No Access in Emergency Clause: What is a Fair Proportion?

There has been a lot said about the “No access in emergency clause” which can be found in clause 27.5 in the 6th edition of the Auckland District Law Society Inc. This clause states that where a tenant is unable to access the premises to fully conduct their businesses because of reasons of safety to the public then a fair proportion of the rent and outgoings shall cease to be payable for the period that they cannot conduct their business due to inaccessibility.

While this clause is useful for tenants who are looking for some relief when it comes to paying their rent, it also raises the question as to how much a fair proportion of rent is and thus, how much relief tenants can in fact get.

The ADLS Deed of Lease does not specifically state how to determine a fair proportion of rent. The Property Council of New Zealand has encouraged owners and tenants to negotiate in good faith what a fair proportion of rent is. They provided three key aspects to consider when approaching solutions to this issue:

• Contractual position – that is the lease agreement and its provisions
• Commercial position – the need to keep landlords and tenants in business
• Ethical position – what is the right thing to do for the parties concerned and our wider community

There is yet to be any case law on clause 27.5, however there has been a decision which has determined what a fair proportion is in regards to clause 27.3, which provides the for the abatement of a fair proportion of the rent and outgoings from the date of the relevant damage when there is partial damage to a property due to an unforeseen event. In the case of Zheng Li Trustee Ltd v Henderson [2015], the tenanted premises, located in Wellington, were partially damaged due to an earthquake. The business of the tenant, a bar & restaurant, was affected due to the scaffolding outside of the entrance that was set up for repairs over two months. The judge ruled that the abatement of fair proportion of rent in these circumstances was to be the equivalent of two months’ rent payable under the lease. In other words, a full abatement of the rent was applied.

Although this case does not directly deal with clause 27.5, it does suggest that there are circumstances where a business is affected by a supervening event that a fair proportion of rent ceasing to be payable will be the entire rent for the period in which they cannot conduct business as they did before the event.

However, based on the comments by the Government and the Property Council, there are many factors to take into account when determining a fair proportion that will differ significantly between leases, and so negotiation in good faith is the preferred solution to determining a fair proportion of rent. It is important to remember that while businesses are in desperate need of rental relief to survive this period, landlords, especially smaller landlords with mortgages over their properties may struggle if their entire revenue ceases during this period.

For some scenarios negotiation may result in the entire rent being withheld for the lockdown period or it may result in a 50% reduction in rent. This will be determined on a case by case basis and will depend on factors such as the size of the commercial landlord and their ability to absorb the loss of rent, or it the ability of the tenant to carry on business from home and whether or not they will be receiving any income during this period or not. It serves neither the landlord’s nor the tenant’s commercial interests for either party to go under during this time. It is therefore paramount that discussions between landlords and tenants are conducted in good faith so that an appropriate solution can be reached that is in the best interests of both parties.

Overall, the advice being given from the government is to try and find fair outcomes and pragmatic solutions that enable both parties to survive this period as best they can. This is an unprecedented time that is having a significant impact on both landlords and tenants. Therefore, when determining a fair proportion of rent, best outcomes will be achieved when negotiation is in good faith and both the tenant and landlord can agree what is reasonable in their circumstances during this time.

Please contact our expert team:

• Lizandra Bailey, 021 774 333, lizandra@turnerhopkins.co.nz
• Phil Shannon, 021 485 557, phil.shannon@turnerhopkins.co.nz