Commercial Leases Post - COVID
Posted: 25 June 2020
Clause 27.5 and inability to access premises: In the past three months, most landlords and tenants would have become more familiar with the details of their lease. In particular, most will be looking at how clause 27.5 of the Auckland District Law Society (ADLS) lease applies to the government-imposed lockdown that we have all experienced as a result of COVID-19.
A bit of background
Following the Christchurch earthquakes, landlords and tenants were not permitted access to leased properties that were inside the ‘red zone’ while investigations into the structural integrity of buildings were being undertaken. In these instances, where the property had not been totally or partially destroyed, the parties were still required to meet their full obligations under their lease even though they were unable to operate from their leased premises.
As a result of the hardship this situation caused for tenants, clause 27.5 was added to the ADLS lease. It states that, where there is an emergency and a tenant is unable to gain access to the property to fully conduct their business, including by reason of a restriction on the occupation of the premises imposed by any competent authority, then a fair (our italics) portion of the rent and outgoings shall cease to be payable while the tenant is unable to gain access to the property.
This clause is as equally relevant to the COVID lockdown as it is to earthquakes as tenants seek a fair resolution to being prevented from accessing their leased premises.
What is ‘fair’?
It is not fair (or realistic) to presume that because a landlord owns a commercial building, that they do not have their own obligations associated with that such as insurance, rates, etc. Those obligations continue whether rent is paid or not. Similarly, with tenants, other obligations of that business will continue. It is important that whatever arrangements are agreed in respect of clause 27.5 are fair to both sides.
Factors in considering fairness
Subsidies: Landlords and tenants should both explore the financial relief available to them from the government and their lender. Do this before having a discussion with the other party so you are fully informed on the relief packages available.
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