Commercial leasing as a tenant
I’m a tenant looking to enter into a commercial lease.
What should I be considering in light of Covid?
No access in emergency clause
The Canterbury earthquake in 2011 identified a major deficiency in the standard form ADLS commercial deed of lease. The lease did not specify what was to happen to rent payments when access was prohibited to a building, but the building was undamaged.
As a result, the ADLS deed of lease was amended to include a “no access in emergency” provision at clause 27.5. This records that in an “emergency”, where the tenant is unable to access the premises to fully conduct its business, a “fair proportion” of rent and outgoings will cease to be payable (also known as abatement) until such inability ceases.
New Zealand entering into level 4 lockdown during March 2020 was widely accepted as falling within the parameters of clause 27.5. Landlords and tenants had to agree between themselves what was to be a fair proportion of rent and outgoings abatement during the “emergency”. A common negotiated outcome was that the parties agreed to a 50 percent rent and outgoings abatement.
In light of Covid, what should tenants consider when entering into a new lease?
Agreeing “fair proportion” upfront
We have assisted with a number of new lease negotiations since Covid has tested the provisions of clause 27.5. We have witnessed some parties agreeing to record at the outset what percentage a “fair proportion” of rent and outgoings abatement will be in an “emergency”. This approach has its risks, as the emergency clause is drafted intentionally wide to cover many possibilities, and the degree in which a tenant will not be able to fully conduct its business will depend on the exact situation at hand.
As a rule of thumb, it is worthwhile agreeing upfront as many commercial terms as possible in any deal, rather than hoping that you will be able to come to an agreement at a later date. This of course carries the risk of a dispute between the parties, which could result in huge costs to resolve.
As a tenant, you could consider what level of abatement would be fair for the degree of disruption that not having access to the premises is likely to cause to your business. You could record different scenarios with different abatement percentages depending on your assessment of how these situations would likely affect your business. For example, if you are able to partially trade from the premises, this could be a different percentage abatement to that applicable where you are unable to trade at all from the premises.
No access period
The ADLS deed of lease contains a default 9 month no access period. This means that if there is an emergency which means that a tenant cannot access their premises (or either party can establish with reasonable certainty that the tenant is unlikely to be able to access the premises) for at least 9 months, then either party can terminate the lease.
This is a long timeframe in which the parties may be in limbo; particularly if there are alternative premises that a tenant could access and relocate to in the meantime. A clear example of this would be a red-zone cordon area which only affects part of a city.
As a tenant, you could consider requesting that the default 9 month no access period is reduced to a shorter period, such as 3 or 6 months. We often see this timeframe reduced for leases that contain short terms, such as 2 or 3 years.
During Covid, as a measure of protection for tenants, the Government enacted temporary legislation to increase the length of time under the Property Law Act 2007 (“PLA”) in which a landlord could give notice of its intention to cancel a lease for a tenant’s non-payment of rent. The timeframe has been increased from 10 working days to 30 working days. As the cancellation provisions of the PLA are a code, if a document signed between the parties has a shorter timeframe for type of notice, then the provisions of the PLA will override it.
As a tenant, when negotiating a new lease, you may wish to request that the lease records an increased timeframe for this type of landlord notice during an emergency. The current legislative protection has a limited timeframe and it would be best to record this leniency during emergencies in your lease, rather than seeking to rely on future legislative protection.
Landlord’s costs for enforcing its rights
What the temporary legislation doesn’t do is prevent a landlord from seeking payment from the tenant of its legal costs in enforcing its rights under the lease. A landlord can serve a notice on a tenant of its intention to cancel the lease for non-payment of rent as soon as the tenant is one day late in paying the rent. The 10 working day (as temporarily increased to 30 working day) timeframe starts from then (section 245(4) of the PLA). So you could be in a situation where you are a few days late in paying rent and the landlord serves on you a notice of intention to cancel the lease and also seeks payment of its legal costs from you.
As a tenant, you may want to request that your lease provides that the landlord is not entitled to seek legal costs from you for serving a notice of intention to cancel unless you are at least 10 working days late in your rent payments.
In an emergency, you may not be in a position to decide whether or not you want to exercise your right to renew the lease for a new term. As a tenant, you could look at recording that where clause 27.5 applies, the current term will automatically be extended to 3 months after your inability to access the premises ceases. This would then give you the time to determine whether you are in a position to renew the lease once the emergency has ended.
Tenant removal and reinstatement
The ADLS deed of lease requires a tenant to remove its additions and alterations by the expiry (or earlier termination) of the lease. If the tenant does not do this within that timeframe, the landlord can remove these items and charge the tenant the cost of doing so. Where a lease expires during an emergency, or is terminated due to that emergency, the tenant has 5 working days after the emergency ends to remove its additions and alterations from the premises and make good any damage.
This is very short timeframe, particularly if you are a tenant that has a substantial fitout that needs to be removed. There may be a number of other parties in a similar situation to you, with leases that have ended or terminated and you all need to reinstate within the 5 working day period after the emergency ends. This could likely result in a shortage of labour available to undertake the reinstatement within the required timeframe.
As a tenant, you could seek to increase this timeframe to a more workable timeframe, having regard to the degree of fitout you are intending to undertake and the size of the market in which you are operating.
How we can assist
Although the ADLS deed of lease is the most widely used form of commercial lease in New Zealand, it does not necessarily mean that its terms will be completely suitable to your situation and requirements.
We regularly assist clients with negotiating amendments to the standard terms of the ADLS deed of lease. Please get in touch with us if you would like assistance to negotiate the terms of your commercial lease, or for general advice on commercial leases.