“No access” clause to be implied in many commercial leases

The start of the 2020 lockdown had many commercial landlords and tenants thumbing through their commercial leases looking for relevant clauses as to rent relief.

Some discovered that their leases had a clause that provided for an abatement of a ‘”fair proportion” of their rent and outgoings in case they could not access the premises.  Typically, such a clause was included in a post 2011 ADLS lease and looked like this:

No Access in Emergency

27.5 If there is an emergency and the Tenant is unable to gain access to the premises to fully conduct the Tenant’s business from the premises because of reasons of safety of the public or property or the need to prevent reduce or overcome any hazard, harm or loss that may be associated with the emergency including:

(a) a prohibited or restricted access cordon applying to the premises; or

(b) prohibition on the use of the premises pending the completion of structural engineering or other reports and appropriate certifications required by any competent authority that the premises are fit for use; or

(c) restriction on occupation of the premises by any competent authority,

then a fair proportion of the rent or outgoings shall cease to be payable for the period commencing on the date when the Tenant became unable to gain access to the premises to fully conduct the Tenant’s business from the premises until the inability ceases.

The “no access” clause was introduced into standard ADLS lease documents in 2012 and was intended to provide for such circumstances as natural disasters.  If the premises couldn’t be accessed, the rent and outgoings could be reduced accordingly.

Most landlords and tenants with such a clause entered into negotiations as to what a “fair proportion” was.  Depending on the business and the nature of the premises, many landed on 50% of rent.  Some were at 25% and some were at 75%.  Some discounted the rent entirely.  Generally, outgoings were not discounted.

Subsequent litigation has not clarified the ‘fair proportion’ question to any great extent. 

For some tenants, no such clause was in place.  Many landlords abated the rent anyway as an act of generosity or just to keep their tenants solvent. 

Fast forward one and a half years and we are back in lockdown for Auckland and are facing the spectre of lockdowns in other parts of the country.  Tenants with the abatement clause in many cases are receiving discounts.  Tenants who don’t are often not.

The government has responded to this perceived unfairness by introducing a bill that will amend the Property Law Act 2007.  The amendment effectively inserts an abatement clause into commercial leases in very similar terms to the 2012 ADLS clause.

Proponents will say the move is fair and rebalances the costs of the lockdown in favour of the tenant.  Opponents will say the government has interfered in the right of two parties to contract freely.  The parties were free when signing the lease to negotiate how the risk of natural disasters was to be assigned and it was left at the feet of the tenant.  The government has reassigned that risk to the landlord without compensating the landlord. 

The abatement period only applies from the 28^th of September 2021.  It does not apply retrospectively.  Tenants cannot claim rent abatements for past lockdowns but will for the current and future lockdowns from that date (provided the bill passes).

Affected landlords and tenants will have to agree on what constitutes a ‘fair proportion’.  If they can’t, the dispute will go to arbitration per the changes to the Act.  We expect most will agree and the parties will determine the ‘fair proportion’ along similar lines to last time.

If you are a landlord or a tenant and are unsure of your rights or how you are affected by the bill please get in touch with Scott Donaldson or the team at Mactodd Lawyers.