There has been significant discussion within the legal and business communities about the impact of Covid-19 on commercial leases.
If your lease is on the 6th edition of the Auckland District Law Society lease, it should include clause 27.5 (check your individual lease) which provides 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" as a result of reasons of safety of the public that may be associated with the emergency, then a fair proportion of the rent and outgoings shall cease to be payable.
Emergency includes “A situation that is a result of any event, whether natural or otherwise, including an epidemic; and causes or may cause serious illness or in any way seriously endanger the safety of the public or property; and the event is not caused by any act or omission of the Landlord or Tenant”.
It is likely that the current state of affairs will allow the tenant to seek a fair proportion of the rent and outgoings to abate. The feedback we’ve received is that many landlords and tenants are already taking it upon themselves to agree to these reductions although there is clearly a question about what constitutes a fair proportion. That is something which requires consideration on a case by case basis. There are numerous factors which might impact on that assessment:
A question which has arisen is whether a landlord can insist upon the tenant paying the balance of the rent and outgoings at a later date. The answer is, no. If the tenant seeks an abatement of a fair proportion of the rent and outgoings under clause 27.5, then the rent and outgoings for the relevant period reduces. It is not a deferral of obligations. That is of course subject to whatever the landlord and tenant have agreed upon. But the landlord has no right to unilaterally demand payment at the later date.
Landlords and tenants both need to keep in mind that if they cannot agree on what a “fair proportion” means in the circumstances, then the dispute resolution provisions will be engaged. This situation calls for some creative solutions, and there is nothing preventing a landlord and tenant agreeing to something that will work for both of them.
Unfortunately, it seems likely that the impact on some tenants is going to be so severe that even payment of a fair proportion of the rent and outgoings is going to be a struggle. To attempt to address those challenges, the Government has recently announced that intends to introduce a Bill to give commercial tenants more time to catch up on overdue rent before a landlord can take steps to terminate the lease. Of course, this will have downstream effects on landlords who rely on the rent to meet mortgage obligations. The proposed changes are:
Under the current law, a commercial landlord must give a tenant at least 10 working days’ notice before cancelling a lease because of overdue rent. The Bill will extend the notice period from 10 working days to 30 working days. This extension will give commercial tenants more time to catch up with rent payments before the landlord can terminate the lease. If the tenant is not able to catch up, the tenant will have more time to approach the landlord to try and negotiate a solution which will provide the tenant with the opportunity to be able to catch up and resume trading as normal.
Under the current law, a mortgagee must give a borrower at least 20 working days’ notice before the mortgagee can use their powers to take possession of, or sell, mortgaged property. This includes commercial real estate. The Bill will extend that period to 40 days. The proposed change will apply to all mortgages, whether residential or commercial, regardless of whether the property is tenanted.
The proposed changes are intended to be retrospective and take effect 10 working days after the Epidemic Preparedness (Covid-19) Notice 2020 notice was issued on 25 March 2020. The measures will be temporary to allow commercial tenants, and property owners, some breathing space while dealing with the impact of the Covid-19 crisis.
The date on which the measures will take effect is important to note, as it is possible that notices for overdue rent, or overdue mortgage obligations, have already been issued. As always, we recommend that you take legal advice on your particular situation before taking any action.