While New Zealand carries on under lockdown, many retailers are stuck paying rent on commercial properties they’re not currently permitted to use. Katrina Hammon, partner at Wynn Williams, and Penny Birch, senior associate, answer some common questions about retail tenancies in a time of Covid-19.
We’re hearing reports that some commercial property leases may have a “no access” clause which means tenants can stop paying rent if they can’t access the property in an emergency. Can you tell us more about these no-access clauses?
In New Zealand there are common forms of leases used, however each lease is different given the parties negotiate amendments to those standard or template forms. Some of the common forms include the Auckland District Law Society Deed of Lease (ADLS Lease), Property Council Lease and Building Owners and Managers Association leases generally used by shopping centres (BOMA Leases). Large landlords such as the major shopping malls and retail precincts also have their own form of leases with associated rules that must be complied with.
How common are “no access” clauses and how would a retailer know if their lease contained those provisions?
It is uncommon to have “no access” provisions in a lease, unless the form of lease is the ADLS Lease form (sixth edition) that was updated in 2012. The driver for the new provisions was the aftermath of the Canterbury earthquakes. The provisions attempt to deal with access restrictions, including for reasons of safety of the public. The definition of emergency in that lease includes an “epidemic”, the current “pandemic” should be captured.
Is activating that clause a simple matter?
There has been significant commentary in connection with a newer version of the ADLS Lease that contains provisions that deal with access and emergency events. Please note that not all ADLS Leases have those provisions, including those renewed or varied ADLS Leases signed prior to 2012.
Where the lease contains the emergency access provisions, a tenant who is unable to gain access to their premises to conduct their business during the lockdown period, may be able to claim a full rental and outgoings abatement or at least a “fair proportion” of the rent and outgoings. This abatement would apply during the time that access to the premises is restricted.
What is a fair proportion of rent and outgoings? The answer will be specific to the relevant tenant business and premises. For example, if a business can partially operate or part of the premises are used for storage, then that may be considered when looking at the proportion to be abated. It is over to the landlord and tenant to reach agreement and we expect there to be some conflicting views.
In the event this lockdown continues for an extended period then clause 27.6 may help, and some tenants may seek to terminate their leases. The standard no access period in the ADLS lease is 9 months, after which the tenant (or landlord) can terminate the lease. You should check the period noted in your lease as it is often negotiated and can range anywhere from 3 to 12 months.
We’re hearing that shopping centres don’t use the ADLS Lease. Is that correct? If so, why not?
Most shopping malls or retail precincts have their own form of lease or use other forms such as The Property Council Lease (with amendments) and rules that must be complied with in addition to the lease. The ADLS Lease is not an appropriate form of lease for shopping malls or retail precincts, the level of detail required for those locations is quite different to a stand-alone premise or strip retail premise.
These other forms of lease may have provisions that allow for suspension of rent and/or outgoings where the tenant is unable to access the premises or which may apply due to the current Government order or state of emergency declared.
Some major landlords include provisions in their lease that restrict any reduction to circumstances where the landlord has loss of rent insurance cover (such as the Property Council New Zealand office lease). The relevant provisions also generally limit the rent and outgoings suspension to the sum that the landlord can recover under its own loss of rent insurance policy. It is uncommon for such policies to apply to a pandemic.
If a retailer’s lease lacks a no-access clause, is there anything else they can do to alleviate their rent burden?
Ideally discussions between landlord and tenant should have commenced, if not, try to reach a fair and commercial agreement as to rent and outgoings payments. It is in the interests of both parties to assist the tenant to survive the lockdown. Also exploring less common provisions or avenues to terminate the lease such as force majeure clauses or asserting frustration of the contract applies (refer to comments below).
Many businesses in New Zealand fall within the SME category, the Government is due to announce further support for small businesses, this in addition with the wage subsidies and some changes to tax rules should assist. In addition, New Zealand banks are fielding a large number of requests for loan repayment holidays. Consider the cost of the short-term loans on offer and the interest cost where a repayment holiday is offered and talk to your accountant, lawyer or trusted business adviser.
Tenants should consider the following questions to help inform discussions with their landlord:
· What type of lease have you signed? Does it contain an emergency access clause or a similar clause?
· How is this likely to affect your (your tenant’s) business and what kind of reduction do you (your tenant) need? Whether or not the lease provides for any reduction, it is useful to understand how the lockdown will affect each party and their cashflow. A reduction or other arrangement might be the best option to ensure the continued viability of the lease.
· What is a fair proportion of the rent and outgoings that should be abated? Can you use the premises at all? The landlord may consider that storage areas are being used – if so, what proportion of the floor area is storage?
· What agreement has been reached with your landlord? You should clearly document any agreement reached. This could be recorded by email or a more formal agreement could be prepared. Wynn Williams can assist with documenting the agreement reached.
Have you updated your bank? You should also talk to your bank during this time and keep them updated of any agreement reached regarding rent reduction. Note also that your landlord’s bank require them to obtain written agreement of the bank to any rent reduction.
· What other support may be available to you during this time? Look at Government subsidies and other recently announced support options.
· Do you have any insurance cover that applies? Speak to your insurance broker before you reach agreement with the landlord.
Do Force Majeure clauses apply?
There has been some suggestion that force majeure clauses could be relied on to suspend payment obligations or terminate the lease. A force majeure clause relieves a party from liability in certain circumstances that prevent the performance of its obligations. Such a clause typically applies in the event of war, natural disasters, government acts or other serious circumstances. Many standard clauses refer to epidemics or similar. Whether the clause applies in your particular circumstances will depend on the wording of the clause.
It is important to note that force majeure clauses are uncommon in leases.
What is frustration of contract?
Another legal concept that businesses and their lawyer might look to explore is frustration of contract.
If there are no applicable clauses in the contract (such as the “non access” provisions), the law of frustration of contract may apply. A contract may be frustrated if performance of the contractual obligations becomes impossible or radically different from what was contemplated, provided neither party is at fault. Frustration will only apply where the main purpose of the contract can no longer be achieved. It will not apply where only a secondary or minor purpose cannot be achieved.
This is a high threshold. It will not apply if performance of the contractual obligations merely becomes more difficult or expensive.