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Commercial Leases & Covid-19

27 March 2020

Many tenants and landlords are wondering how the current Alert Level 4 Lockdown (Lockdown) affects their commercial leases. This article provides a short general explanation of the potential legal effect of the Lockdown on your lease.

The majority of leases our clients have are on the ADLS standard form lease. More recent versions of this lease have a “No Access in Emergency” provision that may be available to a tenant during the Lockdown period. However, even if your particular lease does not have this clause there are other potential legal avenues available for a tenant to seek some rent relief or more during the Lockdown.

The following should be considered general commentary and not relied on without seeking specific legal advice.

ADLS Lease

The ADLS standard form lease is far and away the most common form of lease in New Zealand. More recent versions of this lease contain a clause that deals with a situation where a tenant is unable to access the premises in an emergency. This clause will likely apply to the Lockdown. If your lease is on the ADLS standard form, this should be the first place to look.

The ADLS Lease has changed over time and through the various versions. It may be that the version currently used by any parties does not contain this clause or contains an earlier variation to it. Tenants should seek legal advice before relying on clause 27.5 to not pay rent. Furthermore, given the ambiguity in what exactly is a fair proportion of rent that should cease, it may well pay to think carefully about negotiation strategy before entering into discussions.

Force Majeure

If the Lease is not an ADLS Lease it may still contain a Force Majeure clause. A Force Majeure is a type of contractual clause, and so can only be used when there is a specific clause in the contract. A Force Majeure clause may excuse a party from performing (in whole or in part), allow a delay in, suspend performance of or provide a right to terminate the contract.

As an example, where the Lockdown legally requires a construction company to not allow workers on site during the Lockdown then it may potentially rely on a Force Majeure clause to avoid liquidated damages. Another example would be that a person may be able to cancel hireage for an event on the basis of the current ban on events.

An affected party must prove that the event that happens fits within the criteria listed in the Force Majeure clause itself. If the clause includes the criteria of “Biological entity or organism”, “Act of Government” or “plagues or epidemic” then it may well apply to the Lockdown or Covid-19. A catch all phrase like “Act of God” might also apply.

Although, the Lockdown is an unprecedented event, historically Force Majeure is very difficult to argue. There is significant risk to rely on a Force Majeure clause. If a court later rules that the clause did not apply, the party relying on it may have wrongfully repudiated the contract, and may be liable for damages resulting from that repudiation.

Frustration

If there is nothing in the Lease that deals with the Lockdown then Lessees may potentially be able to rely on Frustration.

Frustration is not something written in the contract itself, but something only a court can determine. Frustration does not allow for a party to alter the contract in some way, such as obtaining a rent holiday. Instead, it brings the entire contract to an end entirely. It is an all or nothing proposition.

A frustrated contract is one where the obligations in the contract cannot be performed because of some intervening unforeseen event or events that happen after a contract has been entered into. The event cannot be caused by either of the parties. Importantly, it must make performance impossible or radically alter the obligations under the contract.

As with Force Majeure, there is a risk of repudiation for a party to claim frustration and parties should not do so without carefully considered advice.

Conclusion

Reliance by a party on any clause in a contract that provides relief always carries risk. If a party tries to cancel or rely on a clause not to pay rent or perform contractual obligations that party risks repudiating the contract or lease. The applicability of any clause is heavily fact specific and any party considering whether to seek to rely on any of these should obtain advice specific to their situation. We strongly advise obtaining specific advice before seeking to rely on any of the above information.

NWM is working the entire Lockdown period and are available if you have any queries about your rights or want some guidance on how to enforce those rights. We are now operating as a remote law firm. Please do not hesitate to get in touch with any of our property specialists.

If you wish to discuss your particular situation NWM has team of Commercial Property, Financing, & Leasing specialists. They are contactable by email or by phone during the entire Lockdown. Please visit our website at the following address for details:

https://www.nwm.co.nz/our-services/commercial-property-financing-leasing/

If you need to negotiate with a landlord or tenant, or if matters look like they may turn into a dispute, it is vital to obtain specialist advice early in the process in order to obtain the best outcome. Jesse Savage, an associate in our Commercial Disputes team specialises in property disputes and is available to give specialist advice to assist you if you need to negotiate with a landlord or tenant or if matters look like they may turn into a dispute. Jesse’s details are available at:

https://www.nwm.co.nz/our-team/jesse-savage/