Covid-19 coronavirus: will commercial/retail/industrial tenants pay for premises they can't use?

New Zealand's premier office stock in Auckland's CBD heart. Photo / file

Residential tenants enjoy a rent freeze and anti-eviction measures under the Government's new anti-coronavirus emergency legislation but questions are being asked about the multi-billion dollar rent liabilities of office, retail and industrial tenants.

Those businesss don't benefit from the new law, so what is their fate, given shops are shut along with restaurants and bars and all but non-essential workers have been sent home?

From Whitcoulls to The Warehouse, from lawyers to labourers, goods distribution centres to food courts, florists to $2 shops, restaurants, cafes and bars - all must now stay away from premises they leased.

Do they have to keep paying for places they can't trade from or operate in? And if so, for how long?

On Tuesday, giant landlord Kiwi Property said it had "identified a small number of tenants, relative to the total number of tenants in its portfolio, with a contractual right to suspend rental payments if they are unable or chose not to occupy or utilise their premises because of the Government order."

If those tenants were all out for the entire four-week shutdown, Kiwi estimated a $6m loss but played it down, saying this was under 3 per cent of last year's gross rental income. It pointed to being flush with loan potential. Kiwi also this week refinanced $214m of debt facilities on five-year terms and it has $303m in undrawn credit lines, it said.

But it might be insensitive to even think about this during this time of national crisis.

Campbell Barbour of NZ Retail Property Group, which owns the Milford Shopping Centre and Massey's huge Westgate, said this week now was not the right time to discuss commercial issues like rent payments.

ALERT_STAGES

One thing is for sure: clauses in the Auckland District Law Society standard lease agreement govern most of the sector.

Landlord David Hay of Mt Roskill has Aussie Butcher and Fruitworld as tenants. The butcher had been "stocked up to serve the public and has now been shut down with freezers jampacked with meat and no sales". Hay objected to butchers not being regarded as essential.

Daniel Kelleher, a partner at law firm Buddle Findlay, says the Covid-19 alert Level 4 triggers the rent abatement clause in the society's current deed of lease edition.

New Zealand's premier office stock in Auckland's CBD heart. Photo / file

"The abatement starts when the tenant cannot gain access to the premises and finishes when the reason for non-access is over. The lease also has a period of time of non-access after which either party can terminate. This period is often set at around nine months. Other forms of lease approach this issue differently. Some may have no right to abate rent at all. Others may take a slightly modified version of the ADLS clause," Kelleher said.

Chris Wilkinson says landlords responded differently to the crisis. Photo / Mark Mitchell

Leonie Freeman, Property Council chief executive, said on Friday that real estate was "the home of business, any crisis that affects businesses will also affect property owners. We are hearing of a multitude of scenarios regarding rental payments. At one end of the spectrum there are many landlords working constructively with tenants on their particular situations and discussing rent relief such as postponement or other relief measures. But there are many examples of large tenants sending letters announcing they are refusing to pay rent with no consultation. This move could devastate the commercial, industrial and retail property sectors."

Chris Wilkinson, managing director of specialist business First Retail Group, said landlords had responded differently for the crisis: "Talking with one franchise group with around 30 sites, they have had responses ranging from total forgiveness of rent over the next four weeks to no consideration. It seems to depend on the type of property owner with smaller investors more challenged than larger owners who are approaching in a structured way. For some this will require board decisions, so relief may not be immediate as the bigger players develop a policy in how this happens."

Leases are commitments with many covered by personal or company guarantees, Wilkinson said. Tenants are financially liable, with significant risk if they fail to pay rent.

"The situation now though is unprecedented and there is a strong moral obligation on property owners to consider reduced rentals while tenants are unable to earn anything from affected sites," Wilkinson said.

Joanna Pidgeon, who was involved in drafting lease changes. Photo / supplied

Joanna Pidgeon of the Auckland District Law Society's property law committee says that after the Canterbury earthquakes and red-zoning parts of Christchurch, the society reviewed its commercial lease agreement - so widely used across NZ - and inserted the no access in emergency clauses 27.5 and 27.6, which include plague and epidemic as emergencies.

"For these clauses to activate, there has to be a situation of inability to access the premises, likely to be in the current scenario a Government edict. Currently edicts are in relation to numbers of people allowed to gather inside but do not apply to workplaces. I was on the committee drafting the clause, and while we talked about plagues and epidemics it seems surreal to be examining the clause and how it works in practice today." Pidgeon said.

Some other leases may have force majeure clauses, which will need to be examined to see whether they may apply, she said.

These will usually relate to matters outside of control which stop parties from performing material or time sensitive obligations - for example completing construction of new premises by a due date. These might not cite epidemics but might refer to "events or circumstances beyond either party's control" which may cover Covid-19, she said.

The doctrine of the frustrated contracts under common law which is dealt with under the Contract and Commercial Law Act 2017 may apply, Pidgeon thinks.

David Whitburn, a former commercial lawyer-turned-property investor, said many businesses were now struggling for cash, laying off staff and slashing hours so savvy landlords might restructure leases for rent holidays or reductions.

What happens to those tenants who can't afford to keep paying rent? Photo / file

"Obviously having a tenant in receivership or liquidation virtually guarantees no payments and the market for looking at new tenancies is greatly reduced," Whitburn noted.

He warns tenants not paying rent to beware that landlords can cancel tenancies by giving 10 working days written notice. Mass tenancy cancellations aren't prudent given the shutdown is only four weeks and most businesses could operate in some capacity, he thinks.

"It is not for everyone to work at home for the long-term. If you want to keep your premises, talk to the landlord first to ensure they don't terminate the lease."

• Covid19.govt.nz: The Government's official Covid-19 advisory website