Fewer customers means ‘no access’ and a rent abatement? The High Court considers Covid-19 rent abatements

This time last year during the Covid-19 Alert Level 4 lockdown many landlords and tenants were working through the question of whether a tenant was entitled to a rent abatement if it was unable to access its premises due to the national Government-imposed restrictions. The discussions turned on whether the lease contained an express right to an abatement (for example, the “No access in Emergency” clause included in clause 27.5 of later versions of the standard ADLS deed of lease) and whether that clause was triggered by the measures imposed at various Alert Level lockdowns. We published guidance on the issue here and here.

Court sets aside landlord’s statutory demand for unpaid rent for Alert Levels 1 and 2

A recent judgment of the High Court indicates a potentially broader reading of the industry standard rent abatement clause than we believe has been applied in the market. The case considered an application by a tenant to set aside a statutory demand served by its landlord for non-payment of rent and outgoings for Alert Levels 1 and 2. The Court found that there was a substantial dispute as to the debt owed, and set aside the landlord’s statutory demand. A summary of the facts is below.

The nature of this application means that the judge did not have to consider the merits of the case, but rather whether there was a “substantial dispute” as to the existence of the debt owed. This limits the application of some of the High Court’s judgment. Regardless, the case is the first of its kind to consider Covid-19 rent abatements and the observations of the Court are noteworthy.

Absent any appeal, we understand this case will now proceed in the District Court by way of substantive hearing. Get in touch with one of our experts if you’d like to discuss or otherwise follow progress of the case.

Fewer customers may give rise to a rent abatement

The Court made the following observations:

  • The tenant (Coffee Culture, a cafe) has “keep trading” obligations in its lease and the anchor tenant of the building (the IRD) has veto rights, and these reflect that the purpose, if not the permitted use, of the cafe’s lease is to serve the IRD staff and visitors, not the public generally.
  • Although the cafe tenant was able to physically access the premises, the work-from-home policy of the IRD (the building’s anchor tenant) may amount to a measure within the ambit of the no access in an emergency – rent abatement clause (industry standard ADLS clause 27.5) if it was implemented to prevent the spread of Covid-19. This is because it affected the cafe tenant’s ability to “fully conduct the Tenant’s business [(including to serve IRD’s custom)] from the premises because of … the need to prevent reduce or overcome any hazard …”.
  • A requirement for access must be access to allow the business to operate, which covers suppliers, staff and customers. In short, the directions of the anchor tenant (the IRD) to its staff to stay away have a practical effect on restricting custom to the cafe, and access of customers is relevant to the no access in an emergency clause and gives rise to an arguable case for a rent abatement.

The broad and tenant-friendly approach may not stand the test of time

Acknowledging that the Court’s observations were made in the context of an application to set aside a statutory demand (i.e., where the Court would only have been presented with limited evidence), we nonetheless foresee issues if these arguments are followed through to their logical conclusion.

In our view, the broad and tenant-favourable approach taken by the High Court may not be adopted to the same degree by subsequent Courts when the substantive dispute is heard. By way of explanation:

