Malcolm Galloway
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Malcolm Galloway is a partner in the commercial team.

Leases: No Access - Total and Partial Destruction

In March 2020 we wrote about how clause 27.5 of the ADLS Lease applied to situations where tenants were prevented from accessing their leased premises because of the (then) Covid-19 Alert Level 4 restrictions.  Almost three years later we are turning our minds to the same clause but in the context of business operators who have been affected by Cyclone Gabrielle.

What is Clause 27.5 and how does it affect my lease during an emergency?

Clause 27.5 relates to “no access” in emergencies – where a tenant cannot access premises due to an “emergency” situation.

In short, clause 27.5 of the current and recent versions of the ADLS Lease provides that if there is an emergency, and the Tenant is unable to gain access to the premises to fully conduct the Tenant’s business because of it, then a fair proportion of rent and outgoings shall cease to be payable during that no access period.

“Emergency” in the ADLS Lease includes a situation that is a result of a flood or cyclone, so the recent events in Northland, Tairāwhiti and Hawkes Bay would certainly fit within the necessary definition.

A tenant would be unable to gain access to the premises if, for example, washed-out bridges cut road access or if floodwaters meant that the premises could not be accessed safely.  That is not the same as saying that the premises themselves must be flooded in order for the no access clause to apply.  If the premises were a shop at the top of hill and otherwise unaffected but the only access road was flooded at the bottom of the hill such that the tenant could not access the premises without having to overcome that hazard then the premises would be classed as inaccessible.  If the premises are inaccessible then the tenant is entitled to a fair abatement or rent and outgoings until the floodwater recedes and it is safe to get to the top of the hill again.

If your premises is inaccessible, what is a fair rent adjustment?

A tricky question that came up when we were looking at this clause during the Covid restrictions is what size of discount should the tenant get?  That is, what is a fair proportion of rent and outgoings?  The Courts have dealt with only a small handful of cases concerning clause 27.5, and none of them have answer the question, what is fair? 

Quite rightly, disputes between landlords and tenants were resolved through mediation or arbitration (because those are the dispute resolution methods set out in the ADLS Lease).  Unhelpfully though, those outcomes are usually confidential so do not help other parties to understand what fairness might look like.

Anecdotally, although we were aware of some situations where landlords agreed temporary rent reductions of 75-100% while the premises were inaccessible, in the majority of cases the parties agreed to a 50% abatement.  Many of those arrangements recognised the fact that although the tenant could not trade, the landlord still had a mortgage to pay and therefore needed to have some rental income.  The idea of sharing the pain had widespread appeal.

It should be noted that a rent reduction is only available while the premises are inaccessible.  The landlord is not obliged to continue the lower rent while the tenant gets back up on their feet.

If we change the facts from above slightly, it follows that if the premises were at the bottom of the hill and inundated with floodwater such that it would not be safe for the tenant to go inside (the water being a hazard) then the premises will be treated as inaccessible and the tenant will be entitled to rent relief.

That brings us to clauses 26.1 and 27.1, which deal with situations where the premises have been totally or partially destroyed.   

If the damage is to the point that the premises are untenantable then the lease ends from the date of the damage.  “Untenantable” in this context means that tenant’s ability to use, enjoy and operate the premises has been interfered with and with a permanent effect.  In some cases, if it is reasonable for landlord to decide that the premises should be demolished or rebuilt then the landlord may end the lease.

If the extent of the damage was not enough to write the premises off then the landlord can be expected to claim on its insurance and use the proceeds to fund the reasonable repairs.  Both landlord and tenant should work together towards a quick an efficient repair that is reasonably adequate for the tenant’s agreed use of the premises.

Indemnity Insurance vs. Full Replacement 

Since the Christchurch and Kaikoura earthquakes there has been a noticeable trend for landlords to opt for indemnity insurance rather than full replacement (which tends to be more expensive).  If your lease gives the landlord the option of choosing what level of insurance cover they have for the building and they only have indemnity cover then there is a risk that their insurance pay-out will not be enough for them to repair or rebuild if the building cost is greater than what they are insured for.

A headline that caught our attention related to water restrictions for homes and businesses.  Even if a business is dependent on water supply to operate, in most cases that is not the landlord’s responsibility.  The ADLS Lease does not offer any relief for tenants in this regard.  The same logic applies to electricity outages and lost stock.

While our thoughts are with those whose lives and livelihoods have been affected by this natural disaster, it is helpful to know that some relief maybe available under their lease terms.

If you are either a landlord or a tenant and you want to know more about your options under your lease, or if you’re considering entering into a new commercial lease, we would love to hear from you to chat about your circumstances.

Do you seek further advice?

Malcolm Galloway has vast experience in helping his clients navigate the options when faced with difficult situations such as commercial lease negotiations post natural disaster.