COVID-19 Considerations for Commercial Landlords and Tenants

 

COVID-19 Considerations for Commercial Landlords and Tenants 

With the New Zealand government’s recent decision to raise the Covid-19 alert level to Level 4, all non-essential businesses have been closed. 

This has left many businesses and commercial landlords wondering how this impacts their obligations under their leases.

Leases entered into after 2012

Most standard commercial leases entered into after 2012 have what is called a “no access in emergency” provision.

This allows the tenant to stop paying a “fair proportion” of the rent and outgoings if the tenant is unable to access the premises due to an emergency.  In most leases, the definition of emergency will include the current Level 4 lockdown implemented in response to Covid-19.

This begs the question, what is a “fair proportion” of the rent and outgoings?

Unfortunately, this is not a clause which has been examined by the Courts yet and so there is not a simple answer to this question. The appropriate reduction in rent in each case will depend on the particular circumstances of each tenant. 

For example, some tenants will be wholly locked out of the premises, whereas some tenants may have partial access, due to the nature of their business. For example, hardware stores are currently allowed to trade in a limited capacity.  Similarly, some food suppliers (such as butchers) are open for the provision of home-delivered goods, but their premises are closed off from public access.

We suggest in the first instance that landlords and tenants contact the other party to the lease and attempt to reach a pragmatic solution to the current circumstances. 

What if I can’t reach agreement with my landlord or my tenant?

In most lease agreements, if the parties cannot reach agreement between themselves, the lease provides that they can agree to mediation. 

In the current climate, arranging a mediation is not going to be a simple endeavour and in any event, either party can refuse to attend. 

If the parties cannot reach agreement within 30 days of the dispute arising, most leases provide that the matter will then be referred to private arbitration.

Arbitration can be an expensive process and time consuming process for both parties and is unlikely to be resolved prior to the conclusion of the lockdown. However, there should be nothing stopping this process from progressing remotely during this time.

Given that the parties will presumably wish to continue in an ongoing commercial relationship, we strongly recommend maintaining early and proactive communication, so as to avoid any disputes from arising.

 

What if I have an older lease that was entered into before 2012?

The situation becomes trickier in this scenario. 

Without a contractual right to cease payment of rent and outgoings, any attempt to stop payment may amount to a repudiation of the lease. This can result in dire consequences for the tenant, and is not a step that should be taken lightly.

Without a contractual pathway, it may be arguable that the ‘doctrine of frustration’ could apply, however, this will be very rare and will require very particular circumstances.

Contracts can be terminated under the ‘doctrine of frustration’ in certain conditions.

This requires an unforeseen event, not caused by either party’s actions and which has created such a change in the circumstances as to render the performance of the contract either impossible, or radically different from what was contracted for. 

In these circumstances, it is not necessarily clear that a Pandemic will amount to an ‘unforeseen circumstance.’ Indeed, many insurers appear to have had the opposite view when many removed business interruption cover for losses arising from a Pandemic after the SARS outbreak in 2003.

Furthermore, the current one month lockdown may not necessarily render the contract impossible or radically different.  This is because most leases are set for a term that is far in excess of the current one month period.

In short, any attempt to delay payment on a lease without a contractual right to do so will not be straightforward and we recommend you seek specific advice for your circumstances.