With the World Health Organisation declaring a COVID-19 pandemic, New Zealand companies are naturally looking at what the impact will be on all aspects of their particular business.
One aspect to consider is what the impact will be on commercial leasing arrangements. Some relevant concerns are likely to be:
1. Can a landlord shut an office building / shopping centre for a period of time if it is concerned about the possibility of infection spreading in the building / centre?
Some leases may give the owner the express right to force a closure in certain circumstances, (other than when required by law) including in the case of emergency or where the landlord determines it to be necessary for safety purposes. The danger for the landlord is that if it forces a closure, in circumstances where it has no legal right to do that, then it may be in breach of the lease. This is because the landlord agrees, under the terms of the lease, to allow the tenant to hold the premises without interruption from the landlord.
2. Does a tenant have to keep paying rent if it closes its business because of the threat of infection?
Most modern leases contain clauses which specifically address whether the tenant must continue to pay rent if the premises are undamaged but there is some sort of emergency which prevents the tenant from using the premises. Many of these clauses, however, focus on a situation where the tenant is restricted from entering the premises by law or because of a physical obstacle such as a restricted access cordon. In those types of situations leases will often provide that rent and outgoings are suspended until the premises can be accessed again, and the tenant can operate its business.
Some leases (such as the Auckland District Law Society Lease) also allow for a suspension of rent and outgoings in other situations, where the tenant is unable to access the premises to conduct its business because of reasons of safety to the public or the need to prevent or reduce hazards or harm. The question then will be whether the particular circumstances are sufficient to allow the tenant to claim a rent and outgoings' suspension while the premises are temporarily closed. Arguably a closure because of the risk of infection would not entitle a tenant to stop paying rent, but the argument may be stronger if, for instance, an employee working at the premises had contracted COVID-19.
It is also important to note that some leases (such as the Property Council New Zealand office lease) limit the rent and outgoings suspension to the sum that the landlord is able to recover under its own loss of rent insurance policy.
3. Does a tenant have to keep trading from retail premises even if it has a shortage of staff or merchandise or has any other pandemic-related reason to shut?
Many shopping centre leases impose an obligation on the tenant to keep the premises open for trade during the trading hours for the particular centre. Often the tenant has to pay liquidated damages for each day (or hour) of non-trading. For instance the Property Council New Zealand shopping centre lease provides for the tenant to pay NZ$1,000 for the first hour of each day when it fails to trade and for further damages (based on a multiple of the rent payable) after that. Generally there will be no express exclusion for events outside the tenant's control.
It is possible that the common law doctrine of frustration could assist the tenant in certain serious situations. This doctrine would release the parties from the lease where, by no fault of either party, an intervening event makes performance impossible or radically different from what was agreed.
However a tenant must be careful in asserting frustration. There is a very high threshold for the test to apply and if it does not, the tenant may have wrongfully repudiated the lease and be liable to pay damages (based on loss of rent) to the landlord.
If you have any questions about the matters raised in this article please get in touch with the contacts listed or your usual Bell Gully adviser.
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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.