Revisiting ground trodden in previous alert levels means landlords and tenants will once again be negotiating the nuances around access to premises. Bell Gully partner Jane Holland and senior associate Morgan Powell explain.
As Auckland returned to alert Level 3, and the rest of New Zealand to alert Level 2, landlords and tenants could be forgiven a sense of déjà vu. Those using the Auckland District Law Society standard form lease are once again considering the implications of the latest change in alert levels, including the impact of a clause which caused significant debate the first time around.
Under clause 27.5 of the ADLS standard form lease, tenants are entitled to an abatement of a “fair proportion” of rent and outgoings if they are “unable to gain access” to their premises to “fully conduct their business” in an emergency because of the need to prevent or reduce any hazard or harm, including as a result of a government restriction on occupation.
While the meaning of “fair proportion” raises its own difficulties where the clause applies, an immediate issue is whether the clause applies at all at Levels 3 and 2.
Alert Level 3 – Businesses that are open, but with no customers allowed on the premises
Clause 27.5 applies if a tenant is “unable to gain access” to their premises to “fully conduct” their business. At Level 4, this was a more straightforward issue, as most businesses were prevented from opening their premises. Level 3 is more complicated as in many cases businesses can open, provided they use systems such as click and collect or, in the case of food outlets, offering takeaway only.
Landlords are likely to focus on the requirement for a prevention of access, arguing that the tenant is not prevented from accessing the premises, and the real issue for those tenants is the lack of customers. For example, businesses in central Auckland may be able to offer click and collect and takeaway services, but will likely find a significantly reduced customer base with the majority of office workers currently working from home. In such a situation the tenant’s loss is arguably due to lack of customers, not due to any issues in the tenant accessing the premises.
In contrast, tenants are likely to focus on the requirement that they are unable to “fully conduct” their business, arguing that the restrictions on allowing customers onto the premises mean that they are unable to fully conduct their business. Tenants could argue that they lease the entire premises (not just collection areas), and restrictions that prevent customers from entering the premises and only allow “click and collect” are significant restrictions on their ability to fully use their premises.
The proper interpretation of the clause has yet to be tested in an arbitration. During the last Level 3 period the rent abatements negotiated by tenants differed depending on the particular circumstances of the business. For instance a clothes retailer without a click and collect process in place may arguably be entitled to a greater rent abatement than a food outlet able to undertake a significant part of its normal business by offering takeaways. In many cases, however, rent and outgoings abatements were agreed through negotiation without the need for arbitration.
Alert Level 3 – Businesses that are working from home, but could be in the office
The Government has said those businesses that can work from home must do so where possible. However, this is not included in the formal order.
Landlords are likely to say that clause 27.5 does not apply because the formal Public Health Order does not include any requirement that employees work from home where possible.
In contrast, tenants are likely to say that clause 27.5 applies in circumstances where the Government’s website and media statements say that businesses must work from home where possible.
In the last Level 3 period there was a fair amount of debate between landlords and tenants as to whether this particular alert level entitled office tenants to a rent and outgoings abatement. There were differing outcomes across the New Zealand office market but, again, those were generally negotiated outcomes.
Alert Level 2
We consider clause 27.5 does not apply to tenants in Level 2 areas.
Level 2 is considerably more permissive than Level 3. At Level 2, tenants are unlikely to be able to argue they are prevented from accessing their premises. In particular, and unlike Level 3, there is no requirement that businesses must close unless they can comply with the Government’s requirements.
Alternative to clause 27.5?
The Government had said that it would introduce legislation to give tenants additional rights to rent relief. In particular, the Government had proposed to amend the Property Law Act to impose an implied term into leases that would entitle tenants to rent abatement. However, the coalition Government was ultimately unable to agree on the proposed amendment.
Therefore, if a lease does not contain a provision for rent abatement (such as clause 27.5), then the tenant will not be entitled to any such abatement.
Despite this, during the previous lockdown period, some retail tenants did agree rent relief arrangements with their landlord(s). Quite often these arrangements were coupled with a lease variation, such as an extension to the lease term.
New requirement – QR codes
In addition to the restrictions imposed during the previous lockdown, the new Public Health Order also requires businesses to display the Government’s QR codes at or near the entrance to the workplace. This applies to all categories of business except for public transport and applies to both Level 3 and 2 areas.
The order provides that it is the obligation of the party that controls the premises to comply with the requirements for displaying the QR code. Where a tenant leases a single building, and is the only tenant, this will be straightforward – it is the tenant that has control and they must ensure that the QR code is displayed.
But what about situations where the building has multiple tenants and common areas? The tenant will of course have control of its specific premises, and must display its QR code near the entrance to its workplace. However, tenants will not normally be in “control” of common areas such as lobbies, stairwells, lifts, and carparks. Instead, these areas are likely to be under the control of the landlord. On a strict reading of the Public Health Order, these areas are under the landlord’s control. As a result, landlords are required to also arrange for QR codes to be displayed.
It is not clear that it was intended that both tenants and landlords display QR codes for buildings with multiple tenants and common areas. However, given the drafting, both landlords and tenants will need to arrange for QR codes to be displayed. This is straightforward in the case of common areas such as office lobbies, but less straightforward in other cases, such as car parking areas for a large format retail centre.
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