Written by Emma Roberts

As New Zealand moved into COVID-19 Alert Level 2 this week, commercial landlords and tenants need to consider what this means for the rent and outgoings payable under their commercial lease arrangements.

There are still restrictions on how businesses and workplaces are able to operate in Alert Level 2, and this can affect some tenants’ use of their commercial premises.

The position under Alert Levels 4 and 3

Under Alert Level 4, if a tenant had a “no access in emergency” clause as found in the latest version of the ADLS standard form lease at clause 27.5, which provides that:

  • where there was an emergency; and
  • the tenant was unable to access the premises to fully conduct its business from the premises,

it could seek a reduction of a fair proportion of its rent and outgoings during this period.

It was clear that an epidemic qualifies as an emergency event and so the clause was generally applicable in the Alert Level 4 COVID response lockdown.

What was less clear was what the “fair proportion” of the rental and outgoings reduction that could be claimed. This was dependant on the circumstances of both the landlord and the tenant and negotiated on a case by case basis.

In Alert Level 3 while many tenants were able to access their business premises, many were still not able to fully conduct their businesses from the premises during this period and so continued to be entitled to a rental reduction under clause 27.5.

What is the position under Alert Level 2?

On the eve of New Zealand’s entry into Alert Level 2, the State of National Emergency expired and was replaced with a National Transition Period owing to the impacts of COVID-19. The definition of emergency for the purposes of clause 27.5 however includes a situation that is a result of an epidemic and causes or may cause loss of life or serious illness or in anyway seriously endangers the safety of the public. It is therefore arguable clause 27.5 still applies when we are in Alert Level 2.

Under Alert Level 2 all businesses can open as long as they can do so safely. Tenants can now access their commercial premises and resume their business activities, as long as they comply with the public health requirements including physical distancing and contact tracing.

There will be some tenants however that will not be able to fully conduct their businesses in Alert Level 2 due to the continuing restrictions.

For example, cafes and restaurants may be operating with limited capacity due to the requirement of the “three S’s”— seated service, social distancing and single servers per table. Bars are also subject to these requirements and additionally are restricted from opening until 21 May 2020. While retail stores, cinemas, hairdressers and gyms can open this week again their customer capacity may be limited.

In these circumstances a tenant’s entitlement to a rental and outgoings abatement may continue while operating in Alert Level 2.

The issue of what the “fair proportion” of the rental and outgoings that may cease to be payable under Alert Level 2 will again need to be assessed on a case by case basis. A consideration when assessing the “fair proportion” of the rental reduction is the benefit that the tenant is able to derive from the business premises during the restricted period, and as such the increased ability to use the business premises under Level 2 will need to be taken into account when negotiating a rental reduction.

Our advice

While it may be back to business for a number of commercial tenants this week, there will be some tenants whose operations are impacted by the restrictions and obligations of Alert Level 2 more than others. For those tenants it may be agreed that a rental reduction continues.

We would encourage landlords and tenants to work together in negotiating any reduction in Level 2, with a focus on open and respectful communication between the parties. We have been in this together, and we hope to come together.

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