Leases in the time of COVID-19: Fairness cuts both ways

K3 Legal director Edwin Morrison delves deeper into the role of fairness in leases during the time of COVID-19

Leases in the time of COVID-19: Fairness cuts both ways

While Levels 3 & 4 of the COVID-19 Alert are in effect, and by extensions the Emergency Clauses, landlords and commercial tenants are arm-wrestling over a key issue – who pays?

Commentary to date has favoured tenants, suggesting that standard clause 27 of the updated ADLS lease requires reduced rental while premises are empty. But tenants are often eligible for a variety of subsidies, in part to avoid these situations arising. So how can landlords approach such issues?  

Where can I refer tenants for aid?
The government has set up substantial business assistance in the form of wage subsidies and banking support (including government backed guarantees), in part to aid tenants in such situations.

Clause 27 and you
Typically, the optimal situation is for a landlord and tenant to negotiate early on. But there are also fallacious interpretations of clause 27 circulating, based on an incorrect reading of clause 27.  The message that tenants can simply avoid paying rent arises from a misinterpretation; it is also unreasonable, as landlords have fixed costs that must be met. Fairness is a two-way street. 

The specific fine print in clause 27.5 states “A fair proportion of the rent and outgoings shall cease to be payable.” As with most contractual disputes, the outcome depends on a few key words, adopting a plain reading and having regard to context. The obvious issue is the meaning of "fair proportion." 

What is “fair?” 
"Fairness" is unlikely to mean zero. The same ADLS lease includes an arbitration clause. So if negotiations have failed and if this clause hasn’t been removed then the parties have agreed to refer all disputes to an arbitrator and not the Court. It could then be open for a tenant to argue that in contractually providing for an arbitrator, the parties have implicitly included the following wording into clause 27: 

“The parties agree that if they cannot agree on what constitutes a fair proportion of rent and outgoings for this clause then they shall appoint and arbitrator who shall determine what a fair proportion is, acting reasonably.”

So, what is a fair proportion in this context? I would argue that this would be produced by a suitable valuer adopting the overriding economic arguments relating to the business and its use of the premises. In essence, an economic analysis of the nexus between the use – or loss of tenant’s use – and the tenant’s business.

Different tenants are affected differently
The economic impact of COVID-19 has been uneven across industries. For example, if the tenant was a restaurant, then you would expect the use and business would be completely linked. Many such businesses have ended with the lockdown, so it would be fair for the tenant to have a substantial rent reduction – even as high as 100%. However, it may require an assessment of the business once all of the available subsidies and government supported banking facilities have been quantified.

However, if the tenant was a professional services firm, that had all its staff working remotely and the premises had little or no nexus with their business then the fair proportion could be nil. Any loss in business could be attributed to normal business factors outside of the premises, which do not necessarily fall under the landlord’s purview. 

Where do my rights stand as a landlord?
Ultimately, without amendment, the ADLS lease does not allow the Tenant to unilaterally stop paying the entirety or part of the rent. It can only do this by agreement, with a Court order, or as determined by an arbitration. Working through such situations in these times is at the landlord’s discretion, and any agreement with tenants should be recorded in writing – deeds are preferable but may not be practical under the current climate. 

Need to know more?
For consultation around your individual circumstances, please contact:

Edwin Morrison
Director, K3 Legal
[email protected]
021 243 5203

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