Insights

27 March 2020

The Government’s decision to move New Zealand to Alert Level 4 means everyone undertaking a non-essential service is required to stay home and all non-essential business premises are required to close (the lock-down) . In this note we examine the implications of the lock-down for tenants of commercial leases.

Can a tenant stop paying rent?

ADLS Lease provisions

The Auckland District Law Society (ADLS) publishes a lease which is used widely for commercial leases throughout New Zealand. The current version of this lease (2012, 6th edition) contains provisions, added following the Christchurch earthquakes, to give tenants relief in circumstances where they can’t access their premises following an emergency. 

One of these provisions, clause 27.5 relates to “no access” in emergencies – where a tenant cannot access premises due to an “emergency” situation.

In short clause 27.5 of the current and recent versions of the ADLS Lease 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 as a consequence, a fair proportion of rent and outgoings shall cease to be payable during that no access period.

The move to Alert Level 4 together with the declaration of a National State of Emergency will likely serve to provide commercial tenants which operate non-essential businesses and have leases which contain these provisions, relief from having to pay a fair proportion of rent and outgoings during the lock-down period.

What constitutes a “fair proportion“ of rent and outgoings is likely to vary in each case.

Other Leases

There are many other types of leases and tenancies which are unlikely to use the ADLS lease format, for example, shopping mall leases, office tower leases and specialised tenancies which are likely to have their own formats.

The wording of your particular lease will always be critical to determining any rights and obligations of either party. We recommend you seek our advice if you do not have a current ADLS Lease and wish to discuss your options.

Business interruption and loss of rents cover

Both landlords and tenants may have insurance which responds to the current lock-down.

Landlords may have loss of rents cover. Tenants may have business interruption cover.

We suggest you first speak to your insurance broker if you think you may have cover as a consequence of the lock-down. In our experience, since the SARs epidemic, the majority of these types of insurance policies now exclude losses arising from epidemics.

Can either party terminate the lease?

Where lease provides a termination right

Some leases will contain clauses which entitle either the tenant or the landlord to terminate the lease if the lock-down continues for several months or more. Recent ADLS leases contain these clauses but the period of time the tenant must be locked out before a party can invoke the termination right will be specific to each lease.

Where the lease doesn’t contain a termination right

In rare circumstances it may be possible for parties to leases to bring their lease to an end by applying the doctrine of frustration. This doctrine operates to release parties from their contracts where, by no fault of either party, an intervening event makes performance impossible or radically different from what the parties agreed to. If frustration occurs, then the parties don’t have to perform the contract as intended.

In our view the doctrine could be applicable to lease arrangements but likely in only very limited circumstances, such as where a lease expires before the end of the lock-down period

What to do next

We encourage all parties, both landlords and tenants to talk each other as soon as possible and gain an understanding of each other’s position. The current circumstances may only apply for a relatively short period. No one is at fault here. Taking a longer term view and endeavouring to be as fair as possible, with the objective of maintaining a strong relationship with your landlord/tenant is our recommended approach.

We do not recommend that you take any firm action under your lease until you have first talked to us.

If you need advice, or would like to discuss any of these matters, please contact any of our commercial partners whose contact details are set out below: