The question is not if COVID-19 has the potential to alter legal agreements relating to property, but how. Can you cancel or terminate your lease or agreement for sale and purchase? Is this a force majeure event? Who takes the risk on time or cost? Supply chains are at risk, the wider tourism and recreation sector looks vulnerable as travel restrictions remain in place and the likelihood of restrictions on public gatherings grows, retail is under pressure and in the office sector there is potential for disruption as firms advise their employees to stay at home. What should you be looking at in your contracts?

Leases

Some clients have queried what effect the virus could have on lease arrangements. For example, if you have a letting to a travel agent, the tenant is likely to feel the negative economic effects of COVID-19 – could the tenant refuse to pay the rent or even bring the lease to an end prematurely?

The starting point in every case is to check the lease to see if there are any relevant provisions. For example:

• a tenant break clause giving the tenant the option of bringing the lease to an early end (irrespective of the circumstances);
• turnover rent provisions that are dependent on the income generated from the premises; or
• a force majeure clause (though this would be highly unusual for leases).

In the absence of any specific provisions in the lease, it is highly unlikely that the tenant would be able to withhold rental payments because of a downturn in the market.

Equally, a tenant will have an uphill struggle if it tries to argue that the lease should be brought to an early end because of the change in the market (frustration). The threshold test for proving frustration is set very high.

To argue frustration you have to show that there is some form of intervening illegality or failure of common purpose that renders performance of the lease impossible or so radically different from the parties' expectations that frustration is justified. Arguably, the outbreak of disease is not such an event – in recent years we have had to deal with SARS and swine fever. As such, public health issues should be within the contemplation of the parties at the time the lease was entered, leaving it open to them to have negotiated provisions allocating the risk.

In addition, at the moment there is no actual ban on booking hotel rooms or attending leisure venues in New Zealand – instead, what we have is a situation where people are being more cautious and perhaps choosing not to do certain things. Should the government decide to ban certain activities, then perhaps tenants will have a stronger argument for frustration based on the illegality point, but it would not be clear-cut. Much would depend on the nature of the ban (including its duration compared to the duration of the underlying letting) and the actual terms of the lease involved.

Putting aside the legal framework, landlords generally want their tenants to be successful. As such, it may be that both parties will be forced to negotiate practical compromises to help them navigate through difficult times.

However, it is not just existing leases that are going to be affected. We are already seeing clients re-evaluating their approach to new leases. It remains to be seen what sort of clauses may or may not come out of this (just as the aftermath of the Christchurch earthquakes resulted in changes to lease provisions), although we expect all sides will be looking at this forensically.

Sale and purchase agreements

Although New Zealand has in recent years altered its foreign investment regulations international companies are still major players in the property sector. This is especially true in commercial property, residential development and forestry. Currently New Zealand is experiencing an influx of foreign capital looking for a safe haven as global markets reflect the impact of COVID-19.

Existing agreements for the sale of land will typically contain the standard ADLS and REINZ breach and cancellation terms establishing the framework for parties who are “ready willing and able to settle” if their counterparty is not. Any other termination rights are typically bespoke provisions (such as a “material adverse change” or MAC clause more common in larger transactions) specific to the parties and the contract.

Construction contracts

For developments that are in the process of being constructed, you will need to look to the terms of the construction contract to determine what rights the contractor may have to claim time or money, should the works be delayed or disrupted as a consequence of COVID-19.

The standard form NZS3910 or NZS3916 construction contracts are usually amended by a series of special conditions (which should, of course, be reviewed). In an unamended NZS contract, a contractor is entitled to claim an extension of time (but not cost) for “any circumstances not reasonably foreseeable by an experienced contractor at the time of tendering and not due to the fault of the Contractor” (generally referred to as “force majeure” although the standard NZS contracts do not explicitly refer to force majeure). The consequences of COVID-19 (including issues with supply chains) are likely to fall into this category.

For construction contracts which have yet to be entered into (or those which have only been entered into after COVID-19 was known), force majeure or its equivalent will arguably not be applicable (because the fact that the parties already knew about the existence of COVID-19 means it is not "unforeseeable"). In such circumstances, the parties need to include a bespoke amendment in the contract to allocate the risk of any delays caused by COVID-19 (which we have already seen occurring), otherwise these delays are at the contractor’s risk. Referencing the Epidemic Preparedness Act 2006 (who knew?!) has been one option for establishing a legal threshold for when risk passes, although this deals with a New Zealand based outbreak rather than issues with supply chains internationally. It should also be noted that an event of force majeure may entitle either party to terminate an NZS contract if the contract has become impossible of performance or otherwise frustrated.

Conclusion

We all hope that COVID-19 can be contained. The key to success will be keeping calm and behaving responsibly. That advice applies equally to legal arrangements. Irrespective of whether you are landlord or tenant, vendor or purchaser, contractor or principal, the starting point is calmly to understand your legal commitments and not to assume that you will be automatically relieved from responsibility for performing them due to the impact of any external event, including a public health crisis.

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