Access issues – Commercial leases during COVID-19 lockdown
Many commercial tenants were forced to close down non-essential businesses during the nationwide lockdown. As a result, many commercial tenants and landlords face difficulties in meeting daily business expenses. There is a “no access in emergency” clause within ADLS leases, which was included following the 2011 Christchurch earthquakes and the creation of the ‘red zone’ where people were not allowed to enter and operate.
Although not a natural disaster type situation, the current pandemic has been considered an emergency during which tenants are unable to fully conduct their business because of reasons of safety of the public. The ADSL lease clause provides for ‘a fair proportion of the rent and outgoings’ ceasing to be payable for that period. The fairness should be to both the tenant and the landlord. There is much discussion on what is ‘fair’ in the circumstances where tenants cannot trade, as this is subjective. To determine what that reduction should be, there should be some engagement between the parties, hopefully to agree on what is fair.
While unable to trade, arguably tenants still obtain some benefit from the lease continuing; being able to continue to store their equipment and to resume trade without difficulty once they can re-access the premises for trading. Similarly, because most leases are continuing, landlords do not have the ability to otherwise make any use of the premises (as they remain for the tenant’s use), and under a pandemic, they are unable to make insurance claims for the loss of rental.
The insurance position being circulated is that even where business interruption/loss of rent insurance is in place, there will not be a claim available under the insurance cover, as there are exclusions for pandemics. The exclusions are to deal with the underlying idea that insurance companies operate by diversifying their risk worldwide so that there are only portions of insured ever claiming under policies; as they cannot fund claims across the entire pool of insured parties at once.
Because there is no insurance claim available to landlords, and they will continue to face the costs of the premises, including rates, insurance, interest payments etc., it will likely be viewed that it’s not ‘fair’ to the landlord for no rent and outgoings to be paid during the closedown, but rather that fair, would be for the ‘downside’ to be shared.
In some cases, a 50% reduction in rent is somewhat acceptable to parties (given the situation), although some (but not many) landlords are offering to waive rent completely. There are also some landlords who, while not reducing rental further, are agreeing to different payment arrangements, such as it being deferred until their tenant’s business is operating again.
Landlords may have the option of changing any lending for the premises to interest only, or even having a ‘mortgage holiday’. Such measures should assist them in dealing with any rent reduction during the period.
For those that are not on the recent version of the ADLS lease with the “no access in emergency” clause, and no other right under the lease to a rent abatement, landlords are encouraged to consider their tenant’s financial situation. Reaching an agreement such as a rent payment holiday, reduction in rent or variation of the lease, is likely to be in both parties’ interests.
The Government announced its intentions to introduce a Bill to assist tenants with late rental payments for commercial tenancies, and landlords for meeting mortgage payments – so watch this space.
If you are a landlord or tenant within the commercial realm (for the purposes of this article), it is important you contact your bank and lawyer for further assistance in respect of rental matters, advocating for you with the landlord, or documenting any changes within a lease (where applicable). Whether formally documented or not, it is important to ensure there is clear agreement between the parties to preserve commercial relationships during this unprecedented time.