Commercial tenants' entitlements to rent reductions may still be valid under level 3

Wednesday, 15 April 2020

How much rent reduction tenants should receive when they have no access to their premises to run their businesses because of the coronavirus pandemic is being hotly debated.

Tenants may still be entitled to rent reductions under alert level 3 if they do not have full access to their premises to run their businesses.

There has been a lot of debate in the past fortnight over the 'no access' clause, clause 27.5, in the Auckland District Law Society Deed of Lease, the most widely used form of commercial lease in the country for a broad range of tenancies.

It states tenants are entitled to pay 'a fair proportion' of rent if they cannot access their premises to carry on their normal business in an emergency.

Auckland District Law Society Property Disputes Committee convenor Mark Colthart says entitlement to an abatement in rent under clause 27.5 may not end when alert level 4 is lifted if the tenant cannot fully operate the business from the premises.

The key parts of clause 27.5 are that there is an emergency, tenants are unable to gain access to the premises, and they are unable to operate fully from them.

* 'No access' clauses in commercial property leases may off rent relief during an emergency

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The Auckland District Law Society offers a low-cost and binding disputes resolution service.

The Auckland District Law Society's Property Disputes Committee convenor Mark Colthart said clause 27.5 talked about the tenant being able to fully operate their business from the premises.

'So there will be a strong argument that people who are still unable to operate their businesses fully from their premises after level 4 is reduced, they may still be entitled to some abatement of rent. Just quite what amount that will be is still to be determined.'

'So the entitlement to an abatement in rent may well not end when level 4 is lifted. If the tenant is still compromised in their ability to fully operate their business from their leased premises under level 3 conditions then there still may be issues.'

The Auckland District law Society is expecting more disputes over rent. Colthart said it had already received inquiries over abatement of rent under clause 27.5 but had not yet made any rulings on that.

He was hearing that many landlords and tenants were still trying to resolve their issues. Many were talking to each other but it was taking time and they were nervous about what would happen if they could not reach an agreement.

So far there had been no decisions from the courts as to the application of clause 27.5 of the ADLS lease, Colthart said.

Clause 27.5 was added to the society's lease in 2012 during a revision of it and after the Christchurch earthquakes where tenants were physically unable to gain access to their undamaged buildings in the Christchurch central city 'red zone' because they were cordoned off for safety reasons, the society said.

The concern then was that tenants should not have to continue to pay the full rent for premises they could not access. The addition of clause 27.5 was a specific response to that concern.

It was decided also that the fair proportion would not be defined in the lease, by, for example, prescribing percentages. It was considered that each situation would be different, so the parties need to negotiate what is a fair proportion.

The society's Property Disputes Committee offers a low-cost and binding disputes resolution service. The cost of referring a dispute to the committee is $200 plus GST, shared equally between the parties.

However, the referral has to be made by the parties' lawyers, and the parties need to meet those legal costs.The lawyers had to present to the committee an agreed statement of facts about the dispute.

The committee met at present using video application Zoom to consider the disputes. 'What will be in dispute is the application of the lease provisions to the agreed facts. That is where we can assist.'

The ADLS lease also provided for disputes to be settled through mediation. A result agreed by both parties was preferable to one imposed on them, Colthart said.The New Zealand Disputes Resolution Centre also offered a fast-track arbitration service for rent abatement disputes.