Commercial Lease Rent Reductions Under Alert Levels 3 & 4

With this being our second nation-wide lockdown, many landlords and tenants are familiar with what happens to lease payment obligations whilst a lockdown is in effect. To recap:

• In each case, whether there is a rent or outgoings abatement depends upon the terms of the particular lease in question.  Some leases which have been entered into since April 2020 have included “special clauses” to deal with a lockdown, so regard ought to be had to those in the first instance. In the event that there is no “special clause” which deals with the matter, then:
   

• If the lease is an Auckland District Law Society Lease Sixth Edition 2012(5) lease and the tenant is unable to, as a result of the lockdown, gain access to the premises to fully conduct the tenant’s business, then a “fair proportion” of rent and outgoings shall cease to be payable for the duration of that inability.
   

• If the lease is an older (pre sixth edition) Auckland District Law Society Lease, then the tenant will not be entitled to an abatement of rent or outgoings.
   

• If the lease is a Property Council New Zealand Retail Property, or Office Lease, then the tenant will not be entitled to an abatement of rent or outgoings (unless, in the case of the 2013 editions, the landlord is able to claim for loss of rents under its business interruption insurance policy, which is unlikely).

ABATEMENTS UNDER THE AUCKLAND DISTRICT LAW SOCIETY LEASE SIXTH EDITION 2012(5)

Has the abatement clause been triggered?

If the lease is an Auckland District Law Society Lease, sixth edition, then the first thing you should do is consider the nature of the tenant’s business and whether clause 27.5 (the “no access in an emergency” clause) has actually been engaged.

This involves determining whether the Alert Level restrictions which are in place actually prevent the tenant from being able to fully carry on its business from the premises.

In the case of the Alert Level 4 rules, a key question to ask is whether the tenant’s business includes an “essential business”. If it does include an essential business, then the tenant may or may not be entitled to an abatement, depending on the extent to which the tenant’s business operations are restricted. For example, under Alert Level 4 rules, a hardware store tenant may be open for trade to trade customers but not retail customers (other than by click and collect). So whilst a hardware store tenant can still be open for trade it can only do so in a limited way and is not able to “fully” do so.  Clause 27.5 will therefore be engaged and a “fair proportion” of rent and outgoings shall cease to be payable

If a business is not an essential business at all, then clause 27.5 will also have been engaged and a "fair proportion" of rent and outgoings shall cease to be payable. 

In the case of Alert Level 3 rules, more tenants are able to work from their premises at Alert Level 3. However, their ability to do so may be limited due to social distancing requirements, or other restrictions (such as, the prohibition against customers entering most business premises).  So, whilst the tenant may be able to conduct its business from the premises during Alert Level 3, it may not be able to “fully” do so. Where that is the case, again clause 27.5 will have been engaged and a “fair proportion” of rent and outgoings shall cease to be payable.

Ultimately, determining whether a tenant is prevented from fully conducting its business can be quite a tricky exercise (as it involves assessing the relevant Alert Level rules which applied at the time and considering the various aspects that may make up a tenant’s business (some of which may be “essential”, and some may not)). We therefore suggest that you seek professional advice on the matter. This is particularly important given that it is highly relevant in considering how much an abatement by a “fair proportion” might be.  

You may also wish to refer to an article which we published in April 2020 titled “Are you eligible for Commercial Lease Rent Relief?” for a more detailed discussion on the point. This is available here.  

What is a “fair proportion”

This is a much debated topic, to which there is no definitive answer. There are various factors which may be weighed up in trying to assess what is “fair”. Such factors have already been widely discussed, so we will not attempt to list them.

Since the last nation-wide lockdown, however, there has been two key developments which offer food for thought:

• Many landlords and tenants have agreed that a 50% abatement of rent (but not outgoings) amounts to a “fair proportion”. Whilst we do not agree that a “one-size fits all” approach is necessarily correct, in the case of landlords and tenants who are unable to agree to the amount of an abatement, this will probably serve as market based evidence which a court or arbitrator will refer to in trying to determine the amount of an abatement for landlords and tenants who are in dispute over the matter.

• A recent High Court case [1] has suggested that in determining what a fair abatement ought to be, regard ought to be paid to what a reasonable landlord and a reasonable tenant would have agreed in a hypothetical “friendly negotiation”. Importantly, the court noted that  factors of benefit or detriment on either side would be material to such an assessment. In other words, it is not a one-sided enquiry and regard ought to be had to the position of both the landlord and the tenant. For a discussion on this point, and a list of factors which may be considered in such an enquiry, please refer to our article titled “My Lease Provides for an Abatement of a “Fair Proportion” of Rent and Outgoings – What do I pay and when do I Pay it?” which we published in April 2020. This is available here.   

In the case of tenants who have taken the position of not paying any rent during the lockdowns, we expect these two points to be highly relevant.

ABATEMENTS UNDER THE PROPERTY COUNCIL NEW ZEALAND LEASES

As we have said above, it is unlikely that a tenant will be entitled to an abatement of rent our outgoings under any of the Property Council New Zealand lease forms. Having said that, landlords and tenants now have more knowledge about the consequences of a lockdown on various kinds of tenant businesses. Some businesses do well during or after lockdowns and some do not. In respect of rent abatements or other rent relief relating to the current lockdown, this means that landlords and tenants are more likely to look at negotiating arrangements in a refined and targeted way (as opposed to adopting a “one-size fits all” approach as was common in the case of the 2020 lockdowns).  For a discussion about rent  relief options, please refer to our article titled “Covid-19 – Rent Relief Deals Under Commercial Leases” which we published in April 2020. This is available here.   

CONCLUDING COMMENTS

The 2020 lockdowns demonstrated that a “one-size fits all” approach to rent abatements, whilst easy and efficient to implement, does not necessarily result in the best outcomes for tenants or landlords.

In that regard, it is important to work out your starting position (i.e. whether an abatement has been triggered) and then work from there to see the extent to which your position may be improved.

Please do not hesitate to get in contact with a member of our team should you wish to discuss your specific circumstances and how we may be able to assist.

Disclaimer

The above information is of a general nature only; in no way does it constitute legal advice. All readers should contact a law firm for advice relating to their specific circumstances.