The unprecedented situation we are currently experiencing with COVID-19 is causing a great deal of uncertainty for commercial tenants and landlords alike.  As a business owner who leases premises, you may have had to close down your business completely for the time being, or you may be operating at reduced capacity from home.  If that is the case you are likely worried about how you will afford to keep paying rent on your commercial premises.  

Talk to your landlord

As soon as possible you should talk to your landlord.  Everyone is affected by the current COVID-19 situation.  Therefore it will not come as a surprise to your landlord that you are struggling financially and expecting to have difficulties paying the rent; they may well be in a similar situation themselves.  Your landlord may consider it worthwhile to reduce the rent for a period of time, because a lower rent amount coming in is preferable to having the premises vacant and having to look for a new tenant at this difficult time. 

Government’s COVID-19 financial support

If you are facing the prospect of not being able to pay your rent, look into the Government’s COVID-19 financial support package.  If you are an employer, contractor, sole trader, or self-employed then you may qualify for the COVID-19 wage subsidy.  This subsidy is a lump sum payment designed to help you meet essential costs over the next few months.  The Work and Income website (https://www.workandincome.govt.nz/products/a-z-benefits/covid-19-support.html#null) has detailed information about what is available and how to apply. 

No access in an emergency

If your lease was entered into after 2012, and is on the Auckland District Law Society standard form, it is likely to include a “no access in emergency” clause (27.5).  This clause provides that if there is an emergency which means the tenant is unable to access the premises to conduct business then a fair proportion of the rent and outgoings will cease to be payable. 

If the tenant remains unable to access the property for nine months (or such other period as the parties have agreed to in the first schedule of the lease), or if it can be established with reasonable certainty that the premises will not be accessible for that period, then either the tenant or the landlord may terminate the lease with 10 working days’ notice.

The “no access” clause was inserted after the Christchurch earthquakes, because of the scenario where business premises could not be accessed due to damage and/or areas being cordoned off.  The current level four shutdown of all non-essential businesses is a different kind of emergency, and tenants with businesses that provide non-essential services are now unable to access their premises to fully conduct business.  At this stage the second part of the clause relating to termination will not yet come into play, but the part relating to rent and outgoings not being payable may well, meaning that tenants may be able to have their rent and outgoings reduced for the duration of the shutdown.  This is uncharted territory for commercial leases in New Zealand. It remains to be seen what might be considered a “fair proportion” of rent and outgoings that the tenant will not have to pay. 

An older version of the lease, one that has been varied or had clauses deleted, or one that has been uniquely drafted may not contain this sort of clause.  It is imperative that you talk with your legal advisor to see if your lease includes a “no access” provision, and to discuss how this might be relevant to your particular circumstances.

Landlord can cancel the lease

Paying rent is an essential term of a lease, so failure to pay it is a breach of the tenant’s obligations under the lease. 

If rent has been in arrears for 10 working days or more, the landlord can issue a notice of their intention to cancel the lease.  The Property Law Act sets out strict requirements for what that notice must contain, including allowing a reasonable amount of time (at least 10 working days) to pay the rent.  If the tenant does not pay the rent within that specified period of time, the landlord may then cancel the lease. 

The landlord’s notice should also advise the tenant of their right to apply to the court for relief against cancellation of the lease.  In general a court will prevent the cancellation of the lease if the tenant can pay the rent and any other associated costs, but if they cannot then the cancellation will likely go ahead.  Once the lease is cancelled, the landlord can re-enter the premises and change the locks. 

In practical terms, it may not be possible for a tenant to take the matter to court during the shutdown.  You should talk with your legal advisor about the practicalities of pursuing legal action at this time, to make sure that you are not unfairly disadvantaged. 

What about the rent arrears?

Even if a lease is cancelled, the tenant is liable for any money owing (rent arrears and anything else they have agreed to pay for). 

The tenant may be an individual or a corporate entity such as a company.  The tenant’s assets – whether personal if they are an individual or commercial if they are a corporate entity – must be used to pay what is owing, which may involve using savings or selling tangible assets.  This obligation could lead to a very serious situation for the tenant, as they may have to declare bankruptcy (if an individual) or wind up (if a commercial entity) if they do not have sufficient assets to meet their debt.

Is there a guarantee?

Many commercial leases have a guarantor who has signed along with the tenant and landlord.  The guarantor is a person who agrees to be personally liable for the tenant’s obligations under the lease in the event that the tenant cannot meet them.  This includes liability for rent arrears.

If a tenant cannot pay their rent the landlord is entitled to call upon the guarantor, and can do so before issuing a notice of intention to cancel as referred to above.  The guarantor is legally obliged to personally pay whatever is owing.   Often the guarantor is the individual person or persons behind the tenant entity – for example the people who are Directors of the tenant company – but in some cases they may be a third party. 

If the guarantor is able to pay the rent arrears then the lease can continue.  However in the current circumstances, a guarantor may find themselves in the difficult situation of having to sell assets, or even declare bankruptcy, if they cannot afford to carry out the guarantee.

So what should a tenant do?

If you are in the position of being unable to pay your rent because of COVID-19, it would be best to be upfront with your landlord. 

If you do agree to any form of rent reduction, or any other variation to the terms of the lease, you must record this in writing.  If possible, you and your landlord should each sign a copy of the written agreement, which can be done in separate copies that are scanned to each other.  If that is not practical (for example because you cannot print or scan) then you can set out the agreement by email to each other.  The most important thing is that you keep a documentation trail which can be referred to later. 

You should also seek legal advice as soon as possible.  Your legal advisor will be able to help you work out your rights and obligations under your own lease including if a “no access” clause applies, negotiate some form of payment plan or reduced rent period, apply to the court for relief against cancellation of the lease, or deal with cancelling the lease altogether if appropriate. 




Louisa Gommans
Senior Solicitor
Wellington