COVID-19 Alert Level 4 (or 3): Do I Still Have to Pay Rent?
The Government issued an epidemic notice under section 5 of the Epidemic Preparedness Act 2006 on Monday 23 March 2020 and announced New Zealand would immediately move to COVID-19 alert level 3 with a further escalation to alert level 4 at 11.59pm on Wednesday 25 March 2020. This has resulted in most commercial premises (aside from those involved in providing essential services) no longer being accessible while we remain at this alert level.
This has left many landlords and tenants wondering about their ongoing rights and obligations under their leases and how these may be impacted by the current risk level and lockdown, with the first question on everyone’s mind being “Does a tenant who is prohibited from lawfully accessing their leased premises still have to pay rent (and outgoings)?”
The answer to this question will depend on the particular terms of the lease in question, but we have considered the question in the context of the most common form of lease in use in relation to commercial premises, the Sixth Edition of the Auckland District Law Society Deed of Lease. Leases which are bespoke or based on different templates (such as those issued by the Property Council) cannot be assumed to contain the same provisions as those referenced below.
BACKGROUND TO THE NO ACCESS IN EMERGENCY PROVISIONS
ADLS released the Sixth Edition of its Deed of Lease in 2012. This edition following the Christchurch earthquakes in 2010 and 2011 which resulted in much of the central city being cordoned off for public safety due to damage. While the Fifth (2008) and earlier editions of the ADLS Deed of Lease included provisions dealing with damage to the premises themselves, those editions did not include provisions which contemplated the premises remaining intact but inaccessible due to their location within a public exclusion zone, as occurred with the Christchurch CBD Red Zone. There was no standard term in these earlier editions of the ADLS deed of lease (some of which will still be in use) which expressly contemplate rent relief if premises are rendered inaccessible.
This omission was rectified with the Sixth Edition (2012) by the introduction of the “No Access in Emergency” provisions. These provisions cover a wide range of emergency scenarios including earthquakes, eruptions and floods as well as (topically) epidemics and plagues.
NO ACCESS IN EMERGENCY
Clause 27.5 in the Sixth Edition 2012 states:
“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 including:
(c) …restriction on occupation of the premises by any competent authority,
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."
“Emergency” is defined to include a wide range of emergency scenarios which include epidemics (and by inference pandemics) as well other natural phenomena such as earthquakes, eruptions and floods.
Additionally, clause 27.6 provides that if the circumstances described under clause 27.5 continue to exist for the duration of the “no access” period specified in the lease (which by default is nine months) or a party is able to establish with reasonable certainty that the tenant will be unable to gain access for that period, either party may terminate the lease upon ten working days’ notice.
The setting of COVID-19 alert level 4 has varying consequences for leases depending on the business being operating from them premises. The providers of essential services remain fully in operation, such as supermarkets and chemists. Other premises are only partially operable, such as hardware stores which can still serve trade customers who are providing essential services but not general members of the public.
However, the majority of commercial premises will now be inaccessible.
As to what is a “fair” abatement of rent and outgoings in each case will need to be considered having regard to these varying levels of accessibility and the extent to which the tenant is still able to utilise the premises despite not being able to physically access them. At one extreme, for a café which is now unable to open and serve customers, a fair abatement would seem to be 100%. For other businesses which arguably continue to benefit from their premises, such as for storage or to house the computer servers which are used for remote working, an appropriate abatement may be at some level less than 100%.
Ideally the landlord and tenant in each case will agree on the extent of the abatement to apply as from and including 26 March 2020. Failing agreement, the lease provides that such a dispute is to be resolved by arbitration.
Clause 27.6 may also give some parties the ability to terminate their lease depending on the duration of the specified “no access” period, although at the default duration of nine months that ability will not currently apply.
We recommend all commercial landlords and tenants consult with their lawyers as to the implications of COVID-19 on their leases and seek advice as to whether the provisions we have referred to above apply to their particular circumstances.
A tenant who believes that COVID-19 should result in a rental abatement is recommended to instigate this process itself rather than waiting for the landlord to do this. If you require assistance with contacting your landlord on this basis, we will be happy to assist.
ANDERSON CREAGH LAI LIMITED
Article written by Paul Chambers and Kathryn Palmer
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