Unsure of what your obligations are as a landlord during the COVID-19 lockout period?
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Commercial Leases during COVID-19: What are your Rights and Options as a Landlord?
29 March, 2020 | Bret Gower
At midnight on 25 March 2020, the New Zealand Government implemented an alert level 4 to deal with the COVID-19 (novel coronavirus) crisis and a state of emergency was declared the same day. All businesses deemed non-essential have been required to close, and as a result thousands of New Zealand business owners are effectively locked out and no longer able to access their leased premises (“the lockout”). This means thousands of tenants have questions of their landlords about whether they are still liable to pay rent and outgoings during the period of the lockout.
Landlords too have many questions about whether tenants are excused from their obligations, and for how long? Is 100% of the rent no longer payable? What about outgoings? What if the businesses are still operating essential services from the premises but only partial access is allowed? What if the business is effectively closed but the tenant still has all its goods stored in the premises?
We have already fielded many landlord enquiries about these very questions and, as always, every situation is unique and requires case by case analysis and advice. However, we can make the following general observations that should be of assistance to landlords looking to understand their position.
Commercial leases are not standardised but many are commonly drafted on the Auckland District Law Society (“ADLS”) Deed of Lease precedent, the most recent precedent being the 6th edition, which provides at clause 27.5 that:
“If there is an emergency and the Tenant is unable to gain access to fully conduct the Tenant’s business from the premises… then a fair proportion of the rent and outgoings shall cease to be payable…”
The ADLS clause does not provide much clarity for landlords or tenants about determining apportionment or whether they need to give notice — and some landlords find “fair” is too subjective for their liking. Unfortunately — because of its drafting — this clause appears open to interpretation. However, we consider that in many cases, “a fair proportion” means if the tenant cannot access their premises to “fully conduct” their business then no rent or outgoings will be payable for the duration of the lockout.
There may be cases where tenants continue to gain benefits from their lease despite being locked out, for example if the tenant business provides both essential and non-essential services they may continue to have some access — or if the premises is a storage facility that continues to store the tenant’s goods despite the tenant not having full access. There may be an argument that the tenant is not prevented from “fully” conducting its business and therefore that “a fair proportion” does not mean 100% of the rent is not payable — but it will be case and fact specific. Similarly, if the tenant’s business continues to run freezers or cool stores to maintain its goods over the lockdown period there may be an argument that a proportion of outgoings for electricity and insurance will continue to be payable.
Force majeure and frustration
If your lease is not written using the standard ADLS precedent, or is an old edition that does not include the emergency access provisions set out above, your tenants may have recourse to force majeure or frustration protection.
We explain how these two legal concepts affect commercial contracts in further detail here. The same restrictions that apply to commercial contracts can apply to leases, but again you need to consider every case according to the facts — and what the contract actually records as the agreement of the parties.
If your lease includes a force majeure provision (the clause 27.5 emergency access provision discussed above could be seen as a form of force majeure) it will usually set out the effects of the force majeure event and how each of the landlord and tenant are required to act, to notify each other — and potentially to terminate the agreement. The reality in most cases is that force majeure, and the emergency access restrictions, effectively suspend the operation of the lease rather than end it.
If there is no emergency or force majeure provision then ultimately a tenant may claim the lease has been frustrated. Contractual frustration will mean the contract is terminated entirely but it has a very high threshold and the decisions that have flowed from the Christchurch earthquakes show that courts will not easily or quickly find that a lease has been frustrated.
On 27 March 2020 the Government announced a business continuity package allowing depreciation on commercial and industrial buildings from 2020/2021. As a commercial landlord you should discuss the implications of this with your accountant to ensure you have the correct tax structures and valuations in place to ensure you get the maximum benefit available.
Lease cancellation provisions
Under the Property Law Act 2007, a commercial landlord can cancel a lease where a tenant fails to pay rent if the rent is unpaid for no less than 10 working days, and the landlord has served a notice of the breach that specifies a period of not less than 10 working days to remedy the breach, and the tenant does not remedy the breach by the end of the specified period.
The Government has announced that it intends to introduce a Bill to extend the above time-frames from 10 working days to 30 working days. This will give more time for your commercial tenants to catch up with rent payments before you can cancel the lease. If the tenant is not able to catch up, the tenant will have more time to approach you about temporary changes to the rent or lease agreement to help the tenant get by until it can resume operating as usual. These temporary changes will be introduced once Parliament resumes and will apply to all notices issued from 10 days after the access restrictions came into force on 25 March 2020 — and will continue in force for 6 months from that date.
Clearly the effect of access restrictions on tenants will not be welcomed by landlords who continue to have mortgage and other financial commitments of their own. We cannot stress too heavily how important it is to remember that every case will be unique and as a landlord you need to keep the lines of communication open with your tenants. Talk to your bank about whether they can help — if cash flow is an issue a mortgage holiday or interest-only arrangement might ease the stress.
Both tenants and landlords need to do everything possible to mitigate their losses including applying for government assistance where it is relevant. Insurance is unlikely to cover any losses under these circumstances with pandemics generally being excluded — but do check with your broker. You need to take a long term view — one where being understanding of your tenant’s position during this difficult time will help keep good tenants in place when the restrictions are ultimately lifted and businesses can return to work.
It seems likely that the recession caused by the COVID-19 outbreak and lockout will force many businesses into liquidation and their owners into bankruptcy. If your lack of leniency during and after the lockout drives your tenants into this position you might face a difficult market for finding new tenants in the post-lockout business environment.
We anticipate a high number of disputes will arise from the lockout — and having a commercial property lawyer on board (with their understanding of land law and the law of equity) will add value to your negotiations. If you require specific advice about your position with regards to your tenant’s rights and obligations, please contact our commercial team for a frank and pragmatic view of your options – and remember, every case will be unique — get good advice early and do not assume anything.