20.05.2020

COVID-19: Rent abatements during level 4 – updated 14th April 2020

With the COVID-19 Level 4 Eliminate now in force, so that the part of the population not providing essential services must stay home, what is the position with the payment of rent and outgoings by tenants?

Supplementary note- The ADLSi has since issued a Statement on its Deed of Lease stating that “the present COVID-19 pandemic is an emergency that was contemplated, although probably not to the extent we now have on a nationwide basis”, describing the current situation as “effectively a nationwide ‘red zone’”.  The ADLSi acknowledges that clause 27.5 has been in the current edition of the Lease for seven and a half years, and that it is in midst of a revision of the Lease which will take into consideration learnings from COVID-19 but it is unlikely to take a prescriptive approach.  Hopefully, it might suggest that in determining a fair proportion account be taken of the extent to which the Tenant continues to be able to use the premises, including: a business use of warehousing and storage contrasted against manufacturing employing human factory workers, or where a tenant is able to continue its business because it supplies “essential services”, or our relatively technologically advanced age where servers on our premises enable us to continue working off-site; and the fact that pandemics from insurance policies taken by landlords of which the tenants have the benefit (and should also share in the detriment).

Just as we like to have bespoke houses in New Zealand, we have also tailored our legal documents, including leases, to suit the circumstances or even our manner of drafting.  Therefore, now arises a situation where we cannot provide a “one size fits all” answer to the question of whether a tenant would be entitled to a rent abatement or how much, and a situation where the typical preface to a legal opinion that until it is tested in court one can never be certain seems apt.

For leases that do not have a provision for abatement of rent in an “emergency” situation or where premises are not accessible or if a tenant is unable to gain access to leased premises to fully conduct the tenant’s business, it would seem that any abatement will be a matter of negotiation between the landlord and the tenant.  Here, it will depend on the relationship between the tenant and the landlord; the landlord’s commercial decision as to whether it would rather help a tenant and receive a lesser rent or risk the tenant closing down and receive no rent at all; the tenant’s history in the performance of the terms of the lease; and other business and common sense considerations.  While one might argue that there is mortgage relief for the landlord, one must not overlook the relief packages that have been made available for businesses.  Tenants do not offer to pay more rent when times are good, so it would not be fair to now demand a rent concession.  With all that in mind, the parties will need to act in good faith and endeavour to reach a sensible and practical solution that is fair to both.  Pending agreement being reached, the tenant should continue to pay rent as payment is usually expressed to be an essential term of the lease.

We should also mention there may be other options, such as mounting an argument that the lease contract is “frustrated”, which would give a right of cancellation.  A contract is “frustrated” if it is impossible to perform for reasons/circumstances that were not foreseeable or the outcome which would be achieved from performance of the contract has radically changed from what the parties expected at the time they entered into the contract – the ‘whole substratum’ of the contract must have been taken away.  “Frustration” would be difficult to establish if the tenant has to close down the business for a month or so, in the context of a term which has a few years left to run; closing down the business for a few months may cause hardship but that by itself would not be sufficient to trigger frustration of contract.  Moreover, it is likely that the tenant will still have legal possession and even in some senses at least occupation of the premises – which are the things the landlord is required to deliver – even though it may also be true that the tenant cannot at the moment make full practical use of the premises.  On balance, we feel that “frustration” is a complex legal principle that a tenant should take great care in arguing; if a tenant incorrectly walks away from the lease on the basis of frustration, the tenant may itself be repudiating the lease.  A potentially expensive course that seems incongruous to pursue under current conditions!

For leases that do contain a clause for abatement of rent, this will depend on the particular wording of the clause and surrounding or related clauses that will assist with the interpretation of the clause.

An example of a clause that refers to rent abatement is that contained in clause 27.5 of the Sixth Edition of the ADLSi Lease.  The clause states that 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 (1) a prohibited or restricted access cordon applying to the premises; or (2) prohibition on the use of the premises pending completion of structural engineering or other reports and appropriate certifications required by any competent authority that the premises are fit for use; or (3) 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…until the inability ceases.  It is clear that there is an emergency as a result of the imposition of COVID-19 Level 4. 

On a literal interpretation, one would say that the clause applies to the current situation and therefore a fair proportion of the rent and outgoings shall cease.

On closer examination, however, one would realise that the clause was introduced after the Christchurch earthquakes where some buildings though not damaged or destroyed were cordoned off (“red zone”) so as to be inaccessible to tenants.  The ADLSi Lease has often been touted as a form of lease that is fair to both landlord and tenant, and it was not surprising that such a clause was introduced in light of Christchurch.  In that situation, it was likely that a landlord’s loss of rent cover would respond.  In addition, clause 27.6 was also introduced to allow a tenant to terminate the lease if it was likely that the premises would continue to be inaccessible for an agreed period – this so that the tenant could find new premises and get on with life instead of having to wait out the period of the cordon.

Therefore, although clause 27.5 is worded “the Tenant is unable to gain access to the premises to fully conduct the Tenant’s business from the premises”, the intent seems to be that the premises are inaccessible: all three examples mentioned in the clause appear to point to the physical condition of the premises rendering the premises inaccessible. 

In the current situation, the condition of the premises do not prevent access – the tenant continues to store its stock, chattels, plant and equipment and likely continue to operate their servers from the premises – but for the requirement imposed on the population/tenant to stay home.  The purpose of clause 27.6 which is to work as an adjunct to clause 27.5 to enable a tenant to move on would not be served because there is no other place to move on to.

Therefore, in light of the spirit and intent of the clauses, we have some reservation on applying the literal interpretation to clause 27.5.

Even if a literal interpretation were applied, there is the second consideration of what is “a fair proportion”. 

This will depend on the extent to which the tenant is still using the premises – such as storage of stock, chattels, plant and equipment, continued operation of servers (bearing in mind that at the time of the Christchurch earthquakes, the operation of offices, for instance, was probably more paper-based and therefore more dependent on the need to be physically at the premises).  A valuer may be able to throw some light on what would be a fair rent, taking into account the fact that the tenant practically has nowhere else to go.

As has been noted by many commentators, one cannot under-estimate the importance of preserving goodwill in the on-going relationship between the landlord and the tenant.  Taking into account the fact that this situation is unprecedented, has not arisen through the act or omission of the landlord or the tenant, and is likely excluded from cover under the insurance effected by the landlord (of which the tenant has benefit under the Property Law Act), it is highly appropriate to appeal to the parties to also take into account “sharing the pain”. 

Conclusion:  We therefore recommend that landlords and tenants review their leases, and talk to each other.  It would be unwise for a tenant to unilaterally cease paying rent or to simply write to its landlord to inform the landlord that it is entitled to cease paying rent, even if its lease states unequivocally that rent shall cease, much less if its lease only refers to abatement of a “fair proportion”.  After all, in most cases, the tenant would likely still have stock, chattels, plant and equipment on the premises and might continue to operate servers from the premises to enable work from home – so the premises continue to be of value to the tenant.  Be practical and fair; of greater merit than arguing legal rights is probably the current phrase “Be kind”.  Now is a stressful time for most of us.

If you have any questions about this article, please get in touch with our property team or your usual contact at Hesketh Henry.

 

Disclaimer:  The information contained in this article is current at the date of publishing and is of a general nature.  It should be used as a guide only and not as a substitute for obtaining legal advice.  Specific legal advice should be sought where required.

 

 

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