New Zealand is nearly into its third week of the Alert Level 4 lockdown. We hope that you are well and that you also enjoyed the Easter break.
Building on our most recent update for commercial leases and COVID-19, you have likely now determined whether your lease comprises a No Access in Emergency type clause. The Auckland District Law Society’s Deed of Lease (Sixth Edition 2012 (5)) No Access provision states:
No Access in Emergency
27.5 – 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…
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.
Other bespoke or custom made leases may have similar clauses or may have otherwise incorporated the above wording verbatim. If so, you and your respective landlord or tenant may now be at crossroads as to how a ‘fair proportion’ should be calculated.
At present, there is no true authority or any unified approach within the legal profession that may be used to give real or practical guidance as to how parties may be able to determine what would actually constitute a fair proportion.
The Cambridge Dictionary defines ‘fair’ as:
treating someone in a way that is right or reasonable, or treating a group of people equally and not allowing personal opinions to influence your judgment
There is no doubt that the majority of parties who are currently in the process of negotiating this fair proportion are doing so exclusively with their own self-interests borne in mind. Is this inconsistent with the very purpose of the clause? Perhaps. Though given the turbulent times we now find ourselves in, with the survivability of our businesses in question, such a response is not surprising, if not inevitable.
From our experience so far in dealing with this precise issue, we note that the main points for consideration being raised during negotiations between landlords and tenants as to the fair proportion are:
- What is the purpose of the lease?
Parties begin by identifying how the leased premises were being used by the tenant prior to the Alert Level 4 lockdown. Obviously, premises being used for things such as storage are less likely to be affected by the lockdown when compared to retail businesses, for example. Therefore, an assessment must be made as to the extent the tenant is actually prevented from accessing the premises in light of the use originally contemplated when the parties entered into the lease.
- To what extent can the tenant prove a loss?
A number of landlords are requiring that their tenants must first provide financial statements showing losses incurred directly as a result of the lockdown before they are willing to consider discussions for rent abatement. However, tenants should note that the extent of their losses should not be the primary consideration for determining the fair proportion. Access is a fundamental implied term of the lease, and the losses a tenant may experience as a result of being denied access are not as material as the fact that the tenant has actually been denied access.
- What external assistance is available for either of the parties?
The Government has implemented a number of initiatives in response to COVID-19 that may assist both landlords and tenants, and there are other third parties who provide services that may also assist during these times. Some of these are:
- The Wage Subsidy scheme;
- The Mortgage Holiday Repayment scheme; and
- Changes to the Companies Act offering Safe Harbours and Business Debt Hibernation;
- Insurance providers whose policies cover business interruption. However, this may not be applicable for those policies that exclude any interruptions that result from a notifiable infectious disease under the Health Act 1956.
While such assistance may help maintain a party’s ability to pay rent, or allow for rent to be abated, it should only be considered as an ancillary factor when determining the fair proportion. For example, the purpose of the Wage Subsidy scheme is specifically to ensure that employees are paid during the lockdown, and was not implemented to assist tenants in paying their rent.
- Short-term forfeiture versus long-term relations.
A number of landlords will need to consider whether obtaining full rent in the short-term is more important than ensuring the longevity and solvency of their tenants, who otherwise act as the financial backbone for their commercial properties. Those landlords with multi-million-dollar portfolios will likely be able to endure the immediate effects COVID-19 has had on New Zealand’s economy, while those smaller businesses, who survive on a month-to-month profit basis, may not.
It must be remembered that these “no access” provisions are strictly concerned with access to the leased premises, and as such, do not require consideration for all the points above. Despite this, we have seen landlords, and tenants agree to factor in the above on an interim basis, while reserving the right for this position to be adjusted upon a derivative being given by a higher authority.
The Minister of Finance has indicated the government announcement on the proposed relief for owners of commercial properties is due to be released sometime this week. We will be following these developments closely and will provide updates for this. However, on the limited information that has already been circulated, we cannot be sure that the proposed support will be so substantial or significant in order to enable us to tell tenants and landlords that they may now rest assured.
Until this announcement is made, we should hope that negotiations over this fair proportion issue shall continue to be conducted in good faith, with parties being reminded that we are facing extraordinary times. Ultimately, it is still not clear how long this lockdown period will last, and there is no certainty as to what will unfold when this lockdown eventually comes to an end. As such, we hope parties who are still contemplating this fair proportion do so with reason, common sense, and courteous good will.
- https://queencitylaw.co.nz/covid-19-commercial-leases (General Guidance for Commercial Leases)
- https://queencitylaw.co.nz/korean-covid-19-commercial-leases (Korean Version)
- https://queencitylaw.co.nz/covid-19-commercial-lease-chinese (Chinese Version)
- https://queencitylaw.co.nz/safe-harbours-and-sleeping-bears (Changes to the Companies Act)