The implications of the COVID-19 pandemic will certainly generate a number of unprecedented issues for both commercial landlords and tenants alike, particularly in consideration of the Level 4 State of Emergency lockdown.
There is no general rule or stock-standard answer that can be applied to all commercial leases in light of this outbreak, as each individual lease must be read in the context of its specific terms and provisions. Therefore, it is important that you seek independent legal advice before approaching your landlord or tenant.
Our starting point is to consult your particular lease to see if there are any “no access” or “force majeure” clauses, as this will enable us to identify your obligations under your lease, and then determine whether these can be temporarily suspended, or terminated completely.
A number of non-essential businesses will, for obvious reasons, be seeking to suspend rent payments during this lockdown period, given that they will no longer be able to operate their businesses from their premises for an uncertain period. The ability for each tenant to do this, however, will again depend specifically on what their respective lease allows for.
Some leases may include “No Access in Emergency” clauses. These clauses were added to ADLS leases in response to the cordons established in the Christchurch CBD after the February 2011 earthquake. If you have the 6th Edition 2012 (5) Deed of Lease provided by the Auckland District Law Society (ADLS), this would be recorded under clause 27.5 (No Access in Emergency) and provides that if a tenant is unable to gain access to their premises to conduct their business for reasons of public health and safety, a fair proportion of their rent and outgoings shall cease to be payable during that period. However, it is not clear whether this provision accounts for the COVID-19 pandemic, as the definition for emergency only provides for “epidemics”, and there is debate as to whether an epidemic encompasses a pandemic.
Under clause 27.6 of the ADLS Deed of Lease, a landlord or a tenant is entitled to terminate a lease if it is found that the No Access in Emergency provision is indeed satisfied and that emergency prevents the tenant from accessing the premises for the period as specified in that lease’s “No Access Period”, which is normally 9 months (unless otherwise agreed). However, the parties need not wait until the tenant has been unable to access the premises for that No Access Period, as this is essentially a forecasting exercise. If it is estimated that the tenant will be unable to access the premises for the specified No Access Period, then this provision may be applied. However, at present, the Government has only implemented a lockdown period of four weeks, having commenced at 11.59 pm, Wednesday, 25 March 2020. Unless this is subject to later change, it is unlikely that most commercial tenants will be able to call upon this clause unless the lockdown is further extended.
Other leases may incorporate “force majeure” provisions, which may allow for the suspension of rent payments or termination of the lease entirely. These provisions are designed to establish the rights of both the tenant and the landlord in response to “acts of God”, which are generally accepted to be natural disasters or any other extraordinary event. Whether a pandemic such as COVID-19 would constitute a force majeure event will turn on the specific wording of that clause and the lease itself. The latest ADLS Deed of Lease does not explicitly provide for force majeure events.
If a lease does not incorporate these types of provisions, there are still situations whereby a tenant may be able to exit their lease. For example, the courts may elect to implement the doctrine of frustration, which essentially means that it is impossible for both the landlord and the tenant to perform their obligations under a lease, or the lease becomes so different from what was originally contemplated that it has become frustrated, and must, therefore, be terminated. It is not yet clear whether the COVID-19 will allow for contracts to be frustrated, and it is unlikely that this would be considered the case in the current circumstances, given that tenants may be able to re-enter their premises in the coming weeks. Moreover, you will need to be careful when evoking this clause if you intend to continue with your lease after the lockdown period, as the only relief available for you in these limited circumstances would be the outright cancellation of the lease.
Landlords may have more liberty as to how they choose to respond to the COVID-19 outbreak, in that they have greater discretion and bargaining power when compared to their tenants. A landlord, upon considering the circumstances and hardships that will be faced by their tenants, may realise that it is more viable for them to ensure the financial sustainability of their tenants in the short term, and therefore elect to suspend or discount rent payment during this lockdown period.
Additionally, lessors may work with their lessees to establish practises such as a deferred rent payment schemes, whereby the two parties agree upon terms for when certain payments must be made as well as giving consideration to the types of payments. For example, lessors may choose to have rental payments deferred while their lessees continue to pay a fair proportion of outgoings for the premises.
One must also keep an eye on Government initiatives implemented during these times so as to allow landlords to assess their own financial positions and determine their best plan of action moving forward.
Landlords will also need to be mindful of their banking covenants. A landlord’s bank or mortgagee will probably have power under security documents to agree or not agree with any decision a landlord may make. This will of course depend on the landlord’s gearing and sophistication.
Insurance will also need to be considered, but generally most of loss of rent insurance policies will not cover these circumstances. You will need to consult your own insurance policies to see if you are covered.
This blog is primarily focused on the ADLS lease. There are of course other types of commercial leases, including tailor-made leases for A-grade premises that generally adopt far more tenant onerous leases. There will be joint and several tenant guarantees and all sorts of other legal considerations to also take into account.
The practical reality is that a lot of small and medium-sized enterprises type tenants will not properly understand their obligations and rights under a lease. And on top of all of this, most will agree that feeding one’s family in these circumstances will be of paramount importance.
Ultimately, the most practical advice we can give in these circumstances is for parties that are involved in commercial leases to contact their respective landlords or tenants in an attempt to reach a fair and reasonable resolution.
Queen City Law are commercial leasing experts. We are very well placed to act for, and deal with, both landlords and tenants. If you are uncertain as to how you should approach the coming weeks with regards to your own lease, please feel more than free to get in contact with us, and we will do all that we can to assist you in guiding you through these unprecedented times.
If you wish to discuss in more details with our team, please contact us on:
- Telephone: 09 970 8820
- Mobile: Marcus N Beveridge (Principal) 0274877332
- John Jon (Senior Associate) – 021558290
- Tom Huang (Associate) 021659502 (for any Chinese speaking clients)
- Email: email@example.com
- https://queencitylaw.co.nz/korean-covid-19-commercial-leases (Korean Version)
- https://queencitylaw.co.nz/covid-19-commercial-lease-chinese (Chinese Version)