The growing agitation caused by COVID-19 and the implementation of Alert Level 4 is causing significant concern for commercial tenants and landlords.
New Zealand is now at Alert Level 4 and a state of emergency has been announced. The Government has stated that Alert Level 4 will be in place for at least four weeks and only essential businesses may run from their premises during the Alert Level 4 period. Whether tenants require to keep paying rent while their stores are closed due to COVID-19 relies on the terms of the lease; and the circumstances surrounding the closure of the stores.
How Does “No Access” Clauses of Tenant Lease Help?
Advance leases include some form of “no access” clause. Many of these clauses focus on access limitations due to a physical obstruction such as a restricted access cordon or limitations imposed by law.
The “no access” clause in the current version of the Auckland District Law Society (ADLSi) lease also extends to the situation of a tenant being unable to access the premises in an emergency due to either reason of protection of the public; or to overcome any risk, hurt or damage associated with the emergency, which involves a limitation on the occupation of the premises by any competent authority.
Since New Zealand is now at Alert Level 4 and a state of emergency has been announced, the “no access” clause in the ADLSi lease should implement. This clause allows for the reduction of a fair proportion of rent and outgoings for the period of restricted access to the premises.
What is “Fair proportion” of Rent?
Currently, there is no judicial guidance on what constitutes a fair proportion of rent and outgoings.
The specific circumstances of the premises and tenant should be considered. For instance, some landlords of retail stores are providing a greater discount as smaller retail stores often have limited means to pay rent while they are bound, and some larger foreign-owned tenants are trying to pay no rent at all.
Tenants may want to consider reserving their position on the rental pending a judicial decision of what is a suitable reduction in the rent and outgoings. This could result in an expansion or drop from the amount otherwise agreed.
Termination for Prolonged No Access
Many leases also grant a right for either party to end if the tenant is unable to gain access for a particularised no access period or either party is able to establish with reasonable certainty that the tenant is unable to gain access for that period. The default no access time in the ADLSi lease is 9 months.
Under this Covid-19 situation, the “no access” clause of the ADLS lease should apply. However, for each lease, the terms of the lease, the situation surrounding the non-access to the stores and the specific situation of the tenant would need to be examined carefully.
If an agreement cannot be reached between the landlord and tenant on the amount of the reduction, most leases will include a dispute resolution process which could be requested by either the landlord or tenant. In the ADLSi lease, this process entails mediation and then arbitration, after failing to agree on the discount.
If you have any question about any of the commercial lease arrangements, or if you need assistance at any stage of your lease, please do not hesitate to contact us.