Payments Due Under Commercial Leases

Introduction

When New Zealand moves out of alert level four at the end of 27 April 2020, some businesses will be able to resume operating, but many businesses will still be unable to do so. With many businesses earning little to no revenue, the issue of whether those businesses should be entitled to a temporary reduction in the cost of rent and outgoings needs to be addressed.

In most commercial lease situations, there is a written lease document setting out the rights and obligations of each party. Therefore, the logical first step in considering how to deal with issues of potential reductions in rent and outgoings is to look at what is in that document.

Recent Editions of Standard Deed of Lease

Recent editions of the standard Auckland District Law Society (“ADLS”) Deed of Lease state at clause 27.5 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… then a fair proportion of the rent and outgoings shall cease to be payable…”

It would be difficult to argue that the COVID-19 pandemic is not an “emergency”, even when New Zealand’s alert level is reduced to three. However, the question of whether a tenant is unable to gain access to fully conduct their business will depend on the circumstances. For example, supermarket operators have been able to access their premises and fully conduct business, so it would seem fair that a supermarket should continue to pay the full amount of rent and outgoings payable under their lease. However, it would of course be different for an operator of a dine-in restaurant, which hasn’t been able to operate while New Zealand has been at alert level four and still won’t be able to operate at alert level three.

In cases where a tenant is not able to access their premises and fully conduct their business, the next question is what is the “fair proportion” that rent and outgoings should be reduced by. This again will depend on the circumstances of each situation. Relevant considerations might include the tenant’s ability to continue to trade remotely, the impact on the tenant if it were required to have to continue to pay rent and outgoings and the impact on the landlord if rent and outgoings were not paid. In regard to that last point, it should be acknowledged by tenants that landlords will still potentially have their own expenses, such as loan repayments to their financier (although it may be that a landlord can obtain some temporary relief from their financier regarding those payments). In regard to outgoings specifically, many outgoings will still need to be paid during the lockdown period, so a landlord might consider that it is reasonable to still expect a tenant to at least continue to pay for outgoings.

Even in a situation where a tenant has no revenue at all coming in during the lockdown period, this does not necessarily mean that the tenant should pay no rent or outgoings. A landlord might argue that the tenant is still obtaining some value from the lease by being able to store their equipment in the premises and have their business set up ready to resume operating when that is permitted.

It is also important to consider the situation once New Zealand moves back to alert level two and beyond. In particular, a landlord does need to be mindful that requiring too much from the tenant now may mean that the tenant is unable to survive. Furthermore, it is possible, perhaps even probable, that a landlord will have difficulty finding a new tenant in the near future, and even if the landlord has a personal guarantee from a director of the current tenant company, that may be of little value in reality. Accordingly, it is probably in the best interests of a landlord to be willing to come to an arrangement with their tenant where a reduced level of rent (and possibly outgoings) is paid temporarily while the tenant cannot fully conduct its business so as to give the tenant a better chance of still being able to operate its business as soon as it is allowed to do so.

Another possible way forward is that even if a landlord does insist on receiving the full amount of rent and outgoings, it could potentially agree that payment of those amounts can be deferred. For example, part of the payments could be made on the due dates, and the rest could be payable in instalments over an agreed period of time.

Other Versions of Lease Document

In situations where a written lease document not including that clause 27.5 is in place, the parties should consider what, if any, provisions their particular lease document does contain regarding reduction of rent and outgoings in emergency situations. Even if the lease document does not mention anything relevant to the current situation, it seems reasonable that the points mentioned above could still be considered by the parties in order to try to reach agreement regarding a temporary arrangement.

In any event, regardless of what version of written lease document is in place, or even if there is no written lease document at all, good communication between landlord and tenant will be crucial. This is important at any time, but is even more so at times like these.

Possible Termination of Lease

The temporary lockdown period does not automatically give a landlord or a tenant the right to terminate a lease. Note though that recent versions of the standard ADLS Deed of Lease include a provision allowing either party to terminate the lease in the event that the tenant cannot access the premises for a certain period of time. The standard provision is nine months, but that can be amended by the parties by agreement. If the parties have amended that timeframe to, for example, one month, then that provision would be relevant.

Finally, it is worth noting that, at the time this article was written, the government has announced it is proposing to temporarily amend the law relating to a landlord’s ability to cancel a lease where a tenant fails to pay rent. Current rules allow a landlord to cancel a lease where rent is not paid for at least 10 working days, the landlord has served a notice to the tenant giving the tenant at least 10 working days to pay and the tenant has not done so within the specified time. The government is proposing to extend each of those timeframes from 10 working days to 30 working days.

Conclusion

If you would like advice regarding your specific lease situation, please contact us.