Lockdown lease disputes – recent decisions provide hope

It’s now over a year since the first Covid-19 lockdown was ordered by the Government, as a result of which many commercial landlords and tenants suddenly found themselves in conflict over lease obligations.

Unfortunately, despite that time having passed, many landlords and tenants are still in dispute, and still uncertain of their lease rights and responsibilities – even though many leases contained provisions intended to give some rent abatement in that type of ‘no access’ situation.

Two recent decisions offer tenants some further encouragement (see below).

What does the lease say?

First, some background. The best known and most common of the ‘no access’ provisions in use is the now-famous clause 27.5 which was included in more recent ADLS Deed of Lease forms used by many landlords. Under the heading ‘No access in emergency’, this provided that:

If there is an emergency and the Tenant is unable to gain access to the premises to fully conduct the Tenant’s business from the premises because of reasons of safety of the public or property or the need to prevent reduce or overcome any hazard, harm or loss that may be associated with the emergency including:

(a) a prohibited or restricted access cordon applying to the premises; or

(b) prohibition on the use of the premises pending the completion of structural engineering or other reports and appropriate certifications required by any competent authority that the premises are fit for use; or

(c) restriction on occupation of the premises by any competent authority,

then a fair proportion of the rent or outgoings shall cease to be payable for the period commencing on the date when the Tenant became unable to gain access to the premises to fully conduct the Tenant’s business from the premises until the inability ceases.

After a flurry of legal debate initially, it has now been generally accepted that Covid-19 lockdowns which prevented the tenant from accessing their premises, or limited their ability to operate from those premises, would be likely to trigger this clause and, as a result, the need to decide what ‘fair proportion of rent or outgoings’ should cease to be payable.

But …

Because no formula or guidance was given as to what is ‘fair’, and many landlords and tenants have conflicting interests, negotiations under clause 27.5 often turned into a ‘win/lose’ negotiation. Many landlords and tenants haven’t been able to agree what rent or outgoings amounts should cease to be payable.  

At Goodwin Turner, we observed that many early negotiations conducted around this time last year were done under considerable pressure for both sides, at a time of incredible uncertainty. As a result, it appeared that many landlords and tenants who negotiated their own abatement deals often did so on a fairly simplistic basis just to get ‘something’ agreed. 

Those sorts of simplistic abatements agreed initially for the level 4 lockdown have however, been more difficult for parties to reach over subsequent lockdowns – particularly when those lockdowns were less restrictive ones (alert levels 1-3 for instance) that didn’t completely prevent any access, but might still have limited ability to ‘fully conduct’ the tenant’s business.

As a result, there are many disputes still unresolved, and those affected are still looking for (a) cost effective ways to resolve the situation, and (b) greater certainty about what might happen if they continue to argue or have a 3rd party decide the matter.

Two recent decisions 

Each case is specific, and there aren’t yet many good precedent setting decisions that anyone can take guidance from or rely on. Anyone still locked in a dispute should take their own legal advice on their own circumstances.

As a general comment, however (and not as legal advice to be relied upon!), we note the following:

(a)    One already-decided arbitration decision (called an ‘award’) was heavily in favour of the tenant, who operated a hospitality business. The arbitrator in that instance clearly took the view that the decision over what was fair should be based around the tenant’s circumstances and not the landlord's, and said that the tenant only had to pay 10-20% of the rent (ie. an 80-90% abatement) and 50% of the outgoings during both Level 3 and Level 4 lockdown periods. They also gave significant abatements during level 1 and 2 lockdowns. 

That was much more than the landlord in question had been offering, and this particular tenant benefitted greatly from taking their dispute to arbitration.  The benefit of that award will only be increased if we have further lockdown periods in future.

(b)    A very recent court decision (Coffee Culture Franchise Limited v Home Straight Park Trustees Limited [2021] NZHC 577) gives further encouragement for tenants, and will be of concern to landlords. It was a decision focused on some other specific matters (regarding the landlord’s attempt to use statutory demand processes), so doesn’t set a definitive precedent, but the relevant Judge made a number of comments that support arguments tenants have been making and may give tenants additional arguments/claims to consider pursuing. For instance:

i.  No setoff or deduction: The landlord’s lawyers argued that despite clause 27.5 creating this abatement right, other clauses in the lease prevented the tenant from making any ‘deductions’ or ‘set-offs’ from the rent. Essentially, the landlord argued that while the exact abatement was still in dispute, the tenant must continue to pay the full original rent and then later claim back any overpayment after the dispute is resolved. The Judge clearly indicates his view that clause 27.5 operates to ‘re-set’ the rent for the relevant period, and this could be useful for tenants as it allows them to deny that the tenant is improperly deducting anything.

