Rent abatement in the COVID-19 Level 4 period
As businesses process the economic impacts of COVID-19, all options will need to be considered to get through New Zealand’s level 4 alert period – and beyond. For businesses that lease their premises, there may be relief available through a rent abatement.
Some leases contain what is known as a “no access in an emergency” clause. The wording of this clause will vary from lease to lease, but the standard ADLS lease 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.
There has been a fair amount of discussion about whether tenants can now make a claim under this clause.
Our view is that tenants can. The Government’s COVID-19 response escalated to Level 4 at 11.59pm on Wednesday 25 March 2020, with all non-essential business directed to close their places of work. This means most tenants should be able to claim a rent and outgoings abatement if:
- they are on a form of lease that contains this clause (which is found in certain versions of the ADLS lease form); and
- they do not operate an essential service from the premises.
The ability to abate rent and outgoings (for non-essential business) could provide some significant relief to those businesses, many of whom are facing rental payments due on 1 April 2020.
For essential businesses still materially operating from leased premises during the lockdown, and for tenants not on a form of lease with the “no access in an emergency” clause, the position is more complex.
These businesses may not have a legal ability to claim a rent and outgoings abatement. It is unlikely that the lease will have a force majeure clause and it is our view that the (aptly-named) doctrine of frustration will not apply because the period of the lockdown is currently only four weeks.
However, as we have been helping more and more landlords and tenants work through these tricky issues in the last few days, we are starting to see trends emerge in respect of:
- the parties’ rights and obligations to each other; and
- suitable approaches to take with landlords/tenants in view of the current market and reputational issues and the significant financial pressures facing both parties.
These trends are helping to guide parties through the more complex situations. Specifically, we are seeing:
- an increasing talk of ‘partnerships' between the landlords and the tenants;
- high-level directions being given within landlord organisations to take a soft approach regarding:
- the timing of the payment of rent in the current circumstances, and whether to abate or defer those payments on a temporary basis;
- the issuing of default notices if a tenant does not pay the rent and outgoings due.
- a wider discussion about whether there needs to be a temporary moratorium to allow landlords and tenants time to “get back on their feet”;
- consideration of insurance, and whether this will respond to assist either the landlord or the tenant.
Where there is no contractual right for a tenant to a rent abatement, landlords are taking varied approaches so far – some landlords are actively offering rent abatements in the interim period, motivated in part by the hope that they have a tenant to come back to when the lockdown is over. Some are agreeing interim rent abatements in exchange for a proportionate extension to the lease term. Other landlords are asking tenants to share their month-end sales figures and then adopting a wait-and-see approach (especially in the retail/tourism space).
The essential services status adds a layer of complexity, and every situation is different, so if you would like to talk to us about your specific circumstances, please contact us.