Commercial Leases – Changes to the Standard Terms 04 Sep 2013
The ADLS (Auckland District Law Society) Deed of Lease is the document most commonly utilised for commercial tenancies. An updated version (6th edition) has recently been released.
The updated lease contains a number of key changes which, if left unamended, could prove problematic for landlords and/or tenants. We summarise some of those changes/issues below.
We always recommend that, before you sign a new Agreement to Lease, you forward it to us for our review – as once signed, it sets the terms of the Lease in stone, potentially having significant consequences down the track.
The Lease now makes it clear that the tenant is responsible for meeting (part of) the insurance excess in respect of a claim – increased to a maximum of $2,000 (previously $500). The parties can of course negotiate a different excess amount, and some landlord will require tenants to meet the whole of their excess, which can be significant, particularly for earthquake damage.
It is important that Landlords ensure they can meet the insurance obligations set out in the lease and, if not, make specific changes to the documents which reflect the true insurance position. While the lease does provide that the Landlord will not be in breach if insurance cover becomes unavailable (other than because of the Landlord’s act or omission) the Landlord must still use all reasonable endeavours on an on-going basis to obtain cover. There are also additional obligations to advise the Tenant when cover becomes unavailable and to give reasons, as well as provide the Tenant with reasonable information relating to the cover on request.
The types of “optional” insurances that the Landlord may insure against – loss of rent, loss to fixtures and fittings and public liability – have been moved to the First Schedule and, if not specifically deleted, mean a landlord may be obliged to effect insurance that they do not have in place.
Landlords should also be aware that, as a result of the Canterbury earthquakes:
- they may be unable to obtain certain types of insurance (eg full replacement cover);
- the annual insurance premiums are likely to have increased significantly; and
- they may be liable for an excess much higher than the $2,000 set out in the lease.
This reiterates the need for even the Agreement to Lease to accurately reflect the landlord’s specific circumstances.
Lack of Access in an Emergency
New provisions have been included in an attempt to address situations such as the “red zone” in Christchurch where the leased premises were either not damaged or only partly damaged but could not be accessed by the tenant and the lease remained on foot.
In such cases, there is now to be an abatement (reduction) of a fair proportion of rent and outgoings where the tenant is unable to gain access to fully conduct its business because of reasons of safety of the public or the need to prevent any hazard, harm or loss that may be connected with the emergency. These provisions only apply however if the lease has not been cancelled as a result of the premises being totally or substantially destroyed.
The new provisions specifically include as reasons of safety/need to prevent harm:
- a restricted access cordon;
- prohibition of the use of the premises pending completion of structural engineering or other reports; and
- a restriction on occupation of the premises imposed by any competent authority.
In these situations, the lease also now provides that either the landlord or tenant may cancel the lease if access cannot be gained for a period specified in the lease (the default period being nine months) or if the party cancelling can at any time prior to cancellation establish with reasonable certainty that the tenant will be unable to gain access to the premises for that period.
Landlords need to consider their insurance position if rent is abated in circumstances where there is no damage to the premises – i.e. can they in fact cover this risk when most loss of rental policies only respond to actual damage to the premises?
Previously the tenant was liable to pay the landlord’s costs for the preparation of the lease and any variation or renewal of it. Now each party is to meet their own costs unless the lease specifies otherwise.
The landlord’s costs of providing consent and legal costs relating to enforcement are still chargeable.
If no rent review date is specified in the lease (again, including the Agreement to Lease), the default position is now that there are no reviews. Previously, the default position had provided for a rent review on each renewal date. There is also no default review upon a lease renewal – again, a review on that date will need to be specified.
In addition, the lease now provides for a choice between market rent review or CPI rent review (or a combination of both throughout the lease term). Both forms of rent review will operate as “ratchets”, even if a CPI rent review follows a market review.
Premises Condition Report
A Fifth Schedule has been attached being a Premises Condition Report which, if completed, provides evidence of the condition of the premises at the commencement date of the lease. The intention is to avoid disputes as to the condition of the premises at the end of the lease.
Clause 16 of the First Schedule provides for an estimate of the Outgoings as at the Commencement Date. This may not always be easy to ascertain with any degree of certainty and it may be prudent to consider deleting this part.
Maintenance and Improvements
The re-decoration clauses in the lease now clarify that replacement items (eg floor coverings) are to be to a same or better quality, specification and appearance as before.
The landlord also now has an express obligation to keep the building weather-proof.
The 6th edition makes it clear that the landlord is responsible for the maintenance and replacement of “building services” – which are those services provided by the landlord as an integral part of the building – e.g. water, gas, electricity, lighting, air conditioning, heating, lifts and escalators etc. The cost of replacing these are not recoverable by the landlord as an outgoing – the rationale being that this is consistent with the expectations of a tenant who pays rent for premises with a level of services enabling that tenant to use the premises for it’s specified business use.
Make good/reinstatement must now occur by the end the lease term – not within a reasonable time thereafter, as had previously been the case.
If the landlord requires access to the premises to comply with the requirements of any statute or regulation (such as bringing a building up to building code) then the tenant must grant such access, but an abatement (reduction) of a fair proportion of rent and outgoings will apply if the tenant’s use of the premises is “materially disrupted”. The landlord can require the tenant to vacate the premises altogether while repairs are being carried out.
There is also a good faith requirement on the part of the landlord, supposedly to ensure that there is reasonable co-operation with the tenant in terms of timing and extent of work. Particularly where upgrades to meet the Building Code are involved, timing may be very important – e.g. avoiding the Christmas season for retailers.
The improvements rent percentage has been deleted, partly out of fear that landlords may try to inappropriately pass expensive building strengthening costs onto tenants under the clause. This does not, of course, stop the parties themselves specifying what terms should apply if building strengthening/improvements are in fact contemplated during the term of the lease.
Related to the above, clause 13 of the Outgoings Schedule now specifies that the costs of upgrading the building to comply with the Building Act 2004 are not an outgoing recoverable from the tenant.
A counter part clause is now included which means that, in essence, the Lease can be signed concurrently by the Landlord and the Tenant in their respective lawyers’ offices.