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LETS GET DOWN TO BUSINESS.

Question :
HelloI own commercial property.  One of my tenants has clause 27.5. They told me they were paying nothing, then told me they would pay 50% and weren’t negotiating.They are back in the building, operating as of the 28th and have told me that they will only pay 75% during level 3.If they have full access to he building then how can they expect to only pay 75%?  Does clause 27.5 allow for this?  If it dosent are they I. Breach of their lease and I can go down that route?Thanks

Question submitted 30/04/20 @ 06:52pm
Industry: Property
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  • Hi there. Unfortunately 27.5 isn’t clear on % allocations based on access. We have always encouraged Fair and open communication between the parties.

    What type of business is it? Office, retail or industrial?

    There are also other opportunities for you to drive value out of the asset. You could get them to exercise their right of renewal, or lengthen their lease as a way to recoup some of the lost value from not paying rent.

    Happy to help out with more specific details if we can. lloyd.budd@bayleys.co.nz

    All the best.

    Great question and one at the forefront of a number of both Tenant’s and Landlord’s minds right now. We operate a property management company and have spent the best part of April carrying these out and every case is different.

    Here is a useful link that adopts a pragmatic approach to this and provides some further insight into the origination of clause 27.5.

    https://www.hobec.co.nz/news-resources/2020/april/update-the-adls-lease-and-epidemics

    Tenants are more important than ever right now and you will know how attractive your building is to determine how tough of a stance you want to take with your tenant. If it is a highly specialised building, i.e. there won’t be a huge demand pool out the other end of this Covid turbulence, even more reason to work with the tenant.

    It sounds as if you feel your tenant is being unreasonable. Ask yourself how important your tenant is to your own financial position and what you would be prepared to do to keep them. Many landlords we have been working with have offered 50% for April and then a further gesture into May and even June to help tenants get back on their feet. The requests of your tenant are not out of line with what we have heard from the market, however, it sounds as if the delivery of their rent discussions could be improved.

    Lloyd made a good suggestion to extend the lease term to the value of the concession to the lease tail. It does sound like there is a bit of tension between you your tenant and the best way to win an argument is to avoid it. Tenants will remember their landlords when they needed financial support and if you are front footing the support to your tenant, this goes beyond the legal discussions and looking into the fine print of which there isn’t any for a pandemic and instead, let common sense prevail.

    Again, I am unsure of your own financial position and landlords in many instances are left holding the baby in that there isn’t any such discount or relief offered to them from their banks – merely a deferred principal and in some cases, interest plan, but it is still payable in full, so it is a tough pill to swallow.

    In my humble opinion if you can financially take the short term hit, do it for the long term gain.

    Cheers!

    Blair

    Hi, good to hear from a landlord.

    Clause 27.5 does nor grant automatic rights to a tenant to cease paying rent or to arbitrarily reduce the rent because the tenant cannot access their premises.

    The clause requires the tenant to pay a fair portion of the rent while they are unable to access the premises. What constitutes a fair portion of the rental is a matter for negotiation between you and the tenant. In my opinion depending on the fact scenario, a fair portion may range from 20% to 60% plus rates and insurance.

    While it is clear that under level 4 they were unable to access the premises, therefore clause 27.5 could be invoked. However, if under level 3 they are back in the premises, then it would be hard for the tenant to argue that clause 27.5 applies and the rent should be reduced.

    While the above comments address the contractual perspective I would also encourage you to consider the pragmatic perspective. How is your tenant impacted by the lockdown, what is their likely cashflow situation and if you provided some short term rental relief would the tenant be able to sustain their lease and pay you rent long term?

    Are you able to trade short term tent relief for extra tenure etc?

    Without knowing more facts its hard to advise to a pragmatic solution for you.

    Trust the above helps.

    Cheers
    Marcus

    From a legal perspective, clause 27.5 can still apply under level 3. The extensive control measures required for businesses to return to their premises will effectively mean that some businesses won’t yet be able to access their premises. For other businesses, the restrictive nature of the control measures will likely mean that they still cannot “fully conduct” their business from their premises (like restaurants who are only able to offer takeaways, and some businesses where the distance requirements mean that they cannot have everyone in the office at once). If however your tenant is able to access the premises to fully conduct its business even with the tight restrictions, then clause 27.5 should not apply. So, as the experts above have noted, the legal position depends on the particular facts of the situation in every case.

    The “fair proportion” reference in clause 27.5 relates to the degree of access your tenant legally has. However, as landlords and tenants try to work through the unprecedented nature of this pandemic, we have seen the parties bring the concept of “commercial fairness” into the discussion and take into account other factors. However, pragmatic negotiations can be difficult to have, especially where the tenant is reluctant to communicate (and it does sound from the way you describe negotiations to date as though the tenant could do better on this front). Apologies if this sounds trite to say, but we do find clients often have more productive negotiations over the phone than email. Overall, though, I agree with the comments of the experts above who encourage you to consider the bigger and longer-term picture. What effect would a PLA notice have on your tenant? Has this tenant has been reliable and paid on time pre-Covid-19? How easily/quickly, taking into account the uncertain economic times we are heading in to, will you be able to replace the tenant? Would having the tenant agree to extend/renew their lease help you? (Also note that there are questions about whether a landlord can issue a valid PLA notice if the rent is in dispute, and if you do decide to serve one, be aware that the Government has extended the remedy period from 10 to 30 working days.)

    Please let me know if you have any queries about the above, and I will try to answer them, and good luck.
    Amanda

    Thanks. It’s an early childhood centre which is therefore receiving full ministry funding and they have pandemic insurance. And I own and operate childcare centres. So I’m ready to move in. They are in, they are operating, they have full income via finding & insurance. By not paying us he in breach, can I issue a remedy notice and if not corrected, evict? Thanks

    I would like to talk more. Could I email you.

    Hi Natasha. Happy to help. Please email amanda.spratt@minterellison.co.nz

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