COVID-19: Unlocking the lockdown – key issues for landlords and tenants as Alert Level 4 restrictions ease

As the Covid-19 curve appears to be flattening and Government rhetoric becomes more positive, the country, and in particular the business community, is starting to contemplate what life at Alert Level 3 might look like.

The breakneck speed with which the country moved to Alert Level 4 as a result of the Covid-19 pandemic – from Level 2 to total lockdown in less than three days – left businesses with little time to prepare for the impact it would have on their operations.  Despite current uncertainty as to how long Level 4 will last (it is currently set to continue until at least 23 April 2020), the reality is that it will end at some point, meaning landlords and tenants can and should take this time to prepare themselves as best they can for when the Alert Level abates.

We recently commented on how standard- form leases respond to the Government-mandated closure of non-essential business premises due to the Covid-19 pandemic – see our previous articles on the Auckland District Law Society standard “No access in emergency” clause here and here.

In this article we look at how access to business premises may change under Level 3, the possibility of continuing rent abatements under the standard “No access in emergency” during Level 3 and what landlords and tenants should be doing now to make the transition as smooth as possible.

What does Alert Level 3 look like?

New Zealand has had a brief encounter with Level 3 before, for less than 72 hours before the country headed into the Level 4 lockdown. It looks likely that the country will soon get to know Level 3 much better.  So what does a life in Level 3 look like?

Certain restrictions will still apply if we return to Level 3, including:

  • closure of some non-essential businesses;
  • closure of public venues (e.g. cinemas and food courts) and cancellation of mass gatherings;
  • alternative ways of working for many businesses;
  • limited travel in areas with Covid-19 clusters or community transmission.

While there is no indication that the types of restrictions under Level 3 will change, we are expecting the Ministry of Business, Innovation and Employment (MBIE) to release further guidance for businesses next week, for example, as to which non-essential business will be required to remain closed during Level 3.

Importantly, we are also expecting that the Government’s general directive to businesses will continue to apply: business operations must be undertaken in a way that limits public health risks, including by restricting physical interactions among staff and among customers. This may mean, for example, that certain corporate offices should continue to require staff to work from home, and certain retail businesses should be limited to operating online platforms only. The Government’s guidance on this will be key to the interpretation of the “No access in an emergency” clause (see below).

Health and safety considerations for re-opening non-essential business premises

When it comes, a decrease in the Alert Level will be welcome news to those businesses who are allowed to operate under Level 3. Before returning to their premises, however, those businesses will need to consider their role as PCBUs under the Health and Safety at Work Act 2015: specifically, what policies and systems should they implement to ensure, so far as is reasonably practicable, that staff and persons accessing the premises are adequately protected from Covid-19-related hazards.

For example, corporate offices may need to consider limiting access to their premises to a reduced number of staff at a time. And retail stores and hospitality sector businesses may need to consider following the “one-in-one-out”  rule adopted by essential retail operations during Level 4.

These are matters that all businesses will be thinking about, and on which landlords and tenants in particular will need to consult, co-ordinate and co-operate. Landlords will need to understand how their tenants, particularly in multi-tenanted buildings, intend to operate, as decisions to reoccupy will impact on practical health and safety considerations. For example, landlords will need to think about whether they should increase their cleaning regimes in common areas, and whether the building’s common areas and lifts can accommodate the required social distancing measures, as well as any continuing rent and outgoings abatements.

What happens under the standard “No access in emergency” clause during Alert Level 3?

The standard Auckland District Law Society “No access in emergency” clause 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 reduce or overcome any hazard, harm or loss that may be associated with the emergency, including restriction on occupation of the premises by any competent authority,

the tenant may claim an abatement of a “fair proportion” of the rent and outgoings for as long as the tenant cannot access the premises to fully conduct its business due to the emergency.

It is clear that a Government-mandated lockdown, such as the current Level 4 closure of non-essential businesses, triggers this clause because those businesses are prohibited from accessing their premises. But this is just one scenario where the clause applies. Importantly, the clause also provides that the tenant may be unable to access its premises because of other public safety issues or emergency-related hazards.

This may help some tenants in Level 3 – assuming an “emergency” still exists (if the national state of emergency ceases, it is arguable that the pandemic status of Covid-19 is a sufficient emergency). For example:

  • what if, to comply with the Government’s general directive to businesses to operate in a way that limits public health risks, the business has elected to require staff to work from home instead? On the one hand, the business is arguably complying with a competent authority’s restrictions on accessing the building occupation. On the other hand, it is able to access its premises, it is just choosing not to; or
  • what if a staff member has tested positive for Covid-19, and all other staff are self- isolating awaiting test results? Again, the business arguably has to send everyone home to comply with Government guidelines and the health and safety regime – and arguably this is due to “reasons of safety of the public or property”.

At this stage, it’s difficult to know if these arguments will be successful. It will likely depend on the nature of further Government advice issued as the Alert Level abates.  It is possible however that many tenants will lose the right to relief under their “no access in an emergency” clause and find themselves up for full rent and outgoings – even though, especially in retail and hospitality, they may not be operating at full capacity from day one of Level 3.

Even if tenants can successfully claim for a rent and outgoings abatement under the “no access in an emergency” clause under Level 3, we expect even more debate about what a “fair proportion” of that abatement should be.

And for those businesses that do not have a “no access in an emergency” clause in their leases, well, they’re in no different position than under Level 4 – unless and until we see a Government response, these businesses will be reliant on their relationship with their landlord.

Our advice for now

Businesses and advisors will have a better understanding of these considerations once further guidance on Level 3 is released. In the meantime, and to the extent possible, we encourage landlords and tenants to consider these issues in advance so that they are positioned to action any changes as soon as the Alert Level is decreased. Landlords and tenants with national portfolios will also need to consider how their portfolio will be impacted if different Alert Levels are applied on a regional basis.

There will no doubt be a number of landlords and tenants needing to reassess whether the arrangement they agreed in respect of any rent and outgoings abatement under Level 4 should continue to apply during Level 3. Many landlords and tenants will have chosen simply to reserve their position pending indications as to the success of the Government’s Covid-19 response. Those business may, however, need to review that position if Level 4 continues longer than they had anticipated, or if their position becomes greyer during Level 3.

All of which highlights a key theme we are seeing in the wake of Covid-19  – the importance of maintaining open and respectful lines of communication between landlords and tenants as they are, to quote a catchphrase, all in this together.

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