As there is no handbook on ‘how to deal with leasing commercial property in a pandemic’, tenants, landlords and lawyers alike have been left to navigate a new territory of commercial property law that comes with the COVID-19 pandemic. Although we’re still lacking some clarification of how decisions around commercial property leasing should be made, what have we learnt so far?
ADLS Deed of Lease Clause 27.5 – Why should I know about this?
For commercial property owners and tenants, lockdown periods due to COVID-19 have brought a lot of attention to a specific clause in the ADLS Deed of Lease. Clause 27.5 (A.K.A., the “no access” clause) provides rent abatement when access to the premises is blocked during an emergency, such as a lockdown. The clause was first inserted into the standard form Deed following the Canterbury Earthquakes to allow for a reduction in rent for tenants who could not access their business premises.
So, what does this mean? In an emergency situation where a tenant is unable to access the premises to fully conduct their business, they are entitled to an automatic rent abatement of a ‘fair proportion’.
How do you work out a ‘fair proportion’ for the rent abatement?
This is where it gets tricky. While both parties agreed that rent should be abated by a fair proportion, it’s up to both parties, the landlord and the tenant, to agree on what the ‘fair proportion’ will be in their circumstances. This is easy if both the landlord and the tenant are on the same page about what amount is deemed as ‘fair’, but what happens when there’s a disagreement?
We hoped that guidance on what a ‘fair proportion’ means in the context of lockdowns was coming with a recent case. A local Waikato café, Coffee Culture, found themselves in a Court case with their landlord after not paying rent since its closure during the March 2020 lockdown. The café argued that because of COVID-19, there had been less staff on their office-building premises and therefore less customers since the first lockdown, significantly affecting their ability to operate their business fully. The landlord argued that while this was fair for the time that the country was in Alert Levels 3 and 4, rent should’ve continued to be paid when the National State of Emergency for COVID-19 ended on the 13 May 2020.
Unfortunately, the highly anticipated High Court decision of fell short of providing us with judicial guidance on what would be a ‘fair proportion’. However, what was interesting in this case was what the High Court said about how long rent should be abated. Both the landlord and tenant agreed that some abatement during Level 3 and 4 was fair, however, the tenant also wanted abatement during Level 2. The tenant claimed that this was fair because the COVID emergency still existed, and as a direct result of the lockdown, the majority of the tenant’s customers (other tenants in the development) had been directed to work from home – so they were not able to buy food or coffee. This meant the tenant was not able to fully conduct their business (which is a key component of clause 27.5) during Level 2.
In the context of this case, the High Court accepted that there was a substantial argument to be had about what a ‘fair proportion’ was and about how long rent should be abated. Unfortunately, this was all the High Court was asked to determine. Since there was a substantial dispute, it was found that the landlord had improperly used the statutory demand process to recover money from the tenant, and the case was dismissed.
Landlords - Terminating a Lease with Clause 27.5 in mind
As well as the process around automatic rent abatements during lockdowns, landlords also need to take care when terminating a lease for non-payment of rent during these times.
Why? Well, the process of lease termination requires the landlord to issue a Property Law Act notice, advising the tenant of the amount of the unpaid rent and the process required to remedy this breach. Landlords claiming the full amount of rent (and not taking into account the automatic abatement) will risk issuing a defective notice, resulting in an unlawful termination of the lease, and possible damages due to the tenant.
New laws in the works
For those of you operating with a lease that does not have clause 27.5 (or similar rent abatement provisions), the Government has recently announced that it intends to amend the Property Law Act to insert a clause into all commercial leases, following the above regime. If the law is passed, a tenant will only need to pay a ‘fair proportion’ of rent where a tenant has been unable to fully conduct their business in their premises due to the COVID-19 restrictions (although the new law still doesn’t give us guidance as to what a ‘fair proportion’ will be).
Figuring out how to make decisions around leasing commercial property during a time that is truly unprecedented can seem confusing, but as lawyers, we are experts (despite lacking the specific guidance we might be yearning for). If you’re a tenant or a landlord and you haven’t considered how Clause 27.5 and the recent lockdowns may have affected your lease, get in touch with us today.
Photo Credit: Omar Flores