Commercial leases post-COVID
Contact Clause 27.5 and inability to access premises
In the past three months, most landlords and tenants would have become more familiar with the details of their lease. In particular, most will be looking at how clause 27.5 of the Auckland District Law Society (ADLS) lease applies to the government-imposed lockdown that we have all experienced as a result of COVID-19.
A bit of background
Following the Christchurch earthquakes, landlords and tenants were not permitted access to leased properties that were inside the ‘red zone’ while investigations into the structural integrity of buildings were being undertaken. In these instances, where the property had not been totally or partially destroyed, the parties were still required to meet their full obligations under their lease even though they were unable to operate from their leased premises.
As a result of the hardship this situation caused for tenants, clause 27.5 was added to the ADLS lease. It states that, where there is an emergency and a tenant is unable to gain access to the property to fully conduct their business, including by reason of a restriction on the occupation of the premises imposed by any competent authority, then a fair (our italics) portion of the rent and outgoings shall cease to be payable while the tenant is unable to gain access to the property.
This clause is as equally relevant to the COVID lockdown as it is to earthquakes as tenants seek a fair resolution to being prevented from accessing their leased premises.
What is ‘fair’?
It is not fair (or realistic) to presume that because a landlord owns a commercial building, that they do not have their own obligations associated with that such as insurance, rates, etc. Those obligations continue whether rent is paid or not. Similarly, with tenants, other obligations of that business will continue. It is important that whatever arrangements are agreed in respect of clause 27.5 are fair to both sides.
Factors in considering fairness
Subsidies: Landlords and tenants should both explore the financial relief available to them from the government and their lender. Do this before having a discussion with the other party so you are fully informed on the relief packages available.
Business use: What the property is used for will have an impact on what is fair. A hairdresser or cafe will have had next to no use of their premises over the lockdown period. However, a professional services firm is likely to be in a different situation as employees can work from home and access the server remotely. Their premises will be used for file storage and documents, desks, etc so the firm is still receiving some benefit of the premises. This has some value and it will differ depending on the circumstances, but for those reasons alone, a 100% rent reduction may not be appropriate for this type of business.
Length of time: It is important to note that clause 27.5 relates only to situations where a tenant is not allowed to access the premises due to the emergency. During COVID-19, most businesses could access their premises once Level 4 was lifted. From Level 3 downwards, clause 27.5 no longer applies and the parties must negotiate between themselves in order to reach agreement in respect of any future rent or opex relief during Level 3.
Relevance to COVID: The lockdown situation with COVID may have highlighted to many businesses their inefficiencies regarding commercial space. Leasing obligations, however, remain in place and no contractual obligation exists to re-negotiate those, once access to the premises is restored.
Good faith: Landlords and tenants must together consider the principles of good faith when negotiating a situation such as this. Both sides need to come to the table and be prepared to negotiate the matter in good faith, considering the needs, wants and obligations of each party to the lease.
Common sense and commercial sense
The reality of the current situation is that everyone has been affected by the COVID lockdown. Commercial leasing is an agreement which is entered into between two parties on an equal footing. There is not, or should not be, any disparity between the parties in terms of their negotiating power.
Clause 27.5 is fairly new and there is not yet any guidance from the courts about how it should be applied in practice. This means that landlords and tenants should have an open and frank discussion about their circumstances, and come to an agreement about what is a fair proportion of the rent and outgoings for their situation. This will inevitably mean that both contribute towards the loss suffered as a result of the situation which is neither party’s fault. In the words of the Prime Minister, “we are all in this together.”
If you would like some advice about the options and relief available to you, we are here to help.