The Auckland District Law Society Inc. recently reviewed commercial leasing practice and have released a sixth edition of the Form of Deed of Lease. The key changes affecting both landlords and tenants are highlighted below.

Rent Review

A CPI rent review clause has been introduced as an alternative to market rent review. Either method may be used by the parties and dates for the review are to be specified in the first schedule. There is a ratchet so there will be no adjustment under this clause if the CPI falls.

Outgoings

The terms have been modernised - telecommunications, not just telephones, recycling as well as rubbish charges.

Maintenance charges for repairs due to defects in design or construction, inherent defects in the building, renewal or replacement of building services and upgrades to comply with the Building Act 2004 are excluded.

It is now mandatory for the landlord to vary the proportion of any outgoing payable to ensure that the tenant is paying a fair proportion. Previously there was no ability to alter the proportion if there was an error.

Costs

Each party must now meet their own costs of negotiation and preparation of the lease and any variation or deed recording a rent review or renewal. This changes from the previous edition where all costs were met by the tenant.

Tenant's Maintenance Obligations

The definition of "premises" has been broadened to include the landlord's fixtures and fittings so the maintenance of these are now the tenant's responsibility. The tenant's obligations are linked to the state of the premises as at the commencement date of the lease which means the commencement date of the initial term if the lease is renewed.

Landlord's Maintenance Obligations

Landlords now have an obligation to ensure that the property is weatherproof.

The lease clarifies that it is the landlord's responsibility to maintain any building services.

Building services that cannot be maintained must be replaced if reasonably required. Whether a service is reasonably required will be determined with reference to the expectations of the tenant. These expenses are not recoverable by the landlord as outgoings.

Access for Works

In response to the Christchurch earthquakes, new provisions have been introduced to deal with the landlord's access to the property to perform necessary works. This clause is designed to cover strengthening works and it is the landlord's responsibility to keep the property up to seismic standards. These costs cannot be recovered through the outgoings.

If the tenant's business is materially disrupted in the carrying out of these works a fair proportion of the rent shall cease to be payable. If the landlord believes that the tenant should vacate the premises then the landlord must provide reasonable notice and give the tenant a reasonable time to vacate.

The landlord must act in good faith in regards to the nature, extent and urgency of the works when exercising their right of access or possession. In practical terms this may mean that the landlord should wait until the expiry of the lease before carrying out non-urgent work.

No Access in Emergency

New provisions have been introduced for a Christchurch "red zone" situation. Where the tenant is unable to gain access to the premises to conduct business then a fair proportion of the rent and outgoings will cease to be payable.

In such a situation, even if the premises are not completely or partially destroyed, either party may still terminate the lease upon 10 working days' notice if the tenant is unable to gain access to the property for 9 months (or such other period of time specified in the first schedule) or it can be established with reasonable certainty that the premises will not be accessible for that period.

Untenantability

Untenantability has been left undefined in the new lease. Recent decisions in the Courts indicate that a finding of untenantability will be fact specific. The test from Russell v Robinson [2011] 2 NZLR 424 (HC) to establish untenantability is:

Whether the property is unfit for occupation for its intended purpose.

The degree of permanence of the damage. It must not be transitory or temporary in nature.

Additions, Alterations, Reinstatement and Chattels Removal

Tenant alterations now include those made prior to the commencement of the lease or during the term. This covers fit out works carried out before the commencement date. However, the lease is silent on the effect of renewals.

Reinstatement by the Tenant must now occur prior to the end of the term - there is no further reasonable period in which to remove fixtures and fittings.

Compliance with Statutes and Regulations

The concept of improvements rent has been removed. The ADLSI Committee were unable to think of any bona fide examples of when such a provision had actually been used and believed that there was too much potential for disputes with the Landlord trying to charge the tenant for strengthening works.

If the Landlord is obliged to expend an "unreasonable" amount in complying with statute then the Landlord may determine the lease. The Tenant's (minimal) protection under this provision is that in the event of a dispute as to what is an "unreasonable" amount (giving rise to the landlord's ability to cancel the lease) such dispute shall be determined by arbitration.

Insurance

The insurance excess to be paid by the tenant as an outgoing has been increased from $500 to $2,000 to reflect current practice.

The first schedule is now more specific about the type of insurance to be procured. Instances where the tenant is to have the benefit of the landlord's insurance have been clarified.

Assignments

Car parks have been specifically included.

Reference to subtenants has been added so that the test as to a subtenant's ability to perform specifically relates to the commitments under the sublease.

The PLA requirements not to unreasonably withhold or delay consent are specifically included in this clause (even though they are expressly excluded in relation to the lease generally).

Implied Terms

The covenants, conditions and powers implied in leases in the Property Law Act 2007 are expressly excluded. This was to avoid the potential for argument between conflicting terms in the PLA and the lease.

Section 224 (consent not to be unreasonably withheld or delayed) is expressly deleted but specifically included elsewhere in the lease.

Miscellaneous

Bank Guarantee: An amount may now be specified in the First Schedule which may be applicable in the event of a renewal or an assignment.

Body Corporate: There is now an express obligation on the Tenant to comply with the rules of the body corporate.

Dispute Resolution: The lease contains an acknowledgement that the parties will endeavour to first resolve disputes by mediation.

While the ADLSI Form of Deed of Lease is designed to be a standard document that balances the interests of both landlord and tenant, it is important to ensure that the deed meets your specific requirements. We can assist you in tailoring this to meet your needs.