Landlord and Tenant obligations during COVID-19 Lockdown

April 1, 2020

in Corporate & Business,COVID-19,Property

We have received numerous requests from clients, both Landlord and Tenant for advice on dealing with issues arising under commercial leases in respect to payments of rent and opex during the Covid-19 lockdown.

We have provided a general summary of the situation below. Please understand that there is no one solution fits all and we recommend that in all cases you consult with us for specific advice in relation to your circumstances.

  1. The level 4 lockdown has raised the question of whether the lockdown constitutes a denial of access to the premises. This has arisen with particular reference to those leases that contain “denial of access clauses”. The ADLS lease which is in common usage contains such a clause (clause 27.5) since the 2012 versions of that lease.
  2. It is still subject to some debate whether this is a strict denial of access circumstance. Rather than a denial of access to buildings the government has issued a stay at home or lockdown order. In the case of the ADLS lease there is an additional consideration in that the definition of “Emergency” in the lease specifically refers to “pandemic”.
  3. While there may be some question around whether the level 4 lockdown is strictly a “denial of access” event, the practical commercial reality is that given the urgencies and time constraints and the likely short duration of the level 4 lockdown there is little point in argument over whether or not the denial of access clause in the ADLS lease (and potentially in other leases) is applicable. We do however emphasise that if you are not dealing with an ADLS lease then specific review of the lease should be undertaken to check the wording and whether the lease does in fact cover the present situation.
  4. Assuming we are dealing with a denial of access situation (and most of our clients are proceeding on that basis) the question of how it affects Landlords and Tenants is essentially governed by the terms of each lease.
  5. For the purposes of this summary we are directing our comments to the ADLS lease in particular clause 27.5.
  6. The clause states that in the case of an emergency (including pandemic as referred to above) where the Tenant cannot access the premises to “fully conduct” the Tenants business then a “fair proportion” of rent and opex ceases to be payable for the period commencing when the access was denied to when the inability to gain access ends. For practical purposes this means while the level 4 lockdown exists.
  7. During the level 4 lockdown the Landlord and Tenant are obliged to try and reach agreement on what fair proportion of rental abatement should occur. However there are some important points to note:
  • The ADLS lease prevents a Tenant from withholding rent. The Tenant is obliged to pay the rent without any deductions or set off.
  • Therefore if the Tenant is unable to reach agreement with the Landlord the Tenant is obliged to make payments of rent and opex as and when they fall due pending reaching an agreement (subject to our further comments below) to avoid technically being in default under the lease.
  • It is open to both the Landlord and Tenant to refer the matter to a dispute resolution process specified in the lease if agreement cannot be reached. However given the costs and time to do so and the limited (at this point) timeframe of the level 4 closedown currently that would seem to be both unrealistic and commercially uneconomic for both parties.
  • Fair proportion is not as simple as saying the Tenant is unable to access the premises therefore no rental or opex is payable. It is clear that in most situations Tenants continue to have some form of occupation of the premises for example stock, plant, equipment and potentially IT services.
  • Because of the difficulties in trying to determine this percentage without expert assistance most Landlords and Tenants are currently agreeing to accept a 50/50 proportion to avoid arguments over what is a fair proportion at this point and if anything on the basis that the 50% scenario represents an equal sharing of the impacts by Landlord and Tenant in circumstances which are clearly beyond either party’s control or cause.
  • In some instances we are seeing Tenants requesting additional relief beyond the level 4 period from their Landlords. We have also had some Landlords that are indicating a willingness to consider rent abatements and/or deferments of obligations of rent payments for periods longer than the level 4 lockdown. These are being considered on a case by case basis however it is important to recognise that economic distress from the global and domestic impact of Covid-19 is not itself a ground for abatement under the ADLS lease.
  • We are able to provide advice and assistance to our clients in relation to these matters both from a Landlord and Tenant perspective including suggestions on the framework for such arrangements. In the circumstances if this affects you please contact us and we can discuss this with you directly.
  1. As we have indicated above a Tenant’s failure to either engage with its Landlord or simply to refuse to pay any rent or opex raises a real risk that they are treated as being in default. Of course every situation will need to be considered on its own merits and circumstances. However in the case of default a practical and economic reality is that Landlords may need to realise that having Tenants in place will be an advantage when normal business resumes. Tenants also need to recognise that the closedown is not an excuse to simply not pay rent or opex. Tenants should also keep in mind that if they are in default under the lease this could potentially have implications under personal guarantees or existing bank guarantees/rent bonds. In this regard Tenants may find that Landlords have exercised their rights against the bank guarantee or rent bond and that there are obligations to top up under the terms of the lease once some form of normality returns.
  2. From a practical point of view the likelihood of default action resulting in termination of lease during this short term period is questionable. A Landlord would have to serve the appropriate notices under the Property Law Act and provide the statutory timeframe for a Tenant to rectify any default. Once that had expired the Landlord would then be faced with the prospect of having to retake possession during a level 4 lockdown which would pose its own practical difficulties.
  3. Both Landlord and Tenant would also have to consider the availability of an application to the Court for urgent relief against cancellation. In the circumstances in particular if the issue is around agreement on what is a fair proportion of abatement, it is highly likely the Court would be sympathetic to a Tenants request for such orders.
  4. It goes without saying that in the absence of a denial of access or other appropriate clause in the lease a Tenant’s failure to pay rent would be a default under the lease as there would be no right to any abatement without the agreement of the Landlord. We also repeat our comment above that economic hardship of itself is not a denial of access event.
  5. One other point, it is reasonably apparent that most if not all insurance companies are refusing to respond to this situation under business interruption or loss of rent policies. Most policies have contained exclusions in relation to notifiable diseases and pandemics since the SARS epidemic but it would still be wise to check your policy because there are some policies that provide for extensions to be taken on the policy coverage to include such arrangements and it therefore might be possible that your own policy does contain coverage. If the Landlord does have insurance coverage it may very well have an obligation to pass on those benefits under the provisions of the lease where insurance is available.
  6. The final aspect to be considered is that the Government has indicated the prospect of some form of financial package for hopefully Landlords and Tenants. Any arrangements entered into in the interim should be carefully worded to ensure that they allow for changes in the macro environment and any other assistance packages that may become available to Tenant or Landlord.

We must emphasise that this advice is of a general nature and primarily directed at the ADLS lease. Each lease particularly if it is not a standard ADLS lease should be carefully reviewed before taking steps. Also we again emphasise that there is no one solution fits all scenario.

Naturally if you require any assistance please contact us. We continue to operate during the closedown period albeit remotely so while there are challenges we are able to continue to provide our full range of services to our clients.

If you require any advice or further information on the matters dealt with in this publication please contact the lawyer at Farry and Co. who normally advises you, or alternatively contact:

Paul Farry
09 353 6671

The information contained in this publication is intended as a guide only.  It does not constitute legal advice and should not be relied upon as such.  Professional advice should be sought before applying any of the information to particular circumstances.  While every reasonable care has been taken in the preparation of this publication, Farry and Co. does not accept liability for any errors it may contain. 

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