Over the last few weeks, the government has repeatedly promised “relief” for commercial tenants. It was widely hoped that this relief might come in the form of financial assistance, but yesterday’s announcement has quashed those hopes, leaving many business owners wondering if the new measures will truly make a difference.
In short, the government has advised that they will extend the timeframes for commercial tenants to remedy breaches of their commercial leases, in light of the pressures placed on businesses as a result of COVID-19.
What does the current law say about cancellation?
Currently, a landlord is only able to cancel a commercial lease:
- For failure to pay rent, if the tenant is at least 10 working days late in paying. In this instance, the lease can only be cancelled once the landlord has served the tenant with a notice asking them to remedy the breach (by paying the rent) and the tenant has failed to do so within 10 additional working days.
- For failure to comply with another term of the lease (for example, failing to pay outgoings). Again, the landlord can only cancel the lease if they have served the tenant with a notice asking them to remedy the breach(es) and the tenant has failed to do so within a “reasonable” period of time (this timeframe will depend on how long it would typically take to remedy the breach).
- If the tenant suffers certain negative financial fates (for example, the tenant becomes insolvent).
What does the proposed law change say?
The government has focused solely on the breach of a lease for failure to pay rent. According to the proposed law change, a tenant must be at least 30 working days late in paying their rent before they are in default. If the landlord has then served the tenant with a notice to remedy the breach and they fail to pay the outstanding rent within 30 additional working days, the landlord will be entitled to cancel the lease.
At this stage, the government doesn’t seem to have extended this law change to the payment of outgoings, which should be of concern to tenants with higher than average outgoings (such as tenants in shopping malls or high-end commercial developments). In theory, a landlord could attempt to cancel a lease for failure to pay the outgoings alone, by serving a notice requiring them to be paid within a “reasonable” time (which would be much shorter than the combined 60 working days that applies to late rent payments).
How the proposed changes affect other terms of the lease
By now, most landlords and tenants will be well aware of what their lease says about the current lockdown. In our earlier article regarding the impact of COVID-19 on commercial leases, we discussed the difference between the Auckland District Law Society (ADLS) sixth edition form of commercial lease (which includes specific provisions for emergency situations such as the one we currently find ourselves in) and other forms of commercial lease (which do not).
While an emergency event is in place, it is our view that a landlord bound by a sixth edition ADLS lease could only cancel that lease based on failure to pay rent if they had previously come to an agreement with the tenant on a reduced amount of rent and outgoings to be paid during the emergency period and the tenant then failed to pay this. There is a clear obligation on both parties to reach an agreement on that sum. Therefore, a landlord could not purport to cancel the lease for failure to pay rent if the parties have not reached agreement on reduced rent.
These issues do not apply to commercial leases that don’t contain an emergency clause.
Issues affecting the lease cancellation process
The greatest barrier to the lease cancellation process is the physical requirement for the notices referred to above to be served upon the tenant. Unless the specific terms of the lease allow service of notices by email, fax or other electronic means, notices must by default be served in person (i.e. by hand or by leaving it at the tenant’s office). While the level 4 (and probably, to some extent, level 3) restrictions are in place, it may not be possible to legally serve notice.
How the next few weeks could look
Depending on which businesses are approved to open their premises during the level 3 alert, it is likely that we will have:
- Some businesses who cannot re-open, continuing to rely on the emergency clause in their lease (if applicable) for rent and outgoings relief
- Some businesses who can re-open, required to pay full rent and outgoings from the day that the level 3 alert comes into force
- Some businesses taking advantage of the law change by holding off on paying rent until business has resumed and income is being generated, in the knowledge that landlords now have to wait at least 60 working days (roughly 3 months) before they can cancel the lease and change the locks
- Some businesses not re-opening at all, even though they may be legally able to, because of the financial damage that has already been done. Unfortunately, the changes proposed by the government will simply prolong the inevitable for these businesses, potentially dragging out the financial suffering for both landlord and tenant
Note: This article applies to commercial leases only, not residential tenancies.
If you would like legal advice in relation to a commercial lease affected by COVID-19, please get in touch with Andrew or contact reception.
Note: This post is brief and general in nature. You should not treat it as legal advice and should seek professional advice before taking any action in relation to the matters dealt with in this post. Armstrong Murray accepts no liability for losses suffered by any person or organisation who may rely directly or indirectly on this post.
