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Commercial Leases Under Covid-19

With all non-essential business physically closed as a result of the COVID-19 lockdown, we are seeing the impact on commercial property landlords and tenants.

As a direct result of the Christchurch earthquakes, the most common standard form of commercial property lease in New Zealand, the Auckland District Law Society Sixth Edition Lease (Sixth Edition Lease) introduced new “No Access in Emergency” clauses (Emergency Clauses). With the Government moving New Zealand to Alert Level 4, most tenants are unable to access their premises and the Emergency Clauses are now being tested for the first time.

The Emergency Clauses provide that, where there is an emergency and a tenant is unable to gain access to their premises to fully conduct the tenant’s business 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 (paraphrased), then a fair proportion of the rent and outgoings shall cease to be payable for the period during which the Tenant is unable to access the premises.

It is clear that COVID-19 falls within the definition of emergency and therefore, unless premises are being used for an essential service, tenants can no longer fully conduct their business from the premises while the Alert Level 4 is in place. Accordingly, a fair proportion of rent and outgoings shall cease to be payable during this period.

The question we are seeing landlords and tenants grapple with is, what is a fair proportion of rent and outgoings? It has already become clear that this is not a full rent abatement. What is fair is a question to be assessed on a case by case basis, depending on the tenant’s use of the premises and the extent to which the tenant is now unable to conduct its business from the premises. In some cases, such as a storage facility for example, there may be little impact on the tenant’s ability to continue to provide services. At the other end of the spectrum, under Alert Level 4 a retail or hospitality tenant will be unable to conduct their business from the premises, so a fair proportion will be a higher percentage.

Our recommendation is to take a commercial approach and reach agreement as quickly and efficiently as possible. It is in the best interests of both landlord and tenant for good tenants to get through this period of business interruption and survive until they are in a position to resume normal rental payments.

The Sixth Edition Lease also provides that either party may terminate the lease if the tenant is unable to gain access to the premises for the period specified in Schedule 1 of the Lease. The default period is 9 months, but in some cases this may have been reduced by agreement and could become relevant depending on the length of the Alert Level 4 lockdown.

The earlier forms of Auckland District Law Society Deed of Lease, as well as other standard forms of commercial lease, do not have the Emergency Clauses. In most of these, rent and outgoings will continue to be payable in full. We expect that many tenants will still try to negotiate a rent abatement for the foreseeable future. Again we encourage landlords to find a workable solution on a case by case basis to ensure that good tenants get through to business as usual operations.

A further key question is whether landlords will be able to access their loss of rents insurance. Our understanding is that most policies contain exclusions for losses in connection with diseases such as COVID-19 and therefore relief is unlikely to be available.

If you are impacted by this and have questions about any of the above, or want assistance in negotiating with your Tenant or Landlord, please get in touch. We are happy to help.

Disclaimer: the views and recommendations expressed in this memorandum are those of the writer and RMF Silva Limited and are intended to provide information only. They should not be treated as formal legal advice.

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