By Andrew Skinner - 17 Apr 2020
The Government has announced that most, but not all,
businesses can start to open when we shift to Alert Level 3. The
businesses that do open must take health measures to keep their
workers safe and workers must work from home if they can.
Retail and hospitality businesses can only open for delivery and
contactless pre-ordered pick up. Businesses cannot offer services
which involve face to face contact or sustained close contact (e.g.
hair-dressing).
As the Government starts providing
further details on Alert Level 3 and the measures businesses will
need to take, there will be fresh scrutiny on business contracts
and leases to determine the impact the transition will have. The
complete shutdown mandated by Alert Level 4 most likely prevented
many non-essential businesses from performing certain obligations
under contracts and also triggered the "No Access" clause in the
6th edition of the Auckland District Law Society lease.
As we contemplate a move to Alert Level 3, the same business
contracts and leases will need to be reviewed again to consider
whether the Alert Level 3 restrictions impact a party's ability to
perform a contract and whether the No Access clause continues to
apply.
The Doctrine of Frustration
A business is sometimes tempted to claim frustration of contract
when a contract becomes more difficult or expensive to perform than
first envisaged. The reality is that the doctrine of frustration is
not often available. Broadly speaking, the doctrine of frustration
may apply to release the parties from a contract where the contract
is incapable of being performed or performance is impossible as a
result of an intervening event not caused by either party. It is
not enough that the contract has become more difficult or less
beneficial for a party. The Courts have set a high threshold for
the doctrine to apply and many factors need to be taken into
account, including the duration of the frustrating event and the
length of the contract. The doctrine also does not apply if the
contract addresses the risk of the event that has occurred.
The transition from Alert Level 4 to Alert Level 3 may remove
some of the restrictions that made performance of a contract
impossible making it less likely the doctrine will apply. Some
contracts in certain industries may continue to be unable to be
performed but businesses need to be very cautious in claiming
frustration and must seek legal advice before claiming a contract
is at an end.
Force Majeure
It is reasonably common in commercial contracts for the parties
to have agreed a force majeure provision, which usually provides
that a party's obligations are suspended during any period when an
event has occurred that prevents the party from being able to
fulfil their obligations (and often a non-exhaustive list of
examples of events is outlined).
It is important to understand that the suspension of obligations
due to force majeure events is governed by the specific clause in
your contract, which means that a careful analysis needs to be
undertaken of the types of events covered by the clause and the
consequences of those events. The onus will be on the party
claiming the force majeure event to prove that the event is
covered. If the event is a force majeure event, the party claiming
the event of force majeure will normally need to notify the other
party and the contract may contain strict notification requirements
that need to be met. It is best not to assume that force
majeure is obvious or assumed and it is always best to clarify the
position with the other party.
If your contract has a force majeure mechanism which applied
during Alert Level 4, then you will need to review the clause again
to consider whether the mechanism operates during Alert Level 3.
There may be much greater scope for differing views between parties
as to whether a business is prevented from performing an obligation
or whether performing that obligation has just become more
difficult.
No Access Clause 27.5 in the 6th Edition of
the ADLS Lease
There has been plenty of discussion and analysis on the "No
Access" clause but in many respects the application of the clause
will only become more difficult as we head towards Alert Level 3.
To summarise, the clause is triggered if there is an emergency and
the Tenant is unable to gain access to the premises to fully
conduct the Tenant's business from the premises because of the
emergency, including, amongst other things, any restriction on
occupation of the premises by a competent authority.
The difficulty in applying the clause is because it mixes the
concepts of access, use and occupation. Whilst under Alert Level 3
many businesses will be able to obtain access to the premises, the
restrictions may impact the tenant's ability to fully conduct the
business from the premises. For example, a restaurant with a large
seating area may open to provide a delivery or takeaway service,
but will not be able to use the seating area. The tenant may argue
that as the business cannot be fully conducted due to the Alert
Level 3 restrictions, then a fair proportion of the rent and
outgoings for the seated area should cease to be payable.
Conversely, the landlord may argue that the clause does not apply
as the tenant has access to the premises.
Many tenants and landlords had hoped for some assistance from
the Government on this issue as we have seen in Australia. However,
aside from the proposed changes to the Property Law Act extending
the timeframes before landlords can cancel leases, it seems the
Government is now largely leaving this matter up to landlords and
tenants to agree.
Contacts
Michael
Worsnop
Melissa
Higham
Andrew
Skinner