As businesses put emergency measures in place to cope with the rapid economic impact COVID-19 is having on all sectors, one of the areas of focus will be reviewing large fixed overhead costs such as property leases. We are actively involved with helping a number of clients already in this area.
Most leases typically do not have force majeure provisions, apart from when the premises are destroyed or damaged in events like fires or earthquakes. There are exceptions, including the most recent editions of the Auckland District Law Society Lease (ADLS) and other hybrid lease forms.
Whether you have an abatement clause or not, if you are considering your options to reduce rental costs in the short-term to help get through COVID-19, you really need to sit down with your landlord and draw on the wider relationship.
A lease is clearly a legally-binding contract which is not easy to break or vary without the consent of both parties. But a lease is also a business relationship between two parties that are reliant on each other. The tenant needs the space (office, retail, industrial, specialist) to operate their business from. The landlord needs the tenant to pay rental to create an income stream. Without each other, there’s no sustainable future.
Here are some practical things you can explore:
As noted, some leases have automatic abatement provisions like the current versions of ADLS, where clause 27.5 gives immediate rent abatement for “no access in an emergency”. A pandemic and national emergency like COVID-19 and the forced lock-down certainty qualifies in most practitioners’ views. Some of these clauses are linked to the landlord being able to claim on their ‘loss of rents’ policy. This again should be straight-forward given the circumstances in play. Tenants typically pay for the loss of rents policy via their Operating Expenses. At times like this, they would expect landlords to do all they can to claim against these policies.
We are seeing some landlords happy to spread rental for the next 4-12 weeks over the balance of the lease term. This helps soften the impact by reducing the monthly rental and improving cashflow.
Extending Lease Term
We are also seeing deals being done where any deferred rental is accounted for by adding extra months to the existing lease term. While this also helps, be careful of not creating an additional contingent liability for your business.
Where leases are due to expire or be renewed in the next 3-6 months or so (or maybe longer for larger leases), there could be an opportunity to renegotiate and restructure the lease, including obtaining some form of rent-free incentive. In the current uncertain times again, directors/senior managers need to be cautious about committing to new leases. Equally, this period may create some commercial leverage as landlords will be very keen to secure/re-secure long-term tenants and income certainty.
In considering these options, it is important to also understand the circumstances of the landlord:
- Smaller landlords may themselves be under financial strain if they are heavily geared or topping up any debt repayments from other income sources. Therefore, getting any temporary rental relief from a rent holiday or similar may be more difficult
- Larger landlords with extensive portfolios however should be able to weather the storm better. If they truly value the long-term relationship between the parties and see a lease as a symbiotic relationship and not a pure contract, they should be thinking about the long-term viability of their clients/customers (ie tenants). Landlords should assess the impact of COVID-19 on each of their tenants’ businesses and put in place relief where needed. In my view, this should extend to cancelling or deferring rent reviews which only potentially add additional costs to businesses and stress
There is a lot of online advice from others in the real estate sector and the legal sector on what to do, which is helpful.
We’ve spent 30 years working closely with tenants to support them through a wide range of lease negotiations and renegotiations. If you need some support with these conversations, please get in touch. We can help – it’s what we do.
Auckland Team (covering Auckland, Hamilton, Tauranga and northern NZ region)
Wellington Team (covering Wellington and balance of NZ including South Island)