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27 March 2020

Rental obligations during mandatory closure of non essential business premises

Covid-19: The circumstances which we are facing are unprecedented and will have wide ranging ramifications.

All non-essential businesses must close their premises from midnight Wednesday 25 March 2020.

This leaves commercial landlords and tenants alike, questioning what lease payments remain payable.

In each case, this will depend upon the terms of the particular lease in question. 

In New Zealand there are three commonly used forms of lease: the Auckland District Law Society Lease, the Property Council New Zealand Retail Property Lease and the Property Council New Zealand Standard Office Lease.  We summarise the position in relation to each of those forms of lease below.[1]

We also comment on matters to consider when assessing what a “fair proportion” of rent and outgoings is. 

Please note that this is general information only and the terms of each lease should be considered on a case-by-case basis.

**Please note that any special lease terms will prevail over the standard form leases.

 

Auckland District Law Society Lease (“ADLS Lease”)

  • The extent to which Annual Rent and Outgoings remain payable depends upon whether the lease is the Sixth Edition of the ADLS Lease (which was released in 2012), or an earlier edition (“Earlier Edition”). The edition details will be in the top right corner of the lease.

Sixth Edition ADLS Lease

  • Under the Sixth Edition ADLS Lease there is a “No Access in Emergency” clause which says that a “fair proportion” of the Annual Rent and Outgoings will cease to be payable if:
    • there is an emergency (an “emergency” includes an epidemic such as COVID-19); and
    • the tenant is unable to gain access to the premises to fully conduct the tenant’s business from the premises because of reasons of safety of the public or the need to overcome any harm, loss or hazard associated with the emergency.

(see clause 27.5 of the Sixth Edition ADLS Lease)

  • If a tenant is not an “essential business” and is therefore forced to close while we are at a COVID-19 Alert Level 4, then that tenant’s liability for rent and outgoings will reduce by a “fair proportion”.[2]
  • In terms of assessing what a “fair proportion” is, there is no one size fits all; it will depend upon the nature of each tenant’s business and the extent to which they are still able to use the premises during any mandatory closure. We have listed some matters to consider in paragraph 4 below.
  • Please note that if the circumstances described in paragraph 1.2 above (there is an emergency and the premises are inaccessible) apply for a period of nine months (which we hope is not going to be the case), then rights of termination will likely arise.  

Earlier Editions of the ADLS Lease

  • For tenants on an Earlier Edition of the ADLS Lease, the default position is that the tenant remains obliged to pay Annual Rent and Outgoings in full.

 

Property Council New Zealand Retail Property Lease (“PCNZ Retail Lease”)

  • The extent to which Base Rent, Operating Expenses and Marketing Fund Contributions remain payable depends upon whether the lease is a 2013 version (“2013 Version”) or an earlier version (“Earlier Version”) of the PCNZ Retail Lease. The version details will be on the cover of the lease.  

2013 Version PCNZ Retail Lease

  • Under the 2013 Version of the PCNZ Retail Lease, there is an “Abatement of Moneys” clause which says that a “fair proportion”[3] of Base Rent, Operating Expenses and other moneys payable under the lease is suspended where:
    • the Premises are “Inaccessible”; and
    • the Landlord is entitled to make an insurance claim for the loss solely because the premises are “Inaccessible”.

(see clause 7.4.1 of the 2013 Version PCNZ Retail Lease)

  • It is unlikely that a landlord will be able to claim loss of rents under its business interruption insurance policy. This is because, generally, “physical damage” is required for cover to respond. Also, insurance policies do not tend to provide cover for loss associated with closures due to infectious diseases (COVID-19, being one of those).
  • Therefore, it is very unlikely that a tenant will be entitled to an abatement.
  • Please note that “Inaccessible” means that there is no access available to the tenant for the purposes of carrying on the Permitted Use due to the act of an Authority. Therefore, if a tenant is an “essential business”, then the premises are not “Inaccessible”.[4]
  • Please note that if the premises are “Inaccessible” for a period of two years (which we hope is not going to be the case), then rights of termination will likely arise. 

Earlier Versions of the PCNZ Retail Lease

  • For tenants on an Earlier Version of the PCNZ Retail Lease, the default position is that the tenant remains obliged to pay Basic Annual Rent, Operating Expenses and Marketing Fund Contributions in full. 