Although later decisions will decide if this Judge was correct and there is a binding precedent to follow, for now tenants may take encouragement from these comments, and they may assist tenants to resist landlord demands/threats, and resulting attempts to use means such as statutory demands to create extra pressure, if full rent isn’t paid while the ‘fair’ abatement is still in dispute; and

 ii.  Wider ability to claim ‘no access’ at lower alert levels? In this case, some of the tenant’s claims for abatement of rent came during lower alert levels where the tenant could open their business (a café within an office building), but faced lower demand because of Covid-19 decisions by other occupiers of the building about how to staff their office in order to mitigate Covid-19 risks. The Judge indicates a view that the reduced numbers of customers in the building could also constitute a lack of ‘access’ for the tenant that could also entitle the tenant to an abatement of rent.  

Other café operators may want to have a close look at this decision, and keep an eye on any subsequent decisions that follow, to see if they can make additional abatement claims at levels 1 and 2.

Updated - Arbitration & mediation scheme extended

Most leases with 27.5-style clauses will provide for the parties to resolve disputes in arbitration (which is essentially a faster and less formal alternative to the Courts, and still results in a third party deciding the issue). For smaller businesses and some landlords, though, the costs of arbitration can still be prohibitive.

When unable to get other promised ‘rent relief’ schemes over the line (seemingly for political reasons), the current Government did create a subsidised arbitration and mediation scheme to make it easier (and more affordable) to resolve these disputes.  That scheme would cover the costs of mediations or subsidise arbitrations by $6,000 (which was sometimes enough to fully cover the costs of simple disputes).

The cases mentioned earlier in this article may further motivate some tenants to seek arbitration of their disputes. Unfortunately, however, that subsidised scheme closed to new applications in March this year. The Government has been lobbied by us and others to re-open the scheme, since the initially allocated budget had not yet been exhausted and the same reasons the scheme was required in the first place continue to apply. When we asked the Justice Minister’s office about the potential for extension of the subsidised arbitration scheme, a spokesperson replied: ‘Unfortunately we are not quite at the point to be able to announce anything imminently, although work is happening. I just don’t have a timeframe on when anything might be announceable.' 

Those comments seem to suggest that the scheme (in some form) may be revived in future, but since the Government went further last year and announced with certainty that certain lease-dispute assistance would be provided and then failed to deliver what was promised, we can’t suggest anyone relying on Government help coming for tenants!

In the meantime, even if the subsidy isn’t available, and tenants might have to bear some costs of going to arbitration, some tenants might still want to consider it if the potential benefits of any decision or 'award' might justify it.

While there is at least some suggestion the subsidy could be revived, and because no one needs more cost right now, parties might still like to hold off going to arbitration for the present if possible, to take a ‘wait and see’ approach. The Judge’s comments in the Coffee Culture case mentioned above might help with fighting off particularly aggressive landlords' threats in the meantime.

Update - On 11 May, the Ministry of Justice advised that the Dispute Resolution Scheme aimed at helping resolve commercial lease disputes arising from Covid-19 is still available, but that eligibility will be considered on a case-by-case basis.

More to come

We will provide further updates if there are significant changes to the positions described in this article, but as there are many parties still locked in frustrating and stressful dispute situations, we hope the comments above are of some assistance in the meantime.

Note: this article is provided for general informational purposes only and is not to be relied upon as legal advice. We recommend any parties with concerns over their lease rights or responsibilities seek specific legal advice regarding their particular situation.

We welcome links from other websites to this article. Please note that this article is copyright © Eden Exchange NZ Holdings Limited, Franchise New Zealand magazine and Franchise New Zealand On Line. While it may be downloaded for personal use, no part may be reproduced on any other website, in electronic or printed form or in any other form whatsoever.