The impact of Covid-19 on commercial leases
We have had many enquiries from clients who are tenants under a commercial lease asking whether they can suspend rental payments or even terminate their leases due to the impact Covid-19 has had on their business.
What does your lease say?
The answer to this question is not that straightforward as it is dependant on the actual terms of your lease. If your lease is an Auckland District Law Society lease entered into post the 2012 Christchurch earthquake (“2012 ADLS Lease”), then it is highly likely that it will contain a clause called the “No Access in Emergency clause” which could assist you. This clause deals with the situation where you are not able to access your premises to fully conduct your business “because of reasons of safety to the public” or “the need to prevent reduce or overcome any hazard, harm or los that may be associated with the emergency” including due to a “restriction on occupation of the premises by any competent authority”. Our view is that the current lockdown imposed as a result of the Covid-19 pandemic falls within the requirements for the activation of this clause if you are unable to access your premises or fully conduct your business as a result. If your lease is not a 2012 ADLS Lease, then the provisions of your lease will need to be viewed carefully to see if there are any clauses in the lease that may assist you. These clauses are called “Force Majeure clauses”. For more information on these types of clauses, read here. The Doctrine of Frustration may also assist in limited situations (discussed below).
What if my lease does not have any provision that deals with this situation?
If your lease is a mall lease or other bespoke type lease, then there is a strong possibility that there may not be any clause in your lease to allow you to suspend or terminate your lease obligations. In this case, our advice is to contact your landlord in the first instance and discuss with them the options in relation to your lease. Any variation to your lease should be documented in writing. It should be very clear to each party as to what the terms of any agreed variation are, for instance; what is the amount of the reduction? How long will it last for? Can this be reviewed if the lockdown lasts for longer than the initial one month imposed by the government?
Can I end my lease due to the Covid-19 lockdown?
Probably not just yet, unless of course the landlord agrees, or your lease allows you to terminate on notice to the landlord (which is unlikely).
If you have a 2012 ADLS Lease, then this provides that you can cancel the lease under the “No Access in Emergency” provision, but you have to have been unable to gain access to the premises for the No Access Period in the lease, which is typically 9 months unless another period is stated. You need to give your landlord at least 10 working days’ notice of your intention to cancel the lease under this provision.
If your lease is silent on this issue, then there is the Common Law doctrine of frustration and the frustrated contract provisions in the Commercial and Contract Law Act 2017, which allow for parties to be discharged from their obligations under the contract where it has been frustrated or impossible to perform. It is possible that the effects of Covid-19 may allow for the application of the Doctrine of Frustration which will end the contract, however there is a high threshold to meet before this doctrine can be applied and the courts will look at factors such as whether or not the effects of Covid-19 are temporary or not when compared to the term of the lease—this will be less likely if the term of the lease is a long one.
The consequences of wrongly terminating a lease can be serious. Legal advice is strongly recommended if you are looking at this as an option.
Our advice is to talk to your landlord in the first instance. It may be possible that you can negotiate a solution that will work for both of you. If you do manage to negotiate such a solution, it is vital that this is documented in writing so there are no arguments later about what was agreed to. This solution should also allow you to preserve any rights you have in your lease such as under any Force Majeure clause or the “No Access in Emergency” provision in the 2012 ADLS Lease.
We also suspect (and hope) that the government will make an announcement in relation to a landlord’s right to terminate the commercial lease in the same way that it has in relation to residential tenancies. Fingers crossed!
Lizandra Bailey, partner on 021 774 333 or [email protected]
Phil Shannon, partner on 021 484 557 or [email protected]
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