COVID-19 and commercial leases

A LEGAL PERSPECTIVE COVID-19 and commercial leases: Should commercial tenants pay their normal share of rent?

Grant Smith, LL.B., B.Com(Hons)

COVID-19 has put a strain on businesses everywhere. And as they look to reduce their costs, most will be asking: should they have had to pay normal full rent throughout 2020? It’s something we’ve been advising commercial tenants and landlords on since March. Here’s a rundown on where things stand now.

When the COVID-19 lockdown was announced, it came with fairly quick reassurance that business’ wage obligations would be subsidised. That helped take care of what is the biggest unadjustable expense for most businesses.

What wasn’t addressed was that other top expense: commercial rent. You might be able to reduce your inventory costs during a period of inactivity. You might be able to reduce your marketing costs. But that rent bill is going to be there as long as you have your lease, whether you’re occupying your premises or not. And apart from pretty much just supermarkets and dairies, businesses weren’t able to turn up to those premises during Level 4. So with businesses already struggling financially, was it right that they should pay full rent for properties they couldn’t legally access? And if not, what would that mean for their landlords, who might still need to meet outgoings of their own?

We’re starting to get a bit of certainty around that, and how tenants and landlords should go about coming to an arrangement between themselves.

Early answers from the Christchurch earthquakes

There’s been another recent situation in New Zealand where commercial tenants were prohibited from entering their business premises: the Christchurch earthquakes. Back then, tenants whose premises were inaccessible only because they were inside the cordons (and not due to earthquake damages) weren’t entitled to any rent relief. They couldn’t use their premises due to reasons beyond their control, but they still had to pay for those premises. Following that, a couple of clauses addressing this kind of situation were added to the Auckland District Law Society standard lease form (used commonly across the country, not just Auckland). These allow that:

• “A fair proportion of the rent and outgoings shall cease to be payable” for the period the tenant can’t access the premises • Either party may terminate the lease with 10 days’ notice if the tenant will be unable to access the premises for a period set out in the lease (the default is 9 months).

That means if you have these clauses, you may be able to reduce rent and expenses by “a fair proportion”. Just what a “fair proportion” is will depend on the circumstances. Still, there’s not much certainty there. It wasn’t designed specifically for a pandemic context, and not all leases have the relevant clauses. Where does that leave everyone else?

Legislative changes to help commercial tenants and landlords

In May the Government introduced legislation to ease some of the immediate challenges.

• To help tenants: In normal circumstances, a landlord can only cancel a lease for nonpayment of rent when the rent has been outstanding for more than 10 working days. Up until at least 24 September, this

period is extended to 30 working days.

To help landlords: In normal circumstances, a mortgagee can exercise their rights to sale of property 20 working days after giving proper notice to the mortgagor. Up

until at least 24 September, the period is extended to 40 working days.

However, those aren’t ideal positions to get into. Preferably you want to get things sorted before then.

So in early June, the Justice Minister announced planned changes to the Property Law Act to help head this off. The changes would have required landlords to reduce “a fair proportion of [the] rent and outgoings” of commercial tenants who have lost revenue due to COVID-19. However, these changes were scrapped at the end of July after failing to gain sufficient support in Parliament.  IN BRIEF: Some leases allow for a fair reduction in rent and outgoings when tenants can’t access their premises. But what that “fair reduction” is will be up to the parties to figure out. Legislative changes to confirm and extend this in the context of COVID-19 were proposed, but ultimately scrapped. If tenants and landlords can’t come to an agreement, the best course of action is to seek outside help. Funding is coming for mediation and arbitration, but if you need to get things sorted immediately, we’re here to help you on the way.

Negotiation, arbitration and mediation to reach a good result for everyone

So without that legislative certainty, the best way to help resolve any rent issues between commercial tenants and landlords is to talk it through.

In most cases, that can hopefully get sorted out one-on-one between the parties. But where it doesn’t, there’s outside help. Over the past few months, that’s where we’ve been getting involved, helping commercial tenants and landlords reach a fair outcome. There’ll also be help with that coming from the Government, with $40 million earmarked to fund arbitration and mediation.

But that process is likely to be some weeks off. In the meantime, we’re here for you.

If you’re a commercial tenant or landlord who needs to get the rent situation sorted, get in touch with our team at Canterbury Legal. We can help you negotiate an agreement that works for everyone.

Grant Smith

grant@canterburylegal.co.nz 3 377 0792 www.canterburylegal.co.nz