In many, if not most cases, landlords and tenants were able to reach an agreement as to what rent and outgoings are payable during the COVID lockdowns. But what happens when agreement can't be reached, the tenant doesn't pay, and the landlord wants to issue a Property Law Act notice to cancel the lease?
The recent case of SHK Trustee Company Ltd v NZDMG Ltd shows that this can be a risky approach for landlords to take.
NZDMG leased office and warehouse space from SHK in Auckland. The parties used the Auckland District Law Society Deed of Lease. Clause 27.5 of the ADLS lease provides that, if there is an emergency, the tenant is entitled to a suspension of some or all of the rent if the tenant is “unable to gain access to the premises to fully conduct the tenant's business from the premises" for a number of reasons, including where there is a “restriction on occupation of the premises by any competent authority".
NZDMG's last rental payment under the lease was on 26 March 2020, the first day of the Level 4 lockdown. NZDMG sought an adjustment of the rent from after that date in accordance with clause 27.5, but no agreement was reached. In the meantime, NZDMG stopped making any payments under the lease.
In August 2020, SHK issued a notice under section 245 of the Property Law Act. The notice informed NZDMG that it was in default under the lease by failing to pay rent, and required NZDMG to pay the rent arrears within 30 working days. The notice did not include the rent due for March 2020, but otherwise claimed the full amount owing for April, May, June and July 2020.
NZDMG failed to comply with the Property Law Act notice, and SHK cancelled the lease by retaking possession of the premises on 8 September 2020.
SHK subsequently commenced summary judgment proceedings against NZDMG and its guarantors in respect of the unpaid rent. The guarantors opposed SHK's application on the basis that SHK had not taken into account NZDMG's right to an abatement of the rent.
The High Court granted SHK's application for summary judgment, except for amounts owing during the lockdowns in respect of the periods from 23 March to 31 May 2020 and 13 August to 30 August 2020. The Court held that it could not give summary judgment, because NZDMG claimed to be entitled to an abatement of rent. The Court said that “assessing a fair proportion is an evaluative exercise that cannot be done on a summary judgment application."
“The Court can only record that the issue has been raised, recognise that it cannot decide the matter on a summary judgment application, and note it as a trial issue for decision after the court has heard full evidence."
While summary judgment was entered in part, more problematically for SHK the Court accepted that it was arguable that the Property Law Act 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 therefore held that it was arguable that SHK was not entitled to cancel the lease.
The Property Law Act provisions relating to the cancellation of leases are a code, and a landlord cannot validly cancel a lease unless they comply with the Act's requirements. Given the Court's comments on summary judgment, it is now open for NZDMG to bring a claim against SHK on the basis that it failed to issue a valid Property Law Act notice, and that the subsequent purported cancellation of the lease and retaking of possession was unlawful. If successful, this will mean that SHK has repudiated the lease and will leave it exposed to a potential claim by NZDMG for damages.
More generally, Property Law Act notices are commonly used by landlords to cancel a lease where a tenant is failing to pay rent. Where some of the 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 under the Property Law Act that includes the abatement period and move to cancel the lease. Landlords will need to rely on non-abatement periods only, or alternatively will need to instead commence proceedings to obtain judgment as to the amount owing under the lease during the abatement period (potentially by way of arbitration depending on the provisions of the lease). Although obtaining judgment will involve more time and cost than the Property Law Act 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.
If you have any questions about the issues raised in this article, please contact the authors or your usual Bell Gully adviser.
This publication is necessarily brief and general in nature. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.