COVID-19: What’s fair when it comes to rent and outgoings abatement?

As New Zealand progresses through the Government-mandated Level 4 lockdown period in response to COVID-19, we are reminded by our Prime Minister to be kind to each other. In the commercial world, parties generally do not always make business decisions based on kindness. But landlords and tenants will certainly need to work together as they grapple with the issue of a “fair proportion” of rental and outgoings abatement during this period.

As discussed in our recent article, if a tenant:

  1. has a “no access in an emergency” clause like that found in recent versions of the ADLS standard-form lease; and
  2. is not operating an essential business from the premises,

it is – and has been since the Government-mandated lockdown – unable to access the premises to “fully conduct” its business “from the premises”. As a result, the tenant can seek the abatement of a “fair proportion” of its rent and outgoings.

What is a “fair proportion” in the context of this clause?

The “no access in an emergency” clause focuses on just that – access. Given the focus on access, it is arguable that if a tenant has no access to its premises to fully conduct its business, then an abatement of rent and outgoings may be claimed.

From a landlord’s perspective, this may seem “unfair”, especially as it is unlikely that the landlord’s business interruption (BI) insurance will respond (BI cover almost always excludes pandemics or notifiable diseases and most BI policies require prior material damage).

But that does not mean it is fair to expect tenants to wear the risk – loss of access to premises has a direct and drastic impact on a tenant’s revenue, not just its profit. The argument about what is a “fair proportion” becomes even more complex for tenants operating essential services, who are running at restricted capacity but may not be able to avail themselves of the “no access in an emergency” clause.

As a result of these developments, and the unprecedented nature of the circumstances that parties find themselves in, we are now seeing calls for “commercial fairness” to be considered in discussions around a tenant’s rent and outgoings payments during the Level 4 lockdown period.

This approach allows landlords to argue that other factors should be considered when calculating a “fair proportion” of rent and outgoings abatement. Some themes we are seeing emerge in discussions on what is “fair” include:

  • Storage: to what extent should there be recognition that a business’s stock, chattels and equipment are still in the premises, essentially being “stored” during the lockdown? If the tenant’s permitted use is storage, does this make a difference?
  • “Virtual access”: many businesses can operate from home, but only because they are still able to run their servers (which also require air-conditioning) from the premises. Is this relevant? What about if staff need to access the servers occasionally for maintenance?
  • Outgoings: many day-to-day building expenses (eg rates, insurance) do not stop being payable by the landlord. Is it “fair” that the landlord bears the brunt of this?

A strict legal interpretation of the “no access in an emergency” clause does not allow all of these factors to be considered given the clause is focussed on access.   Notwithstanding the clause’s wording, we are seeing a lot of parties adopting this “commercial fairness” approach – at least for now, while reserving their respective positions in respect of what may ultimately be determined as “fair”.

The debate will become trickier if the future holds fluctuating lockdowns – will a “commercial fairness” approach be taken when tenants are faced with the costs of getting their business up and running again, but they have lost their right to relief under their “no access in an emergency” clause?  We may well see Government step in to give relief and certainty, especially where a tenant does not have a contractual right to it.

Our advice for now

Every case will depend on its specific circumstances – it is simply not possible to say with certainty what percentage of abatement represents a “fair proportion” of rent and outgoings. Both landlords and tenants will need to be careful about making concessions that they do not legally have to make, especially where they have duties to act in the best interests of investors, or obligations to financiers. But the landlord/tenant relationship is just that – a relationship. If the parties want the relationship to survive these tough times – which is surely in everyone’s best interests – they will need to communicate, be flexible, work together and, well, in a commercial sense, be kind.

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