There has been much discussion lately about whether, and by how much, rental for commercial premises should be reduced because of the Covid-19 lockdown.
The most widely used lease is the lease published by the Auckland District Law Society. That lease was changed following the Christchurch earthquakes, when some tenants found that they still had to pay rent because their premises were undamaged, but they could not access them because they were inside the red zone.
Access or No Access – that is the question
Since the 2012 edition, that standard ADLS lease has contained a “No Access” clause (clause 27.5), which states that there should be a rent and outgoings reduction if there is an emergency.
This particular clause has not yet been interpreted by the Courts, but it is clear that it will apply to the present situation, as there is an “emergency” issued by a competent authority which has resulted in tenants being unable to gain access to their premises to fully conduct their business from the premises.
Clause 27.5 states that under these circumstances, a fair proportion of the rent and outgoings will not be payable.
The issue is, therefore, what would be a “fair proportion”?
What’s fair is fair
The New Zealand Law Society has just released some further commentary about this. The Law Society suggests that the following factors should be considered:
- What is fair will depend on individual circumstances:
- To determine what a fair proportion is requires considering the circumstances of both landlord and tenant (Note: by definition a proportion cannot be either 100% or 0%);
- The extent to which a tenant is still using the premises for some purpose (e.g., partly for essential services);
- The balance of the term of the lease;
- The nature of the premises and, accordingly, the proportionate change in use and enjoyment of them while the inaccessibility to fully conduct the business lasts (i.e. it may vary depending on whether it is bare land, retail, offices, warehousing, industrial);
- Whether the tenant is able to conduct the business remotely (also taking into account its use of servers / equipment at the premises, which would be a benefit of the premises);
- The value inherent in the premises (e.g. fitout, storage, goodwill, business continuity);
- Any rights of termination if the non-access continues;
- The tenant’s ability to continue its business;
- The impact on the tenant’s ongoing viability if required to pay rent (taking into account any government assistance the tenant may be able to recover);
- The financial position and commitments of the landlord (e.g. if the property is mortgaged);
- The landlord’s cost in holding and managing the property (e.g. the landlord’s mortgage obligations and other costs, such as ground rent); and
- A fair proportion may differ as between rent and outgoings.
If you haven’t already, start the conversation now
It may take time for a landlord and tenant to reach agreement on what a fair proportion is. Some landlords and tenants have agreed to an interim reduction to provide immediate relief for the tenant while allowing time for further discussions.
It is also possible that what constitutes a “fair proportion” may change over time as the alert level changes.
Suggested rent reductions range from 50% - 80%
The Law Society has gathered feedback from a number of lawyers around the country who have negotiated on behalf of both tenants and landlords. While these percentages are not something the Law Society can recommend, they serve as an example of what others have agreed:
- Retail – range of 50% to 80% abatement
- Office – range of 50% to 75% abatement
- Warehousing – 50% (the rationale being that goods are being stored and remain stored during lockdown)
Regarding outgoings, it is arguable that at least the rates and insurance components of outgoings should be abated at a different rate or paid in full by a tenant.
Don’t have a No Access clause in your lease? Relief may still be available.
Just because you do not have a No Access clause in your lease does not mean you cannot negotiate a rent reduction with your landlord. From anecdotal evidence, we can report that we have seen negotiations still result in a fair rent reduction. The key is to approach the current situation from a fair and reasonable perspective for all involved.
Please contact any one of our team members if you would like assistance negotiating a fair rent reduction.