and industrial buildings;
- A six-month principle and interest payment holiday for mortgage holders and SME customers whose incomes have been affected by COVID-19.
- A $6.25 billion Business Finance Guarantee Scheme for small and medium-sized businesses. This scheme will provide short-term credit for solvent small and medium-sized firms affected by COVID-19.
Landlords and tenants should speak with their banks for further information on the mortgage payment holiday and Business Finance Guarantee Scheme. More announcements are expected on other measures in the weeks and months ahead.
Further information on the financial support available can be found here.
We recommend that landlords and tenants take the time to fully understand the range of support that may be available to them.
Disclaimer: The content of this article is general in nature and not intended as a substitute for specific professional advice on any matter and should not be relied upon for that purpose. While we make every effort to ensure the accuracy of the information contained in this article, this is a rapidly changing environment and the information will be subject to change.