03 May Rural Leases
What if I can’t get on the land in an extraordinary situation?
As a result of the COVID-19 Alert Level 4 situation, one of the issues that has arisen in the commercial leasing area is that of tenants being unable to access their leased buildings. These tenants are in non-essential industries and are therefore prohibited from working, other than from home. This affects commercial leases right across the spectrum from hospitality, retail, office to warehousing.
Leasing is common in the rural sector, particularly in the pastoral, horticultural and cropping areas. Agriculture, being an essential industry, is not directly affected by this prohibition on accessing leased land.
No access to land can be an issue
It does, however, raise an issue for the rural sector because there are scenarios in which similar problems could arise as a result of an inability to access the land due to an event outside the control of either the lessor or the lessee. Possibilities might be:
- A biosecurity issue, or
- An earthquake or some other event that impacts on the land or access to it.
Looking back to the ‘red zone’
In the commercial leasing area, attempts were made to deal with this issue following the Christchurch earthquakes. Many buildings were undamaged by the earthquakes but lessees couldn’t access them because they were located in the ‘red zone’.
Most commercial leases had fairly comprehensive provisions dealing with what would happen in the event buildings were damaged by an event such as an earthquake but were silent when dealing with buildings that weren’t damaged but the lessee was, by law, prohibited from entry.
What is ‘fair’?
The standard commercial lease (the Auckland District Law Society form) was amended following the Christchurch earthquakes. It now includes a clause that says, in short, if a lessee was precluded from being able to access the property because of an ‘emergency’ (the definition of which includes ‘epidemic’) to ‘fully operate’ its business, then a ‘fair’ proportion of the rent and outgoings would cease during the period that the lessee couldn’t access the building.
While this clause may sound good, it is currently causing major issues throughout the country, mainly because no-one has previously had to establish what is ‘fair’. While most lessors and lessees can come
to an agreement, there are obviously cases where the parties will have difficulty in establishing what might be fair in their situations.
Rural sector situation
Most rural leases have never had comprehensive provisions dealing with damage to buildings simply because, in the main, it is land rather than buildings being leased. Certainly there may be farm buildings on the land but the bulk of the rent is payable for the use of the land. Land is not seen as something that could be damaged in the same way as buildings could be by fire or earthquake. Very few rural leases would have provisions similar to the standard commercial lease after the Christchurch events.
What would happen, however, if an agricultural lessee was unable to access their leased land due to a biosecurity issue that meant certain areas weren’t accessible or perhaps stock wasn’t allowed on the land, or trees or vines were required to be removed?
A lessee would need to rely on two possibilities that are slightly similar:
- A force majeure clause, or
- Doctrine of frustration.
Not all leases will have a force majeure clause; it may well be that such a clause
may become more common as a result of the current situation. A typical force majeure clause would begin as follows:
In the event of the inability of any party to this lease to perform its obligations under this lease by reason of riot, earthquake, volcanic activity, fire, storm, operation of law or other like cause beyond the control of that party, such party will upon service of written notice specifying the force majeure event be released from its obligations under this lease if and to the extent that such party is prevented or delayed from performing its obligations.
A clause such as this would probably cover a regulation preventing the lessee’s use of the land and covers earthquakes and other natural events that might impact on the lessee’s ability to perform their obligations. The words ‘operation of law’ may well cover the type of regulation relied on by the government for its COVID-19 Alert system.
Doctrine of frustration
This is more complicated. Frustration is where an event outside the control of either party causes the subject matter of a contract to become impossible to perform. Frustration is much more difficult to prove and it’s unlikely to be available if the event was temporary and the lease term was relatively long.
What if the event falls short of precluding a lessee from occupying the land but the purpose for which the lessee leased the land had disappeared or changed significantly? An example is a cropping lessee supplying a fast food chain that stops buying produce because their business has been shut down.
In the event of a biosecurity issue, what if the land can’t be re-stocked, or trees or vines need to be pulled, and the land left fallow for a period? A force majeure clause is less likely to apply and the lessor would rely on the fairly standard warranty as to the suitability of the land which often goes along the following lines: The Lessor does not warrant that the land is or will remain suitable or adequate for any of the purposes of the Lessee.
Lessees will be reviewing leases
It is often not until we have an event such as COVID-19 that the failings of some contractual arrangements are laid bare. No doubt the clause that was inserted into commercial leases after Christchurch will be reviewed, debated and possibly modified as a result of the COVID-19 issue.
In the rural space, lessees will also want to review their leasing arrangements to ensure they are adequately protected if something, outside their control, affects their ability to use the land for the purpose for which it has been leased.
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