‘No Access in Emergency’ Clause Gives Commercial Tenants Relief

Posted on April 08, 2020 in Commercial , Property (Tags: Leases)

If you are one of the many businesses in the region which has had to shut up shop during the lockdown Commercial tenant still paying the rent in the Covid-19 lockdown??  or if you are a commercial landlord, you might be wondering where you stand with respect to the rent and outgoings for the premises. The first thing you should do is check your lease. Most commercial leases are documented in the standard form lease from the Auckland District Law Society, the most recent version of which (the 6th edition) contains a ‘no access in emergency’ clause. This clause provides that if the tenant cannot fully conduct their business from the premises because they cannot occupy the premises due to an emergency, they are entitled to cease paying a ‘fair proportion’ of the rent and outgoings for the period of inaccessibility.

This clause was added in to the standard form lease in 2012 following the experience of tenants in Christchurch who were locked out of otherwise undamaged premises in the aftermath of the earthquakes, and the need to work out some adjustment to the rent where they could not get access due to the premises being in the ‘red zone’. The clause applies more broadly to an ‘emergency’ which is specifically defined in the lease as including an epidemic (which would include a pandemic). There is a general consensus that where a business is unable to operate from their premises due to the Covid-19 Alert Level 4 restrictions, the no-access clause is triggered, and the tenant is entitled to stop paying a ‘fair proportion’ of the rent and outgoings during the period that the business cannot operate from the premises.

What will be a ‘fair proportion’ of rent and outgoings is a matter for commercial negotiation between landlord and tenant. Many non-essential businesses will still be partially using their premises during the lockdown even if they cannot physically access them, for example for storage and to house the IT systems which staff are remotely accessing as they work from home. In such circumstances, tenants should not expect a full abatement of rent.

For leases without the ‘no access’ clause, it will usually be commercially worthwhile for a landlord to offer some flexibility to their tenant to help with cash flow difficulties, for example by offering a temporary reduction in rent or to defer a rent payment until later in the year. The value in a commercial property is in the rental income which flows from the tenants.

Where the lease does not have a ‘no access’ clause, there are also other legal arguments which can arise to provide remedies to tenants, such as ‘force majeure’ or frustration of contract.

Landlords and tenants alike would be wise to approach any conversation about rent abatements with the long-term picture in mind. Make sure that any agreement is recorded in writing.

What we are seeing is all parties having to compromise on their position in this difficult scenario. The owners of commercial buildings usually have bank lending to service, so cannot afford to have a tenant stop paying entirely at a time when it will be difficult to get another tenant into the premises. What we have not seen is a great deal of movement on the part of the banks to take their own ‘haircut’ on their revenue in this delicate supply chain.  We would encourage all businesses to lobby through their respective trade and business organisations for more leadership from the banks in this situation, with respect to interest rates and the consequences for businesses who defer principal and interest payments.  The current proposals for ‘mortgage holidays’ are just deferring an obligation which is already there, often resulting in greater cost to the business later.

Rachel Laing, Solicitor