Commercial Tenants’ rights during the Covid-19 Level 4 Lockdown

16 April 2020

With New Zealand now well and truly in lockdown, a number of our commercial landlords and tenants have asked whether a tenant has the contractual right to stop, or at least reduce, rental payments and outgoings. That is an interesting question and largely depends on the terms of your lease agreement.
A common “template” lease used in New Zealand is known as the Auckland District Law Society (ADLS) Deed of Lease, 6th addition. Clause 27.5 of this lease states:
“If there is an emergency and the Tenant is unable to gain access to the premises to fully conduct the Tenant’s business … then a fair proportion of the rent and outgoings shall cease to be payable …”
This clause was added in the most recent 6th addition of the ADLS lease after the disruption caused by the Canterbury earthquake. Its purpose is to ensure there is fairness after an event (such as the earthquake) that is outside the parties’ control. The definition of “emergency” includes an epidemic that may cause loss of life or illness. This would include the current pandemic, COVID-19. This means that a tenant may be able to invoke clause 27.5 to ensure they are only paying a “fair proportion of rent and outgoings”.
The obvious question is what is fair?
A tenant would argue all rental and outgoings should cease; however, this would have the effect of leaving the Landlord to face the entire loss. This may be considered unfair to the landlord in circumstances where the emergency is not the fault of the Landlord. The Tenant may also be able to “conduct its business” to a limited extent if, for example, employees are able to work from home.
With so many variable factors at play, what is fair will largely depend on the nature of the business. While there will certainly be exceptions, a reasonable starting point to consider by the parties involved would be sharing the loss equally by reducing rental and outgoings by 50%.
If you do not have the 6th addition of the ADLS lease, there are still several other provisions that may assist the tenant including a clause known as a “force majeure” clause. A force majeure clause may excuse a party from meeting their obligations if they are prevented from acting because of a specified event such as a pandemic, earthquake, flood etc. Each force majeure clause is slightly different and will need to be carefully considered. We have significant expertise in this area, and recommend you seek advice.
Regardless of your lease we suggest you have an open discussion with your landlord or tenant in good faith in order to try and reach a fair agreement during the lockdown. If an agreement cannot be reached, or if you would like to discuss your options, please get in contact with your lawyer here at CR Law or alternatively please contact Lester Houghton or Paul Schmidt-Uili at lhoughton@crlaw.co.nz or pschmidt-uili@crlaw.co.nz.
Simon Clark
Associate