What happens to your commercial lease during the Covid-19 lockdown?

Here is some practical, and legal, advice if you are a commercial landlord or tenant, and your business is affected by the Covid-19 lockdown.

The first point is that landlords have a business too, that of commercial property ownership and investment.  They will be equally as affected as tenants that operate businesses from landlords’ buildings during these uncertain times.

The first thing both parties need to do is check what version of the lease they are operating under.  In 2014, following the Christchurch earthquakes, the standard law society lease was updated (clause 27.5) to include provisions covering no access to the premises during periods where safety to the public is paramount, or to reduce harm or hazards.  We don’t think there is any doubt that the Covid-19 lockdown period is such an event.

The clause then carries on to say that during any such no access period, a “fair proportion of rent and outgoings shall cease to be payable for the period commencing on the date when the Tenant became unable to gain access to the premises to fully conduct the Tenant’s business from the premises until the inability ceases”.  At face value, for most businesses that are now not “essential” this will be the lockdown period.

Words such as “shall” are instructive, as they indicate that this is not discretionary on the part of the landlord.  The questions then becomes what is “fair”, and whether then Tenant’s lack of access to the premises meant the Tenant was unable to fully conduct its business.

The issue of fairness is a subjective one, as what is fair to one party might not be fair, or seem fair, to the other.  It might also be the case that the Tenant is able to operate the business remotely during the lockdown period, and the Tenant’s business is able to be “fully conducted” remotely and therefore is not affected by the lack of access.  In such a case, it is possible clause 27.5 does not apply.  It is important to note that the clause was included after the Christchurch earthquakes when businesses were essentially shut down overnight, and needs to be interpreted in that light.  In these electronic times, where there are a variety of remote working tools, these issues might not apply consistently. 

It is also worth noting that landlords may have insurance cover for loss of rent and outgoings.  The lease should record this in the First Schedule.  Landlords should make these enquiries too, as insurance cover could allow them to act in a more compassionate manner toward the tenant.

As “fairness” can be a somewhat arbitrary measure, both parties need to consider each other’s position.  There is no one-size-fits-all approach, and early and open communication is always the best initial approach.  For tenants, it is also important to note that set-offs and deductions from the rent are not usually permitted.  This obligation is not inconsistent with clause 27.5, as the tenant is not deducting anything from its lease payments, it is just not paying the full amount. 

If you are operating under an older version of lease, that does not contain clause 27.5 as referred to, then as a tenant your situation is more problematic.  In this situation, again an early and open discussion with the landlord is the first starting point.  If you strike difficulties, the common law may assist you and arguments around contract frustration or act of God might apply, but tread warily here: sound advice is needed before treading down this path.

Finally, it is important to finish on this point, which is reiterated from one made earlier.  Landlords have obligations too, such as to banks (mortgages) and for some, the rent they receive is retirement income for their family.  During the Covid-19 lockdown period, they will suffer pain equally as much as tenants, and for that reason, the concept of “fairness” will apply to both sides of the relationship.

Please feel free to contact our commercial property director, Nick Kearney.