While the government’s wage subsidy helped companies with staffing costs, it appears that the Government has ruled out subsidising the rents for businesses struggling to pay the rent on their commercial property. Instead, it is considering a law change to place a greater onus on landlords and tenants to negotiate a fair reduction. The details are not yet known, so in the meantime, landlords and tenants need to refer to their leases to understand their legal position before negotiating a reduction.

Rent is typically one of the biggest fixed costs for a business and there has been much discussion about whether, and by how much, rental for commercial premises should be reduced because of the Covid-19 lockdown.

The most widely used commercial tenancy lease is published by the Auckland District Law Society and does include a ‘No Access’ clause. This clause was added after the Christchurch earthquakes, when some tenants found they still had to pay rent because their premises were undamaged, but they couldn’t access them because they were inside the red zone.

The ‘No Access’ clause states that there should be a rent and outgoings reduction if there is an emergency, and Covid-19 obviously falls under that category.

This particular clause and how it applies to Covid-19 has not yet been interpreted by the Courts, but it is a no-brainer as there is an ‘emergency’ issued by a competent authority which has resulted in tenants being unable to gain access to their premises to conduct their business. 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 is a ‘fair proportion’?

What’s fair is fair

The New Zealand Law Society suggests 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.

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 may also be a good idea to negotiate an interim agreement pending any further Government action on this issue.

It’s also possible that what constitutes a ‘fair proportion’ may change over time as the alert level changes.

Pick a number

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 recommended by the Law Society, they are examples of what other tenants and landlords have agreed:

  • Retail – reductions ranging from 50% to 80%
  • Office – reductions ranging from 50% to 75%
  • Warehousing – 50% (the rationale being that goods are still being 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.

Fair and reasonable

If you don’t have a No Access clause in your lease, you can still try to negotiate a rent reduction with your landlord. From anecdotal evidence, we can report that we have seen such negotiations result in a fair rent reduction. The key is to approach the 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.

Business & Commercial Leasing