 

 

Property Council New Zealand Standard Office Lease 2013 Version

  • Under the 2013 Version of the PCNZ  Standard Office Lease, there is a “Rent Abatement” clause which says that a “fair proportion”[5] of Annual Rent, Operating Expenses and other moneys payable under the lease is suspended where:
    • the Premises and/or Carparks are “Inaccessible”; and
    • the Landlord is entitled to make an insurance claim in respect of loss of rent solely because the Premises and/or Carparks are “Inaccessible”.  

(see clause 7.5 of the 2013 Version PCNZ Standard Office Lease)

  • Again, it is unlikely that a landlord will be able to claim loss of rents under its business interruption insurance policy. This is because, generally, “physical damage” is required for cover to respond. Also, insurance policies do not tend to provide cover for loss associated with closures due to infectious diseases (COVID-19, being one of those).
  • Therefore, it is very unlikely that a Tenant will be entitled to an abatement.
  • Further, if a tenant is an “essential business”, then the premises are not “Inaccessible” and the tenant will not be entitled to an abatement.[6]
  • Please note that if the premises are “Inaccessible” for a period of nine months (which we hope is not going to be the case), then rights of termination will likely arise. 

 

Rental Payments to Reduce by a “Fair Proportion”

  • As discussed earlier, a number of lease forms provide for a “fair proportion” of rental and outgoings payments to abate when premises are inaccessible. What a “fair proportion” actually is, will depend upon each particular tenant and premises. Some relevant considerations are:
    • whether and how much a tenant ought to be charged for being able to “store” its property in the premises;
    • whether a tenant has servers or any other pieces of technology in the premises which it is still able to use (without accessing the premises);
    • whether a tenant is in fact still accessing the premises (staff may be working from premises one at a time, for example); and
    • in the case of a retail tenant, whether the tenant is selling items online (the physical premises may boost the tenant’s marketing presence helping it sell online).

 

  • A landlord and tenant should consider these things and anything else which may be relevant to an assessment of what a “fair proportion” is.

 

Next Steps

  • Many tenants will be unable to pay rent when it is next due. In turn, some landlords may not be able to meet their mortgage commitments. In order to help minimise the risks and consequences associated with this, landlords and tenants should each:
    • engage with their banks as soon as possible;
    • contact their insurers to check whether their business interruption insurance will respond[7];
    • make enquiries to see whether they are eligible for any of the Government’s relief packages (such as the wage subsidy scheme); and
    • seek legal advice regarding their particular circumstances and lease terms.

We expect that a number of landlords and tenants will be forced to negotiate alternative lease arrangements on a temporary basis. In doing so, there are a number of things which each party should consider and seek legal advice on, in order to best protect themselves.

 

CONCLUDING COMMENTS

The circumstances which we are facing are unprecedented and will have wide ranging ramifications.

Our thoughts are with you all throughout this difficult time. Please do not hesitate to get in contact with us should you require any advice (whether related to leasing, or otherwise).The people listed below are available to provide advice regarding matters discussed in this article.

DISCLAIMER

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

SRB Commercial Team contacts

Anna Fox (Managing Partner) - anna.fox@srblaw.co.nz

Rebecca Banks (Partner) - rebecca.banks@srblaw.co.nz

Nick Strettell (Partner) - nick.strettell@srblaw.co.nz

Jonathan Gillard (Partner) - jonathan.gillard@srblaw.co.nz

Jeff Kenny (Partner) - jeff.kenny@srblaw.co.nz

Josh Orton (Partner) - josh.orton@srblaw.co.nz

Katrina Wood (Associate) - katrina.wood@srblaw.co.nz

Michael Vanner (Associate) - michael.vanner@srblaw.co.nz 

 

[1] Please note that any special lease terms will prevail over the standard form leases. 

[2] For information regarding what is an “essential business”, please see the Government’s list at https://covid19.govt.nz/government-actions/covid-19-alert-level/essentia....

[3] Please see our comments in paragraph above regarding what a “fair proportion” is.

[4] Please see our comments in paragraph above regarding what a “fair proportion” is.

[5] Refer to footnote 2 above regarding what is an “essential business”.

[6] Please see our comments in paragraph above regarding what a “fair proportion” is.

[7] As per our earlier comments, a business interruption policy is unlikely to respond to pandemic related losses. However, this will depend upon the particular wording of each policy (so it is worth checking).

 

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.

 

 

 

 

Katrina Wood

About Katrina Wood

Katrina is a member of our Commercial Team. She specialises in commercial property and retail leasing.

View all posts by Katrina Wood