Covid 19 coronavirus: Businessman draws attention to lease clause allowing rent cuts

By Robin Martin of RNZ

A Taranaki business owner is warning leaseholders to read the fine print of their contracts after he was asked to pay his rent in full despite a clause in his lease allowing for a rent cut if he couldn't legally access the property.

Clause 27.5 was included in the Auckland District Law Society commercial lease in 2012 in response to the Canterbury earthquakes, when many leaseholders were barred from their businesses.

The business owner, who asked for anonymity, said it was illegal for him to operate under alert levels 3 and 4 introduced as part of the Government's Covid-19 response.

He and his business partners have earned nothing since the days immediately prior to the lockdown and cannot return to work until alert level 2.

When they sought rent relief, the man said he did not get the response he hoped for.

"I went into negotiations with our landlord and didn't find that the landlord was very forthcoming in helping us. He allowed us not to pay [for now], but in fact, told us we'd have to catch up and make up those arrears."

The business owner then got his lawyer to have a closer look at the lease.

• Covid19.govt.nz: The Government's official Covid-19 advisory website

"And then we realised that we had a lease with a clause which is the post-Christchurch type of lease that came out in 2012. They have clause 27.5 which allows the tenant to negotiate what a fair rent is while they are in a lockout which is out of their control."

The man and his landlord were now close to a deal in which the rent would drop about 50 per cent.

Auckland District Law Society's property law committee member Joanna Pidgeon said clause 27.5 of the sixth edition of its popular commercial property lease was designed to capture emergency situations beyond earthquakes.

"Such as a plague or a pandemic or epidemic and it deals with being unable to access premises in emergency situations so that people can't fully conduct their business from the premises and there is a prohibited or restricted access.

"And then a fair proportion of rent and outgoings is abated and what that means is it ceases to be payable. It's not a deferment."

Pidgeon said the amount of rent reduction would be different from landlord to landlord.

"So it means a fair proportion is abated and different tenancies will have different situations and you need to look at the situation of the tenant and the landlord and work out what is fair."

She said many landlords had come to the aid of their tenants, but if the two parties could not agree, an independent arbitrator could be appointed.

Property Council chief executive Leonie Freeman said the Taranaki landlord should have known about the contents of his lease agreement.

"I would expect most tenants and most landlords [know] what they've signed up to, but maybe if they are a small business or a small landlord and they relied on legal advice they might not have been aware of all the complexity. You know it's just one clause in a very long lease."

Freeman said clause 27.5 provided a framework for landlords and tenants to work something out between themselves, but she thought the Government should still come to the party and offer a rent subsidy to all commercial tenants.

"Small to medium businesses because that is where the pressure is - whose income has dropped more than 50 per cent that the government would provide a 50 per cent rent relief for the period of lockdown and the landlord and the tenant would share the other 50 per cent."

In response to Covid-19, Australia has introduced a mandatory code to guide rent relief for small to medium enterprises with an annual turnover of up to $50 million.

Under the code, the reduction in a tenant's turnover is reflected in any rent cut.

The New Zealand Government says it is considering rent concessions to ease the burden on small businesses from Covid-19, but has so far ruled out rent subsidies or freezes.