Leases in the Time of Covid-19

We have been fielding an unprecedented (but understandable) number of queries from both tenant and landlord clients wanting to understand the legal position in respect of either termination of commercial leases, and obligations in respect of rental/outgoings payments.

Ideally you should be taking legal advice as to your obligations under a commercial lease, but we thought it may be useful to outline the general position to provide some comfort (or not):

Step 1: Check Your Lease

There is no one-size-fits-all answer and much would depend on the drafting of the commercial lease, so do check the terms.

If the lease is on the ADLS standard form commercial lease (post 2012) then in light of the current Level 4 lockdown you may be able to use the 'No Access in Emergency' clause which:

(a) provides that a fair proportion of rent/outgoings will cease to be payable from the time of the emergency, until it (the emergency) ends; and

(b) allows for termination of the lease (by either party) with 10 workings days prior written notice.  It's important to note that you can only use this right of termination if:

(i) you don't have access to the premises for longer than the No-Access time period stated in the First Schedule to the lease (typically nine months, but you'd be wise to check if this has been altered to a longer (or shorter period) or amended in any further terms to your lease); or

(ii) if you can establish with reasonable certainty that the emergency will last longer than the No-Access period stated in the First Schedule. In our view, while a tempting proposition, none of us can tell with any reasonable certainty how long Covid-19 or the current Alert Level 4 will go on for, and using this particular angle to terminate could be risky and arguably may expose the terminating party to liability for wrongful repudiation/termination.

In respect of rent reduction/abatement under the ADLS agreement, as a departure point, our initial view is that during the Covid-19 Alert Level 4 lockdown, for the majority of 'non-essential services' businesses, a 'fair proportion' of rent/outgoings may be as low as $0 meaning rent may possibly be wholly abated, but will ultimately be up to the parties to agree and should be without prejudice to the Landlord's right to reassess the situation when life returns to 'normal', particularly if the Tenant is provided some form of business subsidy from the Government, which could be dealt with by way of 'wash-up' payment at some point in the future to offset the Landlord's loss during the period of reduced rent.

The caveat to that view is that in cases where the premises are able to be used to some degree ie premises where the business is an essential service, or a warehousing facility etc, then rent will either continue to be paid at the agreed rate, or the tenant should be negotiating for a temporary rent reduction based on the extent to which the premises are able to be used.

If your lease is on an older form of the ADLS lease, or a more bespoke arrangement, then you'd be wise to review and take legal advice on whether the lease contains any similar No-Access or Force Majeure clauses which may permit termination or abatement/reduction of rent during this pandemic.

It may be (often in the case of retail leases where the premises are in a shopping centre/mall) that the lease is silent on termination/rent reduction in emergency type situations, in which case you should get on the phone right now to your Landlord to try to negotiate some form of reprieve.

There are other possible avenues that may be utilised ie Doctrine of Frustration etc, but they tend to have high thresholds and are at times difficult (read expensive) arguments to run.

Step 2: Talk to Your Landlord/Property Manager

Landlords/Property Managers will be in the same state of flux as tenants and whilst keen to ensure that rental keeps coming in, should similarly be keen to ensure that they still have a tenant occupying the premises when all of this is over.

As outlined under the Step 1 heading, if your lease doesn't address rent reduction/termination in emergency situations, either get in touch with your landlord or have a lawyer do so, to discuss a compromise situation, after all, some money being paid as rent, is better than none!

Step 3: Keep calm, take a breath, take care of your loved ones and stay safe. This too, will pass.

This article is not intended to be relied upon as legal advice as each tenant/landlord situation may be different. We would recommend taking legal advice prior to taking any action, particularly in terminating a lease agreement.

The team at McVeagh Fleming are all operating remotely and will do all we can to assist you with any legal queries (property related or otherwise) during these crazy times.

Our thoughts and prayers are with all of you, and we wish you good health. Kia Kaha!

Should you wish to discuss any property or commercial lease related matters, please contact Forrester Grant (fgrant@mcveaghfleming.co.nz) or Brandon Cullen (bcullen@mcveaghfleming.co.nz) or your usual McVeagh Fleming solicitor.

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