ADLS Commercial Leases – rent reduction when no access to premises

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Written by Kalev Crossland, www.shieffangland.co.nz
Republished with permission.
Guidance only – not intended as a substitute for specific legal advice.

Good morning everyone. This is a follow up article that sequels my earlier article on frustration of contract as it related to retail commercial leases. Frustration principles are judge made law. Today, I address some clauses found in the current Auckland District Law Society standard form commercial lease.

These clauses allow for a fair reduction in rent payable where commerical premises cannot be accessed due to an emergency. These clauses were added into the current ADLS form following the Canterbury Earthquakes. There, many businesses were barred from entering there premises even when they were not damaged. This is because the premises were in a Red Zone and as such could not be entered. But some commercial lessors at that time, as they were entitled to argue, maintained that the rent was due come what may.

The relevant clauses are below:

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 the reasons of safety of the public or property or the need to prevent or 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) [not relevant]

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

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

In view of the above, lessors and lessees should carefully check their leases to see if they contain the above or a similar clause. It is possible that even if the standard ADLS form has been used clause 27.5 may have been amended.  If they do not then the doctrine of frustration might apply – see my previous article. (However, if the lease has years to run, then a one month lockdown is most unlikely to be a frustration of the lease).

If such a clause is present then tenants should be approaching their landlords to discuss a fair reduction in rent. It may be that tenants can argue that the reduction should be 100% as they have no access. However, lessors may argue that some rental payment should be paid in consideration of the storage aspect of the premises housing the tenant’s goods, plant and machinery.

I have already heard anecdotally of tenants having recourse to clause 27.5 to pay no rent during the lockdown. This may be legally sustained as correct in later litigation that may well occur over this clause. But tenants and their advisers may wish to keep in mind that commercial leasing is a long term relationship. So whilst, tenants may get the “win” on this topic inevitably there will be some event in the future where the tenant is looking to the landlord for some indulgence. Taking a hard line now may not serve the tenant’s longer term interests.

As an epilogue to the the above, it seems that the many landlord business insurance policies have an exclusion for loss caused by epidemic/pandemic events. This exclusion came about post the SARS outbreak affecting some countries. So it may be that the lessors wear the bulk of this economic cost. In that instance, landlords may wish to take advice on how to approach their lenders.

Help available

For advice from experienced commercial, property and litigation lawyers please contact:

Deanna Clark Special Counsel
Dd +64 9 300 8751 | Deanna.Clark@shieffangland.co.nz

Kalev Crossland Partner
Mb +64 274 740 835 | Kalev.Crossland@shieffangland.co.nz

Richard Hatch Partner
Ph + 64 9 300 8761 | richard.hatch@shieffangland.co.nz