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Thu, 9th Apr 2020

Commercial Leases during COVID-19

When tackling this tricky topic we must always remember that there are two sides to all leases:

  • The Tenant who is trying to hold a business together - AND
  • The landlord who relies on rent for income and possibly the ability to pay the bank.

This information is aimed at both sides – a difficult task in normal times.

THE NO ACCESS CLAUSE:

Most commercial Leases are on the Auckland District Law Society (ADLS) form which, after the Christchurch earthquakes included what has become Clause 27.5. This is in all leases on that form from November 2012. This is probably most leases now current – but there will be some old leases without this clause and others not on this form - that’s a separate discussion, please contact us.

There are two big questions:

1. Does this Clause 27.5 apply to the present COVID-19 situation?

The Auckland District Law Society has issued a statement (7 April) that it does apply as Clause 27.5 was intended to cover civil emergencies. 

2. What is the effect of the inability to gain access to premises and the inability to operate them fully?

It clearly differs from tenancy to tenancy as the Clause 27 .5 wording provides that a fair proportion of rent and outgoings shall cease to be payable from the date the tenant became unable to gain access to the premises to fully conduct the tenants business from the premises until the inability ceases. 

The provision has never been tested so all comment made is based on anecdotal evidence, in fact we have delayed preparing this to try and get some insight into what is developing, the last few days has seen some information start to come out.  We have seen comment in the National Business Review that retail tenants were seeking 25-70% abatement, office tenants 25- 60%, industrial tenants 15-50% and warehousing tenants 10-25%.  There is comment that a restaurant has its whole business on the premises and a higher proportion abatement is fair. While a Call Centre for example probably continues in some form off the premises but using their equipment still on the premises and should pay a higher proportion. The same applies to a retail shop with an online component.

What is clear is that there is no one size fits all solution, but we have had some indication that a number of landlords and tenants have negotiated a 50% abatement.

It must be remembered a tenant has duty to mitigate – the tenant can’t go home and say I’m not paying rent. The landlord isn’t underwriting the business but has to be fair based on the particular circumstances.  We are navigating new waters – the best advice is Negotiate! Negotiate! Negotiate! – It’s going to be too costly to Litigate.

Finally at the time of preparing this there is no news on any direct Government assistance for landlords or tenants – there has been some discussion. A Government package could change things again.

If you need further advice, Dennis McBrearty and Richard Ayton are keeping up with developments – their details are provided below, please contact either of them with any queries on leases or any other issues being presented by such uncertain times.

Dennis McBrearty 021 488 665  

Richard Ayton 021 486 033  

  • Posted By: Richard Ayton and Dennis McBrearty on Thu, 9th Apr 2020 @ 13:52:25

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