Do commercial tenants still need to pay full rent during COVID-19 lockdown?

The COVID-19 lockdown has introduced challenges for both commercial tenants and commercial landlords. Many commercial tenants are struggling to pay rent. Many have questioned whether they should even have to pay rent for properties they cannot access legally.

It’s not easy for many landlords, either. If they lose tenants, or aren’t receiving normal levels of rent, they may face challenges paying mortgages.

This week the Government announced legislation to help out in these situations.

• Currently a landlord can only cancel a lease for non-payment of rent when the rent has been outstanding for more than 10 working days. The Government is extending this period  to 30 working days.
• Currently a mortgagee can exercise their rights to sale of property 20 working days after giving proper notice to the mortgagor. The Government is extending this period to 40 working days. For mortgaged goods, the period will go from 10 working days to 20 working days.

While this won’t solve everything for commercial tenants or commercial landlords, it should introduce an extra buffer to help businesses as they return to a position of trading. It’s generally in the best interests of both tenants and landlords to maintain their relationships, and this could serve to remove some of the factors that might stress that relationship.

But what about the question of whether commercial tenants should pay their normal rents when they don’t have normal access to their premises? There is an answer… but it’s not quite so certain.

Payment of commercial rent during COVID-19

Does your lease include clauses 27.5 and 27.6? These clauses were introduced into the Auckland District Law Society standard lease form (used commonly across the country, and not just Auckland) following the Christchurch earthquakes.

Back then, tenants whose premises were inaccessible only because they were inside the cordons (and not due to earthquake damage) weren’t entitled to any rent relief. They couldn’t use their premises due to reasons beyond their control, but they still had to pay for them.

Clauses 27.5 and 27.6 address that situation and make it fairer. They provide that:

• “A fair proportion of the rent and outgoings shall cease to be payable” for the period the tenant can’t access the premises
• Either party may terminate the lease with 10 days’ notice if the tenant will be unable to access the premises for a period set out in the lease (the default is 9 months).

While there’s been no case or declaratory judgment in relation to COVID-19, it would appear that the lockdown fits the criteria of clause 27.5.

That means commercial tenants may be able to reduce their rent and expenses by “a fair proportion”. Just what a “fair proportion” is will depend on the circumstances. For example, a retail store with no online presence could be expected to fairly have a larger reduction than a business which is still able to operate at some level.

So, if you’re a tenant, should you seek a reduction? If you’re a landlord and asked for a reduction, how should you respond?

Again, it’s worth looking at the broader relationship. Think about how it might affect the other party. Think about how it might affect the stability and longevity of the landlord/tenant relationship.

But if you do want advice on the best ways to maintain those leases - either as a commercial tenant or a commercial landlord - we’re here to lend advice tailored to your situation.

Contact us to talk about your lease situation during COVID-19