Hospitality Business Magazine

Check your Commercial Lease for reprieve clauses

Is your commercial lease the standard popular Auckland District Law Society lease largely used throughout New Zealand?

Not sure or can’t remember? It may pay then to dig it out and have a good look as it could contain clauses that may provide a reprieve from rent.

While the New Zealand Government has announced it is looking at the predicament many businesses are finding themselves in with regard to their commercial lease obligations, this standard commercial lease has provisions that enable you to negotiate with your landlord.

In 2012  Clause 27.5 was included in the Auckland District Law Society commercial lease  in response to the Canterbury earthquakes, when many leaseholders were barred from their businesses.

Clause 27.5 provides that:

If there is an emergency and the Tenant is unable to gain access to the premises to fully conduct the Tenant’s business from the premises because of reasons of safety of the public or property or the need to prevent or overcome any hazard, harm or loss that may be associated with the emergency including:

(c) Restriction on occupation of the premises by any competent authority.

Then a fair proportion of the rent and outgoings shall cease to be payable for the period commencing on the date when the Tenant became unable to gain access to the premises to fully conduct the Tenant’s business from the premises until the inability ceases.

Clause 47.1(d) defines an “emergency” to mean a situation that:

(a) Is a result of any event, whether natural or otherwise, including an … epidemic; and
(b) Causes or may cause loss of life or serious injury, illness or in any way seriously endangers the safety of the public or property; and
(c) The event is not caused by any act or omission of the landlord or tenant.

In the present circumstances, it is highly arguable that there is an emergency as there is an epidemic. This is supported by the fact that an epidemic notice was issued under section 5 of the Epidemic Preparedness Act 2006. Further, the epidemic may cause loss of life and the event is not caused by any act or omission of the landlord or tenant.

Assuming that there is an emergency and the tenant is unable to gain access to the premises to fully conduct its business, then clause 27.5 states that the tenant would not be liable for a proportion of rent and outgoings from when the tenant became unable to gain access until that inability ceases.

Clause 27.6 provides a further option by giving either party the choice of terminating the lease by giving 10 working days written notice to the other if:

The tenant is unable to gain access to the premises for the period specified in the schedule; or

The party that terminates the lease can at any time prior to termination establish with reasonable certainty that the tenant is unable to gain access to the premises for that period.

Accordingly, depending on the period contained in the schedules, the tenant might also be able to terminate the lease.

Burden Goes To The Landlord

What does this mean to tenants and landlords? It appears that the purpose of clauses 27.5 and 27.6 is to shift the burden of the cost of emergencies to the landlord.

It is important to note that the operation of clause 27.5 does not require notice from the tenant. It means that clause 27.5 operates automatically and it would be highly arguable for tenants to rely on this clause for proportional rent and outgoings.

For landlords, this means they need to anticipate for this potential outcome and make provision for less rental income.

The Government has recommended that tenants and landlords work collaboratively during this period to ensure they both come out of Levels 3 and  4 lockdown commercially viable. In many cases, the commercial relationship can continue once the dust settles as the reality for most landlords is they are likely to experience difficulty in finding replacement tenants during this time.

Prime Minister Jacinda Arden has requested that landlords and tenants work together and renegotiate where possible and has said that the Government is looking at the proposed Australian Code of Conduct while the Government continues to seek advice from the Ministry of Justice.

Auckland District Law Society’s property law committee member Joanna Pidgeon said clause 27.5 of the sixth edition of its popular commercial property lease was designed to capture emergency situations beyond earthquakes.

“Such as a plague or a pandemic or epidemic, and it deals with being unable to access premises in emergency situations so that people can’t fully conduct their business from the premises and there is a prohibited or restricted access.

“And then a fair proportion of rent and outgoings is abated and what that means is it ceases to be payable. It’s not a deferment.”

Pidgeon said the amount of rent reduction would be different from landlord to landlord.

“So it means a fair proportion is abated and different tenancies will have different situations and you need to look at the situation of the tenant and the landlord and work out what is fair.”

She said many landlords had come to the aid of their tenants, but if the two parties could not agree, an independent arbitrator could be appointed.

Code of Conduct In Australia

In response to Covid-19, Australia has introduced a mandatory code to guide rent relief for small to medium enterprises with an annual turnover of up to $50 million.

Under the code, the reduction in a tenant’s turnover is reflected in any rent cut.

Currently the New Zealand government says it is considering rent concessions to ease the burden on small businesses from Covid-19, but has so far ruled out rent subsidies or freezes.

Hospitality Business recommends seeking independent legal advice on your Commercial Lease status.