IMPACT OF COVID-19 ON COMMERCIAL LEASES
Landlords and tenants have been eager to know their rights and obligations under commercial leases as a result of COVID -19. At this stage, most interest is in regard to the payment of rent and outgoings. Below are some general comments for landlords and tenants to consider.
When will a Reduced Rent Apply?
The most recent versions of the Auckland District Law Society Deed of Lease state that a fair proportion of the rent and outgoings will cease to be payable in the event the tenant is prevented from having access to the premises in an emergency. COVID-19 falls within the definition of an emergency. Whether the tenant is operating an essential service may be relevant to whether they are prevented from having access to the premises.
So under this version of the lease, in an emergency situation, where the tenant is prevented from having access to the premises, a landlord will be obliged to reduce a tenant's rent and outgoings by a fair proportion. So how much is a fair proportion? This will depend on a number of factors and we suggest that advice is sought in this regard. Unless relevant guidance is issued to the contrary, a degree of negotiation between the parties may be required. We are happy to assist with those negotiations.
What if I have an older ADLS Lease or I don’t have an ADLS Lease?
Older form ADLS leases do not include the provisions relating to a reduction in rent and outgoings in emergency situations. There are also numerous other forms of a lease in circulation that do not have these terms.
In these situations, the position with regard to payment of rent and outgoings will be a matter for negotiation between the landlord and tenant. From a landlords perspective they may like to consider:
Would it be advantageous to agree to rent and outgoing reductions in exchange for agreed variations to the term of the lease or other lease clauses?
How easy will it be to remove a tenant and find a new one?
What will the rental climate be like at the end of the COVID-19 situation? It is likely to be very different than before.
A tenant may have other legal arguments for non-payment of rent, especially while we are at Alert Level 4, but these are more complex and would have a higher threshold to meet.
Insurance and Government Subsidies
Tenants impacted by COVID -19 should contact their insurance brokers to see if their insurances cover losses resulting from the current business interruption. Landlords should enquire as to whether they are insured against loss of rent.
There will be many different scenarios that could arise in relation to insurance and different policies are likely to have different levels of cover. The insurance implications of COVID-19 may take some time to fully play out. We would suggest being aware of your insurance cover and obligations before finalising any arrangements between the landlord and tenant.
Landlords and tenants will be aware that there are also a variety of government subsidies in place. Details of these subsidies are available on various government and other websites.
Each case will be different so specific advise should be sought in relation to each lease.
Davenports Harbour Lawyers remains available to assist during the current situation. If you would like advice in relation to your rights and obligations under a commercial lease or any other commercial contracts please get in touch and we will be happy to help.
Employers: What are the NEXT STEPS?
Firstly, we hope you and your families are safe.
We understand that this is a difficult time and that many of you are still be working through logistics of how the lock-down period is going to work for you and your business.
If you have not already done so, we recommend that you urgently carry out an analyse of your fixed costs and see where you may be able to wipe, reduce or defer those costs in order to minimise your overheads during the lock-down period. Landlords are an obvious first port of call in relation to rent reduction and we have a bulletin coming out tomorrow which deals directly with this issue. If you need urgent assistance with this, please call Jeremy Parsons on 09 915 4381.
In terms of your employees, these are the things that you now need to be thinking about:
- Working from home: If your business is continuing to operate with staff working from home, we recommend having a working from home policy in place (which covers, among other things, the health and safety obligations of both parties).
- Wage Subsidy and using “best efforts” to pay staff 80% of their normal income: The purpose of the wage subsidy is to ensure there is a viable business at the end of this lock-down period. The government is anticipating that you cannot continue to pay your employees 100% of their usual wages when most businesses have no revenue during this lock-down period. To apply for this subsidy you will need to declare that you have used you "best efforts" to pay your staff 80% of their normal income. If you are unsure about how to apply this criteria to your situation, or cannot pay 80% of normal income to your employees during the lock-down period please urgently get in touch.
- Restructure/potential redundancies: If you are concerned about whether you need to restructure and potentially disestablish positions in your business now, please contact us to discuss.
- Annual Leave: We understand some employers are seeking to have their employees take annual leave during the lock-down period. Keep in mind the following things:
- You cannot force employees to immediately take their annual leave (but you can, after 14 days' notice to the employees of this requirement)
- The wage subsidy cannot be used to pay out annual leave entitlement
- Seek Agreement: Employment laws still apply so you must seek agreement on any wage reduction with your employees, once you have decided what payment plan you wish to put in place during lock-down period.
- Privacy: If you are applying for the Wage Subsidy then to prevent breaching privacy laws you should be advising your staff what personal details you are providing to the IRD, and why. Please see this information sheet which can be provided to staff
- Audit: Once you have decided how you are to pay your staff during the lock-down period, please prepare a thorough file note/business case setting out your reasons. This will be crucial particularly if you cannot pay employees at least 80% of their normal pay but you are still applying for the wage subsidy. Your file note/ business case can then be used to justify your application and position down the track, should you ever be audited by the Ministry.
