The outbreak of corona virus had commercial property owners and tenants scrambling to look at the terms of their leases. If a business was severely impacted by Covid-19, would it be able to get its rent payments lowered or suspended?
According to Bell Gully partner and expert in commercial property leases, Jane Holland, the first weeks of the outbreak created much nervousness in the market.
“For owners, they were concerned as to whether they were going to have a rental stream going forward and for tenants, particularly retail tenants there was concern as to whether they could keep operating their business and what happens if they had to shut their doors? It is also relevant for office tenants as well….Would you still have to pay your rent if all your staff are working from home?”
* Watch Mark Jennings’ full interview with Jane Holland in the video player below*
Holland says many leases were changed after the Christchurch earthquakes to protect tenants in the event of a natural disaster.
“There are a lot of leases out there in the market these days that deal with what will happen with rent if the premises can’t be accessed. The problem is those clauses were not set up to deal with a situation like a pandemic, they were all clauses that were drafted or negotiated at the time of the Christchurch earthquakes. At that time, a lot of tenants suddenly found they had to keep paying rent on premises that they couldn’t actually access because they were in a cordoned-off area.
“There are some clauses out there now that allow the tenant to stop paying the rent in other circumstances, but also there a lot of leases out there that unfortunately, even if the tenant shut up shop or is working from home, they still have to keep paying their rent.”
The Government’s move to “Level Four” will be a major help to many commercial tenants. The official directive to close shops, restaurants, bars and other commercial buildings will mean those tenants will no longer have to pay rent.
“If we got to a situation where the Government was saying you’ve got to close and everyone has to stay home and you can’t open your business then that is quite different and most modern leases would respond to that situation and provide that the rent was suspended in that case.
“Pretty much every landlord out there has loss of rent insurance. It used to be mainly one year but now most have two years following the Christchurch earthquake.” Holland says building owners will need to check whether they can claim on insurance but they are unlikely to be able to recover.
“The problem is that if the reason for the claim is that the premises aren’t going to be open for the public the landlord probably won’t be able to recover any money from its insurer in those particular circumstances, either because they only respond to loss of rents arising from physical damage, or because of an exclusion for loss in connection with a notifiable or infectious disease.”
This story has been amended to include additional information on exclusion clauses relating to infectious diseases.
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