Rent payments during lockdown

As New Zealand heads into Alert Level 4 landlords and tenants will be looking at their leases to work out what happens to rent payments over the lockdown period.

During this current lockdown period, some leases will require the tenant to keep paying the rent even though the premises are closed. Other leases may allow for rent to be suspended for businesses that provide non–essential services. However, there are a variety of different lease clauses in the market so it is obviously important to check the exact wording of the lease.

The situation will be different (and possibly more complicated) for businesses providing essential services, particularly as the business may be using only part of the premises.

Unfortunately, loss of rent insurance and business interruption insurance is unlikely to cover this situation for either a landlord or a tenant (as the advice we have received is that most loss of rents policies will exclude cover for any interruption or interference resulting from a notifiable Infectious Disease under the Health Act 1956), although this will, of course, depend on the wording of the particular policy.

It might be possible in certain circumstances for a tenant to argue that the lease has been frustrated. The common law doctrine of frustration would release the parties from a lease where, by no fault of either party, an intervening event makes performance impossible or radically different from what was agreed. However, there is a very high threshold for the test to apply and, if the tenant asserts frustration in circumstances where the test is not met the tenant may be liable to pay damages to the landlord.

No Access Clauses

One of the areas creating confusion and concern centres around the No Access Clauses. In New Zealand, the industry-standard Auckland District Law Society deed of lease includes a ‘no access in emergency’ clause (Clause 27.5 and 27.6 of ADLS Sixth Edition), introduced in 2012 in response to the Christchurch earthquakes.

While the clause was intended for earthquakes, it covered a range of different emergency scenarios including eruptions, tsunamis, floods or even epidemics and contamination. There is a similar clause in the PCNZ Office and PCNZ Retail leases but it limits the rent suspension to what the landlord can claim under its loss of rent insurance. In these circumstances that probably means the tenant gets no rent suspension at all.

The no-access clause provides for a fair proportion of payment of rent to stop temporarily if a property is unable to be accessed in an emergency, and there are rights for the landlord or tenant to terminate the lease if the no access continues for over nine months.

In my view that clause will operate to suspend rent and outgoings (for businesses providing non-essential services) during the Alert Level 4 lockdown. Where a tenant is providing an essential service, but doing so from only part of the premises, the position is less clear at this early stage.

Author | Jane Holland

Partner, Bell Gully

Jane has over 20 years’ experience in commercial property work, both in New Zealand and the UK and specialises in commercial leasing and development projects.

Jane is a recognised expert and applies her extensive knowledge to clients on the leasing, sale and purchase of commercial properties including design and build projects and sale and lease back transactions. Jane has co-authored the New Zealand Property Council Retail Lease and authored the current edition of the New Zealand Property Council Office Lease. She has also authored a Green Lease Schedule on behalf of a number of major property owners in the property market, and a suite of seismic, insurance and re-instatement lease clauses. In demand as a speaker on property issues, Jane presents seminars on numerous topics, including green leasing for members of CoreNet Global, the world’s leading professional association for corporate real estate and workplace executives.