- Easter: You will need to pay staff for their public holidays at their usual rate in accordance with the Holidays Act 2003.
We realise this is an unprecedented and stressful time. We are here to help so please feel free to get in touch.
Alert Level 4 – What do I do with my staff? How do I pay them?
As of Wednesday 11.59pm, all of New Zealand will move to Alert 4 in the Government’s COVID-19 Alert System.
To review the Alert System please see:https://covid19.govt.nz/assets/COVID_Alert-levels_v2.pdf(note the Alert Levels can move up and down and can also be regionalised).
If you operate an essential service then you may be able to continue to operate. The current list of essential services can be viewed at:https://covid19.govt.nz/government-actions/covid-19-alert-level/.
If you are not an essential service, then the first step is to try to mobilise as many of your team as possible to work from home. The health and safety of you and your team is clearly the number one priority at the moment, but productive work to generate cashflow for the business has got to be your second priority wherever possible. If staff can, and do, work from home then you are required to pay them normally.
For employers who have staff that cannot work from home, there are some options around how to pay them during the quarantine period. We note the following:
- You can ask employees to use their outstanding annual leave entitlements. If employees do not agree then you can direct them to take annual leave upon 14 days written notice.
- You could also ask employees to use their accrued annual leave and/or any long service leave, although you cannot force employees to take these types of leave.
- You could consider paying staff special leave (which is a leave payment over and above an employee’s usual entitlements). However, for many SME New Zealand businesses, this may not be possible without the help of the Wage Subsidy from the Government (see below).
- Wage Subsidy: The Government has put in place a Wage Subsidy to help support businesses impacted by COVID-19 (and which therefore face terminating workers or reducing their hours). The subsidy is payable on a per employee basis and is capped at $585.80 for people working 20 hours or more per week and $350 for people working less than 20 hours per week. Some further details are below:
- To qualify for the Wage Subsidy you must show a minimum 30% drop in actual or predicted revenue over the period of any month between January 2020 and 9 June 2020 due to COVID-19, compared with the same month in the previous year.
- The Wage Subsidy is paid as a lump sum, covering a 12 week period.
- When applying, you will need to provide the Ministry of Social Development with the names and other details of the employees who you wish to be covered by the application. For those employees, a privacy fact sheet should be provided to ensure you do not breach any Privacy Laws, please see fact sheet:https://workandincome.govt.nz/documents/eligibility/emergencies/covid-19/employee-privacy-statement.pdf.
- You will need to show you have taken active steps to mitigate the financial impact of COVID-19 on the business (e.g., working with a legal advisor / having a Business Continuity Plan / liaising with the bank and/or landlord).
- Importantly, you will need to have used “best efforts” to retain the employees who you named in the subsidy application and to pay those employees at least 80% of their normal wage or salary during the 12 week period.
- There has been uncertainty as to whether employers could put employees on unpaid leave as from 11.59pm Wednesday night. The situation we are in is unprecedented. There is an untested argument that you may not be required to pay your employees during the shut-down because it is the Government, and not the business, who has enforced the shut-down. However, this argument is untested and therefore carries risk - particularly in New Zealand’s climate where the Government’s 12.1 billion dollar package is primarily focused on businesses retaining and paying their staff. There is also potential reputational damage to you and your business if you put staff on unpaid leave, in spite of the Government’s clear request and support for New Zealand businesses to continue to pay employees during this period. Again, we are in untested waters.
- It may be that some employment agreements contain a specific and appropriately worded “force majeure” clause. Such a clause may enable you not to pay the employee during the shut-down period which is the result of the pandemic/situation being outside of your control. However, once again this may carry reputational risks, given the Government’s support package to help cover staff costs. It is also untested as far as we are aware within the context of a pandemic.
|We understand there is a lot to consider and what works for one business may not work for another.
In terms of initial steps, we recommend that you liaise with your bank to ensure you have necessary stop-gap facilities available. Further, although the Government on Monday put a freeze on rental increases, there may be scope to negotiate a reduction on rent during the quarantine period. These steps will help assist the business to be able to respond during these uncertain times but will also count as being “active steps” should you apply for a Wage Subsidy.
In terms of the decisions around staff levels, the structure (and possible restructure) of the team as well as how we pay staff during this period (e.g., paying at 100% of normal wage vrs 80%), once again we wish to stress that we are in unchartered waters and recommend where possible doing a financial analysis first and getting advice to consider what option is right for you and your business. We strongly recommend these discussions are had prior to applying for any Wage Subsidy or taking any action with regards to redundancies or pay cuts.
Please get in touch to talk through your options and work out what plan will best suit your business needs. The Employment Team at Davenports Harbour are here and available to help.
ALERT SYSTEM ANNOUNCED
|On 21 March 2020 the New Zealand Government has announced a COVID-19 alert system to streamline advice and requirements to the public around what social and public health measures must be taken. The alert system is as follows:
|New Zealand is currently at Level 2, although the Government has advised everyone to be prepared for the level to increase.
