There is a lot of discussion going on at the moment about what a ‘fair’ proportion means.
When the Government declared a state of emergency and ordered all non-essential businesses to close their doors and vacate their premises, this raised numerous legal issues, but the most pressing for commercial tenants is whether it has released them from their obligation to pay rent for the duration of the lockdown.
Much (but not everything) turns on the terms of the lease.
Leases with a “No Access” clause
Commercial leases in New Zealand are not standardised, but most are based on the Auckland District Law Society (“ADLS”) Deed of Lease precedent. This precedent underwent a significant change in 2012 with the introduction of clause 27.5, which relevantly reads:
If there is an emergency and the Tenant is unable to gain access to the premises to fully conduct the Tenant’s business from the premises because of reasons of safety of the public or property or the need to prevent reduce or overcome any hazard, harm or loss that may be associated with the emergency including …
(c) restriction on occupation of the premises by any competent authority,
then a fair proportion of the rent and outgoings shall cease to be payable for the period commencing on the date when the Tenant became unable to gain access to the premises to fully conduct the Tenant’s business from the premises until the inability ceases.”
“Emergency” is defined in clause 47.1 as – … a situation that … is a result of any event, whether natural or otherwise, including … plague, epidemic … and
causes or may cause loss of life or serious injury, illness or in any way seriously endangers the safety of the public …; and
the event is not caused by any act or omission of the Landlord or Tenant.
Every edition of the ADLS lease since 2012 contains this clause and it does appear to apply to the covid-19 lockdown, which:
- is an “emergency” within the terms of the lease;
- was imposed “to reduce or overcome a hazard or hazard associated with the emergency”, and
- which has resulted in most commercial tenants being currently “unable to gain access to the premises” as a consequence of a “a restriction on occupation by a competent authority”.
Opinion is divided, however, on two critical issues:
- What constitutes “a fair proportion of rent and outgoings”, and
- Does the phrase “to fully conduct the Tenant’s business” exclude the providers of essential services who have retained partial access to their premises.
Leases without a “No Access” clause
Tenants should not assume that they are obliged to continue to pay full rent and outgoings just because their lease does not contain clause 27.5. Other lease terms can have much the same effect. These include “change in law” clauses, clauses that allows an extension of deadlines in certain circumstances and clauses which excuse breaches caused by events outside the reasonable control of the parties.
Another important consideration is this: The legal structure of most commercial leases extends beyond the immediate parties. Guarantors and banks are also generally involved and all must agree to the terms of any compromise arrangement between landlord and tenant.
It is vital therefore that any compromise be recorded in writing and only signed after legal advice has been taken.
If you want help reviewing your lease agreement and/or with determining how to strike the right balance between a ‘kind’ and fair proportion of your rent, please give us a call.