ADLS Lease No Access Provisions and Covid-19

Wednesday 5 May, 2021

During Covid-19 related lockdowns in 2020, the no-access provision in the Auckland District Law Society (ADLS) deed of lease (clause 27.5) gained lots of media attention. Lawyers, landlords and tenants debated whether Covid-19 was an emergency to which clause 27.5 applied – the common response was that yes, it was.  A recent High Court decision supports that view. 

Clause 27.5 of the ADLS lease allows for a fair proportion of rent and outgoings to cease to be payable where there an emergency and the tenant is unable to access the premises to fully conduct the tenant’s business.

Background

In this case, the tenant leased premises to operate a café in an office building in Te Rapa – the anchor tenant of the premises was the Inland Revenue Department.   The lease was on standard ADLS terms (including clause 27.5) but had a number of additional further terms which show a relationship between the tenant and IRD (i.e., the tenant was to open 9am – 5pm Monday to Friday and IRD could veto any assignment request).

The tenant closed the café when the Alert Level 4 lockdown started and kept it closed through to December 2020.  The tenant did not pay rent during this time.  The landlord issued a statutory demand for unpaid rent and outgoings but did not claim rent and outgoings during Levels 3 and 4.  The landlord considered that the tenant should pay rent during Levels 1 and 2 because the national state of emergency had ended, and the tenant was able to operate the cafe. However, the tenant claimed it could not operate its business because IRD had instructed staff to work from home, resulting in no customers.

The Judge could only set aside the statutory demand if there was a ‘genuine and substantial dispute’ about the existence of the debt. There would only be a dispute if clause 27.5 applied during Levels 1 and 2, although the Judge would not have to determine what the fair reduction in rent and outgoings would be.

Clause 27.5 and the obligation to pay rent without deduction or set-off

The ADLS lease requires that rent be paid without ‘deduction or set-off’. Previous case law implied that a tenant would need to pay full rent and then bring proceedings for the overpaid rent.  The Judge held that the lease cannot have intended this. An abatement under clause 27.5 is not a set-off, rather clause 27.5 creates a ‘new rent’.  A tenant is not required to pay full rent in an emergency and then attempt to get a refund / credit for an overpayment at a later date.

Was there a substantial dispute – could the tenant access the premises to conduct its business use?

The permitted use in the lease was for a café.  To use the premises for a cafe, customers must have access to the premises. When IRD told its staff to stay working from home, it was to ‘reduce or prevent hazard’, as provided for in clause 27.5.  This stopped staff accessing the building, which stopped café customers accessing the building. Without customers, the café could not fully conduct its business from the premises. The Court set the statutory demand aside on the basis there was a substantial dispute.  The Judge noted that a statutory demand was not the appropriate avenue for rent recovery in the situation, as the landlord was seeking a determination on an issue that had not been tested by the court. The landlord and tenant will now need to try and negotiate a fair reduction in rent for the period that the café remained closed, or the landlord may issue proceedings to recover the unpaid rent.

Although the tenant’s position was unusual, in that its business largely relied on the presence of IRD staff, rather than foot traffic, this case shows that clause 27.5 can potentially apply to more than just the period that New Zealand spent at Alert Levels 3 and 4. Most landlords and tenants reached agreement last year on what a fair reduction in rent was, but the few who did not may be watching this case with interest.