What does a LEVEL 2 alert mean for me and my business?
Employers should now be:
- Be pro-actively implementing alternative ways of working for their staff (e.g., shift work, working from home);
- Working with your “At Risk” employees (i.e. employees who are over 70, are pregnant, have underlying medical conditions or a compromised immune system) and taking reasonable practicable steps to protect them;
- Be encouraging staggered meal breaks at work;
- Limiting work-related non-essential domestic travel of workers;
- Understand how to apply leave/payments to staff who are in self-isolation;
- Understand how and when theCOVID-19 Leave Payment and COVID-19 Wage Subsidy can be applied for;
- Have proper cleaning and sanitisation systems in place;
- Be requiring social distancing at work.
If you are unsure about any of your obligations as an employer, please get in touch with our team. Bronwen is available to work with the business owners/leaders to provide strategic advice as to how your business can flex and respond to the COVID-19 crisis.
Employees will be looking to their leaders for support
. We recommend that employers:
- Obtain advice to ensure that they understand their legal health and safety responsibilities;
- Understand the Government help that is available, in particular theCOVID-19 Wage Subsidy and/or the COVID-19 Leave Payment, and whether the employer can take advantage of these payments;
- Communicate regularly with the employees with a view to mobilising the team to take personal responsibility for COVID-19 but also to unite around your business mission and values and purpose;
- Provide resources to employees to educate and mobilise the team to take personal responsibility(see resources here);
- Offer EAP services to employees;
- Be available to your team to answer questions and provide support;
- Be flexible, open and engaged.
Some employers will need to move swiftly to ensure their business can flex and respond to the impact of COVID-19.Areas that you and your business may need to proactively look at:
- Whether you should put a freeze on pay-rises and/or bonuses;
- Creating a strategy around marketing and creating (and meeting) market demand for your business;
- Moving to, say, a 4 day week to retain staff;
- Potential restructure and redundancies.
We recommend you obtain legal advice to discuss the strategy and business continuity plan for your business prior to taking any of these steps.It is imperative at this time that businesses follow correct and proper procedure in relation to their staff but also to ensure that the approach taken is right for that particular business.
Government Travel Announcements
The Government has announced further border measures restricting entry to New Zealand.
From 11:59pm 19 March 2020, only New Zealand residents and citizens (and their children and partners) will be permitted to enter New Zealand.
Further information regarding exceptions, clarifications, and specific details can be found at:
The government has released a $12.1 billion relief package to support New Zealand businesses, households, and aid in uplifting incomes.
The COVID-19 Wage Subsidy has been put together for employers in all regions.
It is support your business if you are impacted and face laying off staff or reducing their hours because of COVID-19.
- your business must be registered and operating in New Zealand
- your employees must be legally working in New Zealand
- the business must have experienced a minimum 30% decline in actual or predicted revenue over the period of a month when compared with the same month last year, and that decline is related to COVID-19
- your business must have taken active steps to mitigate the impact pg COVID-19
- you must make best efforts to retain employees and pay them a minimum of 80% of their normal income for the subsidised period
The COIVD-19 Wage Subsidy will be paid at a flat rate of:
- $585.80 for people working 20 hours or more per week.
- $350.00 for people working less than 20 hours per week.
The subsidy is paid as a lump sum and covers 12 weeks per employee.
This subsidy is for wages only. It is to keep your staff employed while you consider changes that may be needed while the disruption continues, and to ensure the future viability of of your business.
The maximum subsidy that can be paid to a business is $150,000. Businesses can only get this subsidy once.
The COVID-19 Leave Payment will be available for 8 weeks from 17 March 2020. Employers will be able to apply for this more than once. It will be paid to employers who have eligible employees and they must pass the payment onto their employees in full.
If you're an employer, contractor, sole trader or self- employed, you may qualify for the COVID-19 Leave Payment. It covers full-time, part-time and casual employees, and contractors who are legally working in New Zealand and who:
- need to self isolate in line with Ministry of Health Guidelines and have registered as needing to self-isolate with Health-line, cannot work from home and their self-isolation is not because they left NZ since the travel restrictions on 16 March 2020 and have since returned or
- cannot work because the person has been diagnosed with COVID-19 or
- cannot work because they are caring for dependents who are required to self-isolate or who are sick with COVID-19
The COVID-19 leave payment will be paid at a flat rate of:
- $585.80 to a person working 20 hours or more per week
- $350.00 to a person working less than 20 hours per week.
Employers receiving the payment for employees who are required to self- isolate can receive it for 14 days. As people may be required to self-isolate more than once, employers will be able to apply for this on an 'as needed' basis. It can be paid for the entire period an employee is sick (or looking after a dependent person who is sick) with COVID-19 but the employer must apply every 14 days.
More information on the qualification criteria and what is required for application processes can be found at: