One of the highest profile business issues from Level 4 lockdown last year was the right of closed businesses to seek rent reductions from landlords. Here, Bell Gully experts consider what might happen in the 2021 rerun of lockdown.
The sudden return to lockdown has once again brought 'No Access' clauses in leases into sharp focus. These clauses provide for an abatement of a fair proportion of rent and outgoings while a tenant is unable to access premises to fully conduct their business during an emergency. An example is clause 27.5 of the standard Auckland District Law Society (ADLS) lease, a lease commonly used by many landlords and tenants.
Does the clause apply in Alert Level 4?
In most leases, an alert Level 4 lockdown will trigger such a clause. However, there are a number of factors that will need to be considered in assessing whether the clause applies, and if so, to what extent. For example:
- Is the tenant providing essential services, such that it is permitted to continue to operate from its premises throughout the lockdown?
- Even if the tenant is providing essential services, does the lockdown nevertheless prevent the tenant from fully conducting its business from the premises?
- What is the position if a tenant is able to operate from its premises, but decides not to trade in order to assist with the lockdown?
If the clause applies, how much rent is payable?
There is no set formula to calculate the amount by which rent and outgoings are to be abated (that is, reduced). Instead, the clause only refers to it being by a “fair proportion" of rent and outgoings. While a number of disputes arose between landlords and tenants last year, the courts have not yet considered this issue, and so there is no judicial guidance as to how the “fair proportion" by which the rent is to be reduced should be calculated.
Most clauses contain arbitration provisions, and we are aware of arbitration decisions in which this issue has been considered. However, arbitration decisions are confidential, and therefore are not available as precedent in the same way as court decisions are available.
In our experience with disputes over clause 27.5, some of the common issues that arise include:
- To what extent does the level of abatement need to take into account the landlord’s position (in addition to the ability of the tenant to conduct its business)?
- To what extent does the abatement need to be for an amount that is “fair” to the landlord and tenant, notwithstanding the tenant’s ability to conduct its business;
- Is there a difference between the level of abatement available for rent, compared to outgoings?
When can a landlord cancel a lease for non-payment of rent?
Under the Property Law Act (PLA), a landlord can give notice to a tenant to cancel the lease if the tenant fails to pay rent. Previously, the time to be provided to the tenant to pay the rent to avoid the landlord cancelling the lease was 10 working days. In May last year, the Government amended the PLA to instead require landlords to provide tenants with 40 working days to pay the rent.
However, landlords should be careful in relying on a PLA notice to cancel a lease where a tenant is claiming an abatement of rent. In a recent case, the High Court observed that in such a case, a landlord cannot rely on a PLA notice to cancel the lease for unpaid rent.
The case was SHK Trustee Company Ltd v NZDMG Ltd. Kitchen manufacturer NZDMG leased office and warehouse space from SHK in Auckland, using the ADLS lease. NZDMG's last rental payment was on the first day of the Level 4 lockdown on March 26, 2020. The tenant sought an adjustment of the rent under clause 27.5, but no agreement was reached and no further payments made.
In August 2020, SHK, issued a PLA notice informing NZDMG that it was in default and requiring payment of the rent arrears within 30 working days. NZDMG failed to comply. The landlord then cancelled the lease, took possession of the premises, and later commenced summary judgment proceedings seeking the unpaid rent.
The High Court declined SHK's application in respect of amounts claimed to be owing during the lockdowns, because of the rent abatement claim. The court said: “assessing a fair proportion is an evaluative exercise that cannot be done on a summary judgment application."
More problematically for SHK, the court accepted that it was arguable that the PLA notice was invalid. That was because the notice claimed the rent in full, with no adjustment to reflect the tenant's entitlement to abatement under clause 27.5. The court held it was arguable SHK was not entitled to cancel the lease.
Comment
In our view, most tenants who have the benefit of clause 27.5 and who been required to close their premises will likely be able to claim that they are entitled to an abatement of rent and outgoings. In earlier lockdowns, many, if not most, landlords and tenants were able to reach an agreement as to what rent and outgoings are payable during the Covid lockdowns.
But if agreement can’t be reached, landlords should be aware they cannot simply issue PLA notices or statutory demands for unpaid rent if tenants claim an abatement of rent and outgoings and stop making payments relating to that claim.
Where arrears relate to a period for which the tenant is (or may be) entitled to rent abatement, it will be risky for a landlord to issue a notice that includes the abatement period. Landlords will need to rely on non-abatement periods, or alternatively will need to first commence legal proceedings before issuing a notice (potentially by way of arbitration depending on the provisions of the lease).
Although obtaining judgment will involve more time and cost than the PLA notice process, it will avoid the risk of the landlord being found to have repudiated the lease and being left exposed to a damages claim from the tenant.
Bell Gully is a foundation supporter of Newsroom
