COVID-19 (21?) Commercial leases – Rent, to pay or not to pay, that is the question

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Commercial leases

Lockdown – even as we exit Level 4 and start on two weeks of Level 3 in Auckland, and despite going through all this last year, there are still some unresolved questions around rent payment and relief obligations for commercial premises during the various Alert Levels and associated restrictions.

So is rent payable during lockdown?
The short answer to that is yes. The question requiring much deliberation however, is how much rent is payable? It could be anywhere from a small proportion to 100% of rent and OPEX.

If you have the latest version of the Auckland District Law Society Inc. (ADLS) standard deed of lease (Sixth Edition 2012 (5)), clause 27.5 (No Access in Emergency) should be included. This clause requires a fair proportion of rent and outgoings to cease to be payable from the date the tenant’s access to the premise is prohibited. Regrettably, “fair proportion” is not defined in the terms of the lease, so this is left to landlords and tenants to figure out themselves.

If the lease form is a Property Council lease, tenants may be entitled to rent abatement (reduction), but the circumstances around this are much more limited.

If the lease does not have clause 27.5 or similar, then, unfortunately for the tenant, there is likely no right to reduced rent during lockdown. Without such a clause, it will be much harder for tenants to claim any relief and any rent abatement will be purely based upon negotiation.

We recommend commercial tenants who are not able to access their premises during the lockdown check their lease to see if they have clause 27.5 or a similar provision (if they have not already done so) and approach their landlord to discuss a reduction in rent and outgoings during the lockdown period.

What constitutes a “fair proportion”?
As mentioned above, the “fair proportion” mentioned in the ADLS lease is left to landlords and tenants to negotiate. There are many different circumstances the parties should consider, such as:

• What benefit has the tenant lost from not being able to access the premises? Is the tenant still able to operate in some capacity during a lockdown?
• Does the tenant have a local server on the premises that enables employees to work from home?
• Are the premises still used to store goods, products, operating IT equipment, etc?
• Does the tenant have continuing goodwill benefits from signage and presence?
• Does the tenant require a lot of customer foot traffic?
• Is the tenant able to sell online during lockdown?
• Does the landlord have a mortgage to pay?
• Does the landlord have insurance that may cover the landlord for loss of rent during a lockdown?

Some of these factors may be given greater weight than others in a strict legal interpretation, but all have been accepted as relevant in commercial negotiations between landlords and tenants. Unfortunately, for some tenants in particular it can feel like one is simply consulting tea leaves at times. There is no simple answer, although good negotiation (and potentially, valuation evidence) may swing the situation more one way or the other.

Final reflections
It is concerning that some landlords and tenants never reached agreement on these matters even though they received plenty of press during the first 2020 lockdown. Some of those businesses have since collapsed. Others are on the brink. It is also concerning that the Government provided no targeted assistance and left so much to chance in this area. In practical terms, regardless of the lease, landlords and tenants should be open to recognising the commercial realities of each other’s position in these unusual and difficult times. In our view, it is short-sighted for one party in a position of strength to adopt such a hard line that they put a much weaker party at risk of collapse. That is not to say that all demands should be conceded to. There is always an underlying level of risk and business failure that is normal in any economy (albeit extremely hard on those involved). However we all suffer when we fail to equitably spread the heightened risk and cost caused by an extreme event like the COVID-19 pandemic.

As we have seen in previous lockdowns, parties who arrive at robust negotiated solutions continue to have commercially worthwhile and sustainable relationships. Some others are still trying to resolve who owes who what, with a risk that one or other party won’t outlive the discussion.

At Gaze Burt we have seen examples of generous landlords who grant rent abatements to tenants during lockdown even where there is no contractual entitlement. We have also seen some examples of landlords who try to avoid giving abatement even where there is a contractual obligation to provide it. And we are aware of tenants who demand too much and those who settle for too little.

However it has been pleasing to see that in most instances, the parties have managed to work together to achieve a practical and sustainable outcome.

The above is of general discussion only and should not be relied upon as specific legal advice.

Please get in touch if you would like further assistance with these matters. Our team will be happy to assist.

Timothy Naik
Timothy Naik
Solicitor

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