  • A “keep trading” obligation does not necessarily mean that the tenant’s business was intended to serve the anchor tenant in the building, and that the business use in the lease should be read accordingly. Most retail leases include this clause as a matter of course, and we anticipate this clause could have still been required if the IRD was just one of a number of tenants in the building. Shopping centres, for example, rely on the continued trade of all tenants, regardless of their association (if any) with the flagship department store or supermarket tenant.
  • Similarly, the IRD’s veto rights in the case of change of use, assignment or subtenancy do not necessarily mean that the cafe tenant’s business was required serve the custom of IRD staff and visitors. In our experience, these clauses are commonly included in leases with Crown tenants who require a “line of sight” over the grant of other rights in respect of the building (for example, for security or confidentiality reasons).
  • It is not clear that the IRD’s work-from-home policy is (or will be, if it continues) directly connected to preventing the spread of Covid-19. The policy may simply reflect a trend to a more flexible approach to working arrangements.
  • Even if the IRD’s policy is directly connected to preventing the spread of Covid-19, it is difficult to see how the remaining requirements of the industry standard rent abatement clause (ADLS clause 27.5) are met in the circumstances: although a global pandemic continues, in New Zealand’s Alert Level 1 and 2, is there still an “emergency”? And what rent abatement would be “fair” in circumstances where the tenant has targeted its business at a limited pool of customers? Particularly where leases contain a “no warranties” clause (as in clause 38.1 of the ADLS deed of lease), surely something more express should be required if the tenant is relying on the landlord to guarantee custom.
  • Similarly, where a tenant is a supplier to government, or otherwise heavily reliant on the custom of government staff, how can a landlord be expected to monitor, let alone respond to, government policy changes that may affect the tenant’s business?

Rent abatements reduce the rent payable

Consistent with our view, the High Court expressed that a rent abatement does not amount to a set-off or deduction from the annual rent, but rather, the setting of a new (lower) annual rent. A tenant is not required to pay the full rent and subsequently claim for a discount and refund, but it can pay the new (lower) annual rent in exercise of its right to abate (all or part of) the rent.

Statutory demands may still have a role despite this case

The judge in this case considered it an unusual case for a statutory demand, stating that:

  • statutory demands are best left for occasions where the relevant law supporting the demand is already clearly established; and
  • as the issue of Covid-19 rent abatements has not been tested in court before, the landlord took a risk in issuing a statutory demand here.

The judgment does not consider in detail the extent of any existing dispute between the parties before the landlord issued the statutory demand.

In our view, however, a contractual interpretation task should not necessarily restrict a party from making a statutory demand.

On other authorities, legal questions, including as to contractual interpretation, are not subject to such factual disputes and should still be able to be dealt with by way of a statutory demand.

The orthodox test for setting aside a statutory demand is whether the debtor company (in this case, the tenant) can show a fairly arguable basis upon which it is not liable for the amount claimed. The dispute relied on must be a genuine one, and existence of a dispute may inform whether or not it is appropriate for the creditor to issue a statutory demand in the first place.

The facts of the case

  • Coffee Culture Franchises Limited, leases cafe and restaurant premises in Hamilton from the landlord, Home Straight Park Trustees Limited under a lease for a term of 10 years commencing on 8 July 2019.
  • The anchor tenant of the building is the IRD. Historically, a large amount of the tenant’s custom came from IRD staff and visitors. More recently (since 26 May 2020), the IRD purportedly maintained a policy of authorising its staff to work from home.
  • The lease adopted a recent form of the ADLS deed of lease, including the “No access in Emergency” provision in clause 27.5. It also included an obligation for the tenant to operate its business from the premises from 9am – 5pm on working days, and provisions for the IRD to veto any request by the Tenant to change the permitted use under the lease, or to enter into a proposed assignment or subtenancy.
  • Importantly, the parties did not dispute the payment of rent and outgoings during the Alert Level 4, and subsequent Alert Level 3, lockdowns. The amount in dispute (totalling approximately $44,000) relates to unpaid rent and outgoings during Alert Levels 1 and 2 (the relevant “Demand Period” covered the period from 13 May 2020 to 7 December 2020).
  • The tenant did not pay any rent or outgoings to the landlord during the Demand Period, arguing that the IRD’s policy reduced its custom preventing it from “fully operating” from the premises for the purposes of clause 27.5 of the lease.
  • The landlord argued that the IRD’s policy was not relevant to interpreting clause 27.5: not only could the tenant legally open and operate its business under Alert Levels 1 and 2 (as they applied during the Demand Period), but the lease establishes a “pay now, argue later” approach such that, even if the tenant was entitled to an abatement, it could not unilaterally determine and then refuse to pay the abatement amount.

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