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4 May 2020

Alert Level 3: business closure and rent reduction update

Does Alert Level 3 change which premises have to be closed? How will this change how rent reduction provisions in a lease operate?

From 11:59pm on 27 April 2020, we moved down to the Government’s Alert Level 3.  How has that changed which premises have to be closed?  How has that changed how rent reduction (abatement) provisions in a lease operate?

We previously issued articles which dealt with a number of commercial lease issues at Alert Level 4, including rent reduction (abatement) provisions in leases.  These are mentioned below.

In this article, we update our comments for Alert Level 3 and the new requirements for closure of premises.

The new Health Act Order

The Government has issued a replacement Health Act Order (“Order”) to apply to Alert Level 3 for the closure of premises. [1]

Under the Order, any business may open their premises if they operate the applicable infection control measures at the premises.

Some businesses will be unable to meet the applicable infection control measures and their premises will have to remain closed under the Order.

Exceptions

The Order does not apply to private homes (used as homes, and not business purposes), the parliamentary precincts, courts or prisons.

How the Order works

The Order puts businesses into three categories and then imposes requirements of infection control measures on each category: 

  • Category A businesses or services:  These businesses are listed by type in the Order and include such things as certain health services, early childhood services and schools and veterinary services. [2]  The only requirement is “physical distancing”.
  • Category B businesses: These are limited to supermarkets and diaries, petrol stations (including any store operating as part of petrol station), pharmacies and accommodation services. [3]  The only requirements are “physical distancing” and not allowing food or drink to be consumed on the premises.
  • Category C businesses or services:  This is a catch-all category for the rest of businesses that are neither Category A or B, nor are a venue business or a public transport business. [4]  This will include professional offices and retailers, for example. What is required here is: “physical distancing”, contact tracing and not allowing clients or customers to enter the premises except for the purpose of collecting goods by a way that does not involve the client or customer entering a building and minimises physical contact (think contactless delivery via drive-through, for example). [5] 

As you see above, a Category C business (which will be most businesses) has the most infection control measures applying to them.

Some businesses cannot open

There are some businesses that have to remain closed, because they cannot meet the infection control measures.  This will include service businesses where it is necessary for a client to enter the business premises to receive the service.  Examples are nail salons, hairdressers or public venues such as pools or museums.

However, the premises of any business can be accessed for necessary work only.  Examples given in the Order are minimum basic operations required to:

  • Maintain the condition or value of the premises, plant, equipment and goods (fixing a leak, for example) or to clean the premises.
  • Receiving stock or freight.
  • Enable and support workers to be able to continue to work remotely from home.

Physical distancing

The requirement of “physical distancing” is defined in the Order.  As mentioned above, it applies to all businesses.

For most businesses (Category C), physical distancing means remaining at least 1 metre away from people or within the 1 metre distance for less than 15 minutes.  However, the general guidance is to maintain a 2 metre distance between people where possible.

For business premises to be open, the business needs to put into place systems to ensure physical distancing can be maintained during Alert Level 3.

Offices and the Government’s online guidelines

Looking specifically at office premises, the Government’s online advice has referred to everyone having to still work from home unless that is not possible. [6]

The Government has used this online guidance to encourage working from home (which is understandable and lets people protect themselves and others from the spread of COVID-19).  However, office workers working from home during Alert Level 3 is a voluntary action and is not a legal requirement under the Order.

Office premises can be opened if they operate with the applicable infection control measures in place.

Health and Safety

Despite what is allowed under the Order, a business must still meet its obligations under the Health and Safety at Work Act 2015.   

Businesses will need to consider how to meet those health and safety obligations, based on their individual circumstances. This will include:

  • Meeting public health guidelines.  Examples given by the Government include: regular disinfecting of surfaces, encouraging good hand hygiene by allowing frequent hand washing and sanitising, not having sick people in the workplace and meeting physical distancing requirements. [7]
  • Putting in place a COVID-19 safety plan. [8]

Rent reduction (abatement)

We have already issued a number of articles dealing with rent reduction (abatement) provisions in commercial leases.  These can be found in our Resource Centre here:

Clause 27.5 (No Access in Emergency) of the Sixth Edition of the Auckland District Law Society’s Deed of Lease form needs to be examined in the context of Alert Level 3.

Broadly speaking, this clause entitles a tenant to a “fair proportion” reduction in rent and outgoings, where a tenant’s premises are inaccessible.

A tenant’s inability to access its premises must be due to a legal requirement imposed by a competent authority.   Generally, Alert Level 3 has greatly reduced the restrictions on businesses accessing their premises.

If any part of the tenant’s business conducted from the premises is restricted under Alert Level 3 then clause 27.5 will be engaged.  Given, under the Order, clients or customers of most businesses are not able to enter a building then that restriction will mean that clause 27.5 is engaged for those businesses.

Engagement of clause 27.5 means that a “fair proportion” of rent and outgoings ceases to be payable.

As mentioned above, the Order provides that any business may open their premises if they operate the applicable infection control measures.  This will affect what “fair proportion” reduction applies for many businesses.

The “fair proportion” applicable to a particular business may vary across the time periods for Alert Level 4 and Alert Level 3, based on what is, and what is not, allowed in respect of a tenant’s particular business.

Let’s take two simple examples:

  • A hairdresser: At Alert Level 4, the premises had to be closed.  At Alert Level 3, the premises have to be closed because a hairdresser cannot maintain physical distancing requirements and would otherwise operate by having customers on the premises.  A “fair proportion” reduction in rent would likely be the same for Alert Level 3 as it was for Alert level 4, except you could argue that the reduction should be slightly less given that the tenant can now carry out necessary work to the premises as mentioned above (for example, basic maintenance, cleaning and stocking work, to be ready for opening in the future).
  • Commercial  offices:  At Alert Level 4, the premises had to be closed.  At Alert Level 3, the premises can be open if the business meets the requirements of physical distancing, contact tracing and not allowing clients to enter the premises.   A “fair proportion” reduction in rent is going to be different between Alert Level 4 and Alert Level 3, because the staff of the business can work in the premises with appropriate systems in place to deal with physical distancing and the other infection control requirements.

Concluding comments

Each business will need to review the infection control measures that apply to them and also consider their general health and safety obligations (which will be specific to the circumstances of each business).  The business must then make decisions on whether they operate from their premises during Alert Level 3 and, if so, how.

Commercial landlords and tenants may find themselves discussing different rent relief (including under any rent reduction provision in a lease) for the periods of Alert Level 4 and Alert Level 3, based on what the tenant can, and cannot, do to operate its business in the premises.

Please do not hesitate to get in contact with us should you require any advice (whether related to leasing, or otherwise).  The SRB Team are available to provide advice regarding matters discussed in this article.

 

Disclaimer

The above information is of a general nature only. The information in this article does in no way constitute legal advice and all readers should contact a law firm for advice relating to your specific circumstances.

 

[1] Health Act (COVID-19 Alert Level 3) Order 2020, which can be obtained at www.legislation.govt.nz.

[2] Part 1 of Schedule 2 of the Order.

[3] Part 2 of Schedule 2 of the Order.

[4] A “venue business” is a specific sub-category and means a business providing a venue for gatherings.  This type of business has its own specific infection control measures under the Order.

[5] In addition “venue business” and “education entities” are subject to specific measures.

Josh Orton

About Josh Orton

Josh is a Partner at Saunders Robinson Brown with significant experience across all aspects of property law, specifically commercial property.

View all posts by Josh Orton