LETS GET DOWN TO BUSINESS.
Anonymous
@anonymous
Question :
Hello, we are a small business. We own a small building in a central city. It is currently let by a very globally well known tenant, that owns an equally well know NZ company. The lease we have contains the No Access clause 27.5. I would appreciate any views around how much risk should be considered when determining a fair proportion of rent to pay. There is alot of focus on tenant ‘use’ but surely the word “fair” in the clause should bring into consideration risk and which party is better placed to bear it . This particular tenant negotiated hard as soon as lock down was announced. This premises forms a very small part of their business, Ithey are an essential business and are able to continue this from several other locations around the country. Other small business in the same trade are currently making use of their premises to continue in very small capacity. This tenant has decided to shut up shop and cut costs. According to its official ‘use’ 1/3 of its floor space is unable to carry out its normal use due to covid 19. Our business only has this income as its sole income. The tenant has multiple streams of income. The more I read about this clause , the more I realise it is not cut and dry. It would be interesting to get a view from one of the specialist commercial lawyers on board about placing more weight on each side’s ability to bear risk. May is looming and this tenant will be requesting further discount. I did seek initial legal advice on ths clause but in the end, it did nopt really add much assistance as this clause has not been deliberated in court.
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Hi there,
Moving to level 3 will give you an opportunity to review the abatement for next month (unless you have already agreed this in writing? – check what you have agreed, if anything).
At level 3, the interpretation for clause 27.5 will focus around the extent to which a tenant can “fully” conduct business from the premises. If they can fully operate, but choose not to, I would argue that there is no (or very limited) abatement.
It will depend on the individual circumstances and to the extent the tenant can “fully conduct” their business. It sounds like they can conduct 2/3rds of the business during level 3 (which might only be 2 weeks) – so could a 2/3rds reduction for this 2 week period be a compromise?
You should also consider the long-term implications of the decision: what will be the long-term impact of a refusal to allow a meaningful rent abatement?
– Does it mean that you will have to go to arbitration to determine what a fair and reasonable amount is? The cost of arbitration is likely to outweigh a short term rental abatement.
– Does it mean that the tenant might default on the lease? The costs of pursuing the defaulting tenant and guarantors is likely to outweigh a short term week rent abatement. Sounds like this is unlikely if they are a big outfit.
Hope that helps, but happy to chat on 021 705 914.
Phil
Further to Phil’s response, the Property Law Section of the New Zealand LAw Society has just come out with this list of factors which will likely inform what is a “fair” proportion which will depend on the individual circumstances
• A ‘fair proportion’ should be fair having regard to the circumstances of both
landlord and tenant (by definition a proportion cannot be to pay all or nothing)
• The extent to which the tenant is still using the premises for some purposes (for
example, partly for essential services)
• Balance of the term of the lease
• Nature of the premises and, accordingly, the proportionate change in use and
enjoyment of them while the inaccessibility to fully conduct the tenant’s business
lasts (bare land, retail, offices, warehousing or industrial)
• Whether the tenant is able to conduct business remotely (also taking into account
its use of servers/equipment at the premises (benefit from the premises))
• Value inherent in the premises (for example, fitout, storage, goodwill, business
continuity)
• Rights of termination if the non-access continues
• Tenant’s ability to continue to its business
• Impact on the tenant’s ongoing viability if required to pay the rent (taking into
account any government assistance the tenant may be able to receive)
• the financial position and commitments of the landlord (for example, is the
property mortgaged)
• The landlord’s costs in holding and managing the property (for example, the
landlord’s mortgage obligations and other costs such as ground rent)
• A ‘fair proportion’ may differ as between the rent and outgoings.
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