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FinanceComplianceSeptember 16, 2021

COVID-19 response: cases on abatement of rent and cancellation of leases during lockdowns

Tenant had arguable case for rent abatement 

In Coffee Culture Franchises Ltd v Home Straight Park Trustees Ltd [2021] NZHC 577, a tenant disputed a statutory demand by a landlord that required payment of rent and outgoings while the premises were subject to alert level 1 and 2 restrictions only. 

The landlord accepted that under the alert levels 3 and 4 there were restrictions that triggered cl 27.5 of the standard ADLS lease under which rent is abated or reduced where access is restricted during an emergency. But it said that cl 27.5 did not apply during alert levels 1 and 2 because at that time the tenant had regained full access to its premises.

Since the start of the Pandemic, the tenant had kept its cafe closed and had not paid the landlord any rent or outgoings. The tenant maintained that it did not have access to the premises and the rent had to be adjusted as a result under cl 27.5.
The tenant’s cafe was in Hamilton and was part of a larger commercial building with Inland Revenue as the anchor tenant. Inland Revenue had authorised most of its staff to work from home since the start of the lockdowns. The tenant said that this instruction restricted access to the cafe for most of its customers. 

The tenant had to operate its business from the premises at a minimum from 9 am to 5 pm on each working day. That reflected the fact that the cafe was to serve Inland Revenue staff and visitors to the offices of Inland Revenue and was not to serve the public generally.
The importance of Inland Revenue as an anchor tenant could be seen in 2 other provisions in the lease. The Crown could veto any request by the tenant for a change of use and the Crown could also veto any proposed assignment or sub-tenancy.
The permitted use under the lease was as a cafe and restaurant. To operate as a cafe and restaurant the tenant had to be able to have access to the premises for its staff, for contractors such as cleaners, for suppliers and also for customers. If customers could not access the premises, the business could not operate. When cl 27.5 said “the tenant is unable to gain access to the premises to conduct the tenant’s business”, that meant that those people could not access the premises as they normally would but for the emergency. 

The tenant said that the Inland Revenue restrictions on staff access to the cafe amounted to additional restrictions on access which went beyond the government’s restrictions imposed by the COVID-19 orders. It said that since the start of the pandemic the Inland Revenue offices had been de-populated, with little or no staff working there. Inland Revenue had authorised its staff to work from home rather than barring them from coming to work.

The Court considered that the practical effect was that the staff working in the Inland Revenue office were much reduced.
It was arguable for the tenant that when the Inland Revenue told its staff they did not have to come to work, (or alternatively they should not come to work), and the numbers coming to work were reduced, that was a measure within cl 27.5 to reduce or prevent any hazard (in this case, spreading COVID-19).

It was arguable that the directions to Inland Revenue staff had a practical effect on the tenant’s business. If Inland Revenue staff were discouraged from coming to their place of work, that effectively amounted to a bar on those customers coming to the cafe which was to service the offices of the Inland Revenue Department. The staff stayed away and similarly taxpayers who might have to deal with Inland Revenue were also discouraged from coming.
Without access by its customers to the cafe, the tenant’s business could not operate. There was an arguable case for the tenant that cl 27.5 had been triggered.
The debt was subject to a substantial dispute. The evidence that would be required to decide the final merits of the case was missing. The Court was not in a position to decide what might be a “fair proportion” of the rent and outgoings to be abated under cl 27.5. That matter of assessment could not be decided on an application to set aside a statutory demand. The application was therefore set aside.

Cancellation of lease was arguably invalid

In SHK Trustee Co Ltd v NZDMG Ltd [2021] NZHC 1895, a landlord claimed rent arrears and outgoings at full rates, including the periods of COVID-19 lockdowns when the tenant did not have access to the premises in Auckland.

The tenant was a kitchen manufacturer and kitchen manufacturing was not an essential service under the alert level regulations. There were restrictions on the tenant and its staff accessing the premises during the lockdown periods. The alert level 4 lockdowns required non-essential services to close and for staff to quarantine at their places of residence.

There were provisions in cl 27.5 of the standard deed of lease which provided for abatement of rent relief where tenants were prevented from gaining access to their property because of an emergency.
The landlord recognized that there should be a partial adjustment for rent during the alert level 4 lockdown but did not accept that there should be any reduction in rent for any other period. The tenant did not accept that it should pay any rent at all. All efforts to solve the dispute by arbitration had stalled.

The landlord lost patience and served notices to cancel the lease for non- payment of rent under s 245 of the Property Law Act 2007. The landlord made no allowance for abatement of rent because of any of the COVID-19 lockdowns.
When the tenant did not comply with the demand by the expiry of the notices, the landlord arranged the changing of the locks and re-entered the premises. The tenant had extensive goods, plant and equipment in the premises. The landlord used security agents to secure the premises and contractors to remove rubbish and tidy up the premises.

The landlord also claimed as damages for loss of rent from the time of re-entry until the hearing date.

The tenant argued that the COVID-19 was an epidemic under the definition of emergency in the lease. When the government imposed the lockdown restrictions the tenant’s access to the premises was restricted by lawful authority and they could not fully conduct their business. The rent, therefore, should have been adjusted.

The Court held that it was reasonable for the tenant to argue that its rent should have been abated during the lockdown periods as it could not use the premises for their business because they had to stay away from work. Manufacturing kitchens could not be done remotely from home. Manufacturing kitchens was not an essential service under the lockdown rules.

The lease provision cl 27.5 required an abatement of a fair proportion of the rent and outgoings when access was denied because of an emergency. This created difficulties when a landlord sought summary judgment, and it was arguable that cl 27.5 applied.
A fair proportion formula left room for legitimate differences of opinion as to how much should be paid. No evidence had been provided to assess that.

Assessing a fair proportion was an evaluative exercise that could not be done on a summary judgment application. It was a trial issue after a court had heard full evidence.

The landlord had evicted the tenant, but its notice under s 245 of the Property Law Act 2007 was arguably invalid for overstating the rent in arrears. The landlord demanded payment of the rent without any abatement of rental.

Accordingly, the notice did not adequately inform the tenant how much they had to pay by way of rent and outgoings.
If the tenant made out its case that the cancellation was invalid, there would be consequences.
The landlord had breached the covenant of quiet enjoyment and had substantially reduced the benefit of the lease to the tenant. The re-entry and barring the tenant from using the premises showed that the landlord no longer intended to perform its obligations under the lease. That was a repudiation of the lease.
While the cancellation might be invalid, it was still effective. The tenant had treated the re-entry as bringing the lease to an end. In fact, it might not have had any choice about the matter, because the landlord had security agents at the premises who strictly regulated entry into the premises and only allowed the tenant to return so as to take their own possessions away.
The obligation for the tenant to pay further rent and other amounts and observe other covenants also arguably ceased upon the re-entry.

The Court did, however, award summary judgment to the landlord for the full rent and outgoings for the periods of lockdown at alert levels 1 and 2 prior to the re-entry.
See the full commentary on the 2 cases at ¶26-412 (COVID-19 related rent abatement and lease cancellation cases) and the updated commentary at ¶26-410 (Abatement of lease rental) in New Zealand Conveyancing Law & Practice.

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