As a result of the current Covid-19 lockdown, many businesses will, unless they were classed an essential service, be unable to work from their leased premises.
This has led to a number of questions for both landlords and tenants as to what happens with rent and outgoings during this emergency. This article will address this based on the post-2012 versions of the Auckland District Law Society Lease (“ADLS Lease”). This is the most prevalent form of Lease throughout New Zealand. However, it is important to review the version of lease you have, as not all leases are the same and even the ADLS Lease may be amended.
They key clause that many tenants and landlords will need to familiarise themselves is clause 27.5 of the ADLS Lease which reads as follows:
“If there is an emergency 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 property or the need to prevent reduce or overcome any hazard, harm or loss that may be associated with the emergency including: …
(c) Restriction on occupation of the premises by any competent authority,
then a fair proportion of the rent and outgoings shall cease to be payable for the period commencing on the date when the Tenant became unable to gain access to the premises to fully conduct the Tenant’s business from the premises until the inability ceased.”
Can the Tenant reduce their rent and outgoings during the lockdown?
For current purposes it is clear that the current Covid-19 pandemic constitutes an emergency.
Essential services (e.g. supermarkets) may still have full access to their premises and in such cases it is hard to see that they would have the benefit of this clause as no access has been denied.
However, in other cases there may be partial or complete restriction on access (e.g. a delivery service of essential goods where the a business can operate but the store remains closed, or a complete shutdown of the premises). In these cases, the clause would apply as tenants are unable to access the premises to fully conduct their business.
How to calculate a reduction of rent and outgoings during the Lockdown period
Clause 27.5 refers to a “fair proportion” of rent and outgoings abating. What is “fair and reasonable” is unknown and has not been tested in the courts. For this reason, generally parties are encouraged to reach a negotiated solution that both parties can live with. This will of course be influenced by other factors such as the relationship and the long-term solvency of the tenant.
A fair proportion will depend on the facts and circumstances but key factors will be the extent to which the tenant can continue to operate include remotely, whether “fair” includes some sort of storage component of the tenant’s chattels and whether insurance should continue to be payable by the tenant. We encourage landlords and tenants to work together to find a solution that is workable for all parties to ensure that the relationship is preserved once the lockdown has been lifted.