Can we take a break from paying our commercial rent during Covid-19 lockdown?
The impact of COVID-19 and the unprecedented lockdown have created a lot of uncertainty in business. Non-essential businesses find themselves scrambling to find ways to make ends meet. Many tenants, in particular, are finding they are unable to pay their lease rental and outgoings during the lockdown period.
Taking a break from rent payment is going to depend on what the lease says. The commonly used Auckland District Law Society (“ADLS”) Deed of Lease precedent, provides a wide-ranging clause which covers situations such as government lockdown as grounds for some rent reduction or even suspension of rent. In particular, the No Access in Emergency clause of ADLS form provides that:
“If there is an emergency and the Tenant is unable to gain access to fully conduct the Tenant’s business from the premises… including restriction on occupation of the premises by any competent authority [which includes New Zealand Government]…then a fair proportion of the rent and outgoings shall cease to be payable commencing on the date when the Tenant became unable to gain access to the premises…”
We are of the view that this clause would apply given that a national state of emergency has been declared and most businesses are unable to access the leased premises to continue operating their business.
An apparent issue with this clause is interpreting the meaning of “fair proportion.” We consider that fair proportion would not necessarily equate to a zero payment but at least a reduction in the rent and in some cases a substantial reduction.
Of course, it is unlikely that the landlord would be bound to agree to the full amount of rent to be waived given that there is some minimal on-going use of the premises for storage of their stock or using the IT systems to facilitate working remotely. There is also the tenant’s share of the outgoings on insurance.
Many tenants then are wondering how much rent reduction they are entitled to. This will depend on the industry, size and the impact of the lockdown on profits. Bear in mind that this is also difficult for the landlords as they may also have mortgage repayment obligations and fixed outgoings to pay on the premises. It is therefore understandable that landlords may not easily agree to a reduction of rent.
Not all leases have this type of “No Access in Emergency” clause so the advice we would need to give you potentially could vary from tenancy to tenancy, so it is important that tenants check and read the fine print of their particular lease to get the right advice for their own circumstances.
If such a clause is present, we recommend that the tenants engage to a discussion early with their landlords. In some cases, it is better to not invoke the “No Access in Emergency” clause at the first instance but an open, honest conversation with the landlord might actually provide a better arrangement.
Other alternatives: Force majeure and the doctrine of frustration
In some other rare instances, tenants may have the right to terminate the lease using the doctrine of frustration or a ‘force majeure’ clause.
Frustration can bring a contract to an end when performance of the contract is rendered impossible by an unforeseen event, and thus outside the control and contemplation of both parties. Frustration effectively makes the parties absolved of their obligations under the lease. Tenants, however, have to bear in mind that using the doctrine of frustration as a ground for terminating the agreement is assessed at a very high threshold by the Court.
The Supreme Court is unwilling to terminate a contract using Frustration when the main objective of the contract, based on its terms, can still be accomplished. The doctrine of frustration is a particularly complex area of law. We recommend that a tenant seeks to obtain legal advice before attempting to rely on this doctrine. It will depend on the lease, the nature of the business and circumstances of each case.
For example, a temporary change such as a short-term closure of premises would ordinarily not amount to frustration, even if premises are closed for an extended period of time. At the time of writing, the country has been in lockdown for a week, it is unlikely that the tenant has a reasonable certainty that they will be unable to access the premises for a longer period. (It is also worth noting that the ADLS standard lease normally provides a 9 month no access period, so terminating the lease at this stage is unlikely to be a viable option.)
Given the complexity of the doctrine of frustration, tenants may invoke a ‘force majeure’ clause if it’s included in the contract. Force Majeure is a clause designed to release a party from fulfilment of its contractual obligations as a result of uncontrollable events. This type of relief could be used as an alternative to the doctrine of frustration.
It is arguable that a pandemic amounts to a force majeure but relying on a ‘force majeure’ clause will depend on the wording of the contract. In some contracts, it can provide for cancellation of the lease and others may suspend the lease during the uncontrollable event. Essentially, the use of ‘force majeure’ clause depends on the specific wording of the contract.
If you are a tenant and in a situation where you do not know what your rights and obligations are, particularly in these uncertain times, our commercial team is able to review your lease and advise you accordingly.
We highly recommend that you do not withhold any rent payment without advising the landlord of your intention, otherwise the landlord is entitled to charge penalty interest for the rent in arrears.
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This article is published for general information, interest and discussion purposes only. Legal content in this article is necessarily of a general nature and should not be relied upon as legal advice.