This document may help you save some rent payments under your lease during these difficult times.
Feel free to share it with others who you think might benefit from having this information too (and suggest they contact their own lawyer if they need advice/guidance).
Disclaimer: This isn’t intended to be legal advice for your specific circumstances. Rather, it is intended to help and empower businesses with a general strategy of preserving cash flow in these difficult times. Each situation will turn upon its own unique facts. Please seek advice if necessary.
Some Auckland District Law Society (ADLS) leases include a right to abate rent payments during circumstances that can include NZ’s COVID-19 Alert level 3 or level 4. Abatement is a right to adjust the rent (and sometimes outgoings) according to the circumstances (discussed more below) for a period of time. Whether it applies in NZ’s COVID-19 Alert level 3 or level 4 is dependent on the contractual clauses in your lease agreement, and how NZ’s COVID-19 Alert level 3 or level 4 impacts your ability to access and use of the premises.
What lease forms?
A right to abate rent and outgoing payments may apply to you if:
- you are required to cease conducting your business from your premises during NZ’s COVID-19 Alert level 3 or level 4; and
- you have:
- an ADLS “Deed of Lease”, sixth edition 2012 with a clause headed no access in emergency (likely to be clause 27.5).; or
- an ADLS “Agreement to Lease” entered into in any time from 2012 or later that states that the lease shall be documented on the current ADLS Deed of Lease form (clause 4 headed “Lease” for most Agreements to Lease), and
- the relevant clause hasn’t been excluded or amended in a way that it won’t apply (that’s a great double-negative, but hopefully you get the point!).
These forms of lease are common for commercial and office space. I suggest you check your lease to see if this applies to you.
If this applies to you, then you may be relieved of the obligation to pay the full amount of your rent and outgoings while we remain at COVID-19 Alert level 3 or level 4.
Some other forms of lease may also have a similar right (but not many in our experience). Again, we suggest you check the specifics of your lease.
Why we think it applies
Paraphrased the no access in emergency provision (clause 27.5) provides that a tenant is entitled to a fair abatement of rent and outgoings where:
- if there is an emergency (non-contentious);
- you are unable to gain access to the premises to fully conduct your business; and
- that access is restricted because of reasons of safety to the public or the need to prevent, reduce or overcome any hazard or harm.
Like everything in law, there are always contrary arguments. While we think it pretty clear, expect for landlords to argue:
|Counter-argument||Landlord rationale||Our observations|
|Access is still available||That you are still able to gain access to your premises but it the restrictions associated with COVID-19 are just stopping people from accessing your premises.||We don’t favour this argument given that the Government directions also include a directive to shut all non-essential business.
If you operate an essential business things may well be different.
|Obligation to pay rent is absolute||Even if the clause applies, you cannot self-abate. The obligation to pay rent is absolute. It is not for the tenant to unilaterally determine the level of abatement is applied.||Agree the tenant must pay ‘rent’, but that rent (and outgoings) is adjusted by an abatement.
I.e., if rent is abated 40%, then the obligation is to pay that adjusted rent (i.e., remaining 60%). If rent is abated 100%, then the obligation is to pay that adjusted rent – it’s just been adjusted to zero for the duration of the abatement.
|Abatement should be something less than 100%||The clause requires a fair abatement of rent – it doesn’t specify who it must be fair for and therefore any abatement must also assess the interests of the landlord.||Our starting position is that the abatement provisions is principally there for the benefit of the tenant, and therefore to the extent that the tenant cannot operate their business from the premises, then 100% abatement is fair.
However, we do think there is scope for material arguments on this point (especially around outgoings to the extent they can’t be stopped or reduced).
What to do if you have rights of this nature?
Putting aside the legal side of the lease, there is a community aspect and landlords (and their staff, and families) are also affected by this too.
We don’t say this on the basis that you should forego your rights, and you need to look after your business, but be mindful of how you communicate with your landlord and on what arrangements you seek to obtain. Commercially while the immediate short-term economic pain of COVID-19 is felt, in the long-term we suggest not burning bridges with your landlord – landlords are long-term partners.
Within the above context, we suggest promptly notifying your landlord (or sub-landlord if you sub-lease), making them aware of the situation as it applies to your business, and noting your right to abate (perhaps amongst any other matters you wish to ask for/negotiate).
In relation to any right in a lease to abate, you’ll need to make a judgement on:
- duration: whether your inability to gain access to the premises to fully conduct business applies to your type of “non-essential business” during just Alert level 4, or both Alert level 3 and level 4; and
- fair portion: what a fair portion of rent and outgoings to abate should be.
For many tenants with a 100% restriction on operating their business from the premises, a fair portion to abate may well be 100% of your rent and outgoings – but this is not certain and will depend on your individual circumstances and may be argued to the contrary by landlord (see the table above). Ultimately this will be down to an objective test. If you have applied too high of a percentage – you will be liable for the shortfall, which could put you in breach of your lease. If in doubt, seek advice.
The draft landlord notification below assumes a 100% abatement of rent and outgoings for the duration of level 3 and level 4 – and doesn’t extend to any other matter or terms you might wish to negotiate. Note: while a 100% abatement of rent may be fair, a 100% abatement of outgoings may not be fair. This will depend on your own particular circumstances.
Instead of abatement now, you may want to try and open up a wider discussion to negotiate a better deal with your landlord. We’ve seen instances of different arrangements, e.g., longer rent holidays or reduced rent spread over a longer period of time. Government announcements about mortgage holidays and some moves in respect to bank business loan relief may help your landlord help you too. Be conscious it may take some time for your landlord to be able to respond – but hopefully many are in a position to respond.
Please adjust the notification for your situation, including the items in square brackets.
Suggested notification to landlord if you have a rent abatement right
Dear [insert valued landlord name/contact],
Subject: Covid-19 rent and outgoings abatement – [insert name of business, and premises address]
I hope this notice finds you and close ones safe in these difficult times.
As a result of the Government’s declaration that NZ moved to COVID-19 Emergency Alert [“level 3 on 23 March and] “level 4” on 25 March, our business cannot access the premises at [insert address] to fully conduct our business and clause [27.5] of the Deed of Lease (no access in emergency) applies.
This clause provides for a fair proportion of the rent and outgoings to be abated where there is an emergency. Emergency is defined in clause 45.1(d) of the Deed of Lease and includes an “epidemic”.
As you can appreciate, we are unable to gain access to the premises to fully conduct our business from the premises because of:
- reasons of safety of the public or property; and
- the need to prevent, reduce or overcome any hazard, harm or loss that may be associated with the emergency.
Given we have a 100% restriction from operating our business from the premises under COVID-19 Emergency Alert [level 3 from 23 March and] level 4 from 25 March, we consider an [100%] abatement of our rent and outgoing payments for the duration of time that the NZ has declared a COVID-19 Emergency Alert level 3 and level 4 as fair.
The Government expects this level of alert to last for at least 28 days at this point (i.e., until at least 19 April) but it may be longer. We will start to apply a 28 day abatement in our next rent payment.
We are mindful this may hurt your financial position, and we value our relationship with you. Our business is also hurting as a result of these Covid-19 restrictions. The impact on our business has been immediate and significant. Unfortunately, we need to exercise this lease right at this time to manage our controllable cost structure with the same immediacy and don’t do it lightly. We hope that the crisis will be abridged, and we can resume normal rent practices just as quickly.
Please acknowledge receipt of this notice.
Please don’t hesitate to contact [insert name and contact details] if you would like to discuss. We look forward to working together during this difficult time