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COVID-19 – Alert Level 3 – How does this change affect rental payments?

By Matthew Joyce & Char-Lien Lim

COVID-19 – Alert Level 3 – How does this change affect rental payments?

24 April 2020
The Government’s decision to move New Zealand to Alert Level 3 from Tuesday 28 April 2020 means non-essential businesses are preparing, if they can, to operate their businesses under strict requirements.

The Government has indicated that face-to-face interactions will be prohibited and services will need to be delivered with contactless payments and delivery. Where possible everyone who can is required to work remotely and all non-essential business premises will not be permitted to open to the public. While the Government has not yet released the proposed Order that will give effect to Alert Level 3, with the precise details and restrictions, it has released a guidance note here  and a more detailed Q&A here.

In this note we examine the implications of the move from Alert Level 4 to Alert Level 3 for landlords and tenants of commercial leases. 

What is the effect of the change from Alert Level 4 to Alert Level 3 on leases?
Will ADLS clause 27.5 still be relevant?

Alert Level 4 required all premises to be closed unless they were premises connected to essential services. The move to Alert Level 3 will permit more businesses to operate in some way from their premises but certainly for most, it will not be business as usual. Assuming the Government’s orders will reflect its current guidance note and Q&A (both linked above), for many businesses that do re-open, they will not be able to fully conduct their businesses and make use of all of their premises.

ADLS Lease provisions

In our previous note we drew your attention to clause 27.5 of the ADLS lease (6th edition, 2012 version or later), which provides tenants with relief from paying a fair proportion of rent and outgoings in circumstances where premises cannot be accessed following an emergency.

Before this clause can apply:

  • There must be an emergency, and;
  • The tenant must be unable to gain access to the premises to fully conduct the tenant’s business because of safety of the public including for example where the restriction is due to the order of a competent authority.

In these circumstances, a fair proportion of the rent and outgoings will cease to be payable from the date on which the tenant was unable to gain access to the premises to fully conduct the tenant’s business from the premises until the inability ceases.

As we move from Alert Level 4 to Alert Level 3, landlords and tenants will need to consider whether clause 27.5 continues to apply. The precise terms of any Orders which give effect to Alert Level 3 will be important in assessing the extent to which businesses or premises are mandated to close or are restricted and therefore whether clause 27.5 will apply. Assuming the Orders reflect the current Government guidance and information, it is likely that any access to premises will be for restricted access only and therefore clause 27.5 will continue to apply.

The change in alert levels will affect businesses differently and therefore the assessment of what constitutes a fair reduction of the rent and outgoings will vary from lease to lease. In short, subject to the actual details of the Orders on or about 28 April 2020:

  1. For essential services – in some cases clause 27.5 will continue to apply because for some businesses, only a portion of their premises will involve essential services and other parts of their premises may be restricted or unable to be used by the tenant. How much of the premises can still be used by the tenant will be relevant.  The level of reduction or increase of income a tenant derives from its premises during Level 3 may also be critical to deciding what a fair reduction, if any, of the rent and outgoings is appropriate.
     
  2. For non-essential services – clause 27.5 will continue to apply but what is fair will differ. Broadly tenants will likely be in one of two camps:
a) For tenants who are able to conduct some restricted form of their business from their premises from Tuesday 28 April 2020, the fair reduction of rent and outgoings would likely be less than for those in b. below.

b) For tenants who are still unable to conduct some form of their business from the premises, likely due to the restriction that “if you can you must work from home”, or because their business requires direct consumer contact then the fair reduction of rent and outgoings would be higher than for those in a. above.

Even if clause 27.5 applies remember the amount of any reduction to the rent and outgoings requires landlords and tenants to reach agreement with each other as to what is fair. And yes, it is a reduction not a deferment. As things continue to change and as businesses adapt, what is fair will change.

Other Leases

If you are not on a recent version of the ADLS form of lease with clause 27.5 then the wording of your particular lease will always be critical to determining any rights and obligations of either party. 

Talk to us if you do not have a current ADLS Lease so we can review your options under your particular lease with you.

What to do next

Our advice remains the same with the change of alert level and regardless of what form of lease you are on. We encourage all parties, both landlords and tenants to continue to talk each other regardless of what form of lease you are using to gain an understanding of each other’s position and to negotiate a commercially appropriate outcome for all parties. Circumstances are changing and each stage may only apply for a relatively short period but the effects of COVID-19 are going to last a lot longer. Keep communicating at each step of the way as maintaining a strong relationship with your landlord/tenant is our recommended approach.

We do recommend that you talk to us before you take any firm action under your lease.

Any of our commercial partners set out below would be able to advise and assist you.
 

Nigel Moody | email Nigel | P: 04 916 7465
John Steel | email John | P: 04 916 7495
Nigel Stirling | email Nigel | P: 04 916 7472
Claire Byrne  | email Claire | P: 04 916 7483
Dave Robinson | email Dave | P: 04 916 6307
Mike Gould | email Mike | P: 04 916 6302
Rhys Williams | email Rhys | P: 04 916 6452
Brett Gould |  email Brett | P: 06 370 6475