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Brief Counsel

Commercial deed of lease gets make-over

08 November 2012

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​The Auckland District Law Society (ADLS) commercial Deed of Lease form has been updated to reflect changes in commercial leasing as a result of recent difficult market conditions, and lessons from the Canterbury earthquakes. 

We consider some of the changes.

New option for Consumer Price Index (CPI) rent reviews

An option has been included for CPI rent reviews, reflecting their increasing popularity.  The formula operates as a simple ratchet and would not deliver a rent decrease even if there was a negative CPI movement. 

The new clauses do not anticipate more complex rent reviews, for example where the reviewed rent is the greater of CPI rent review or market rent review.

This will be a useful addition for parties seeking greater certainty on future rent movements, and those wishing to avoid the time and cost of market rent reviews.

Proportion of outgoings

It is now mandatory that landlords review from time to time the agreed proportion of outgoings paid by the tenant.  This will allow adjustment if the percentage set at commencement turns out to be inappropriate or unfair due to error or change of circumstances during the lease term. 

If parties prefer the certainty of a fixed percentage, the lease form would need to be amended to provide for this.

Improvements rent abolished

Under previous editions of the form, money spent by the landlord on permanent improvements to meet statutory obligations could be recovered through the improvements rent percentage until the next rent review. 

However, it was difficult for landlords to charge improvements rent following the Canterbury earthquakes, because it was hard to bring temporary fixes and strengthening works beyond any mandatory legal requirements within the ambit of the mechanism. 

The removal of the improvements rent provision prevents landlords passing on building strengthening costs to tenants, and is consistent with the exclusion of structural repairs from the outgoings, and other forms of lease used in the commercial leasing market.

Fit-out prior to lease commencement

The reinstatement provisions now also apply to additions or alterations made by the tenant before the commencement date.  Tenants frequently complete fit-out before the lease actually commences.

Premises condition report

A premises condition report (premises are defined to include all the landlord’s fixtures and fittings) can now be attached as a schedule to the lease.  This is not mandatory, but may avoid disputes at lease end.

Insurance

The ADLS committee considered a number of issues around insurance – the fact that it is sometimes unavailable, that costs have increased and that an excess above that recoverable as an outgoing (now $2,000 as the default provision) may be required. 

But the new lease form is not tailored to accommodate these circumstances so parties will need to consider whether amendments are required for their transaction – e.g. a cap on insurance premiums recoverable as an outgoing.

Access for work

Landlords can now access premises to carry out mandatory earthquake strengthening work, with a rent abatement if the tenant’s business is materially interrupted.  The landlord may also require the tenant to vacate the premises if the landlord considers that this is necessary. 

The lack of a right for the landlord to access the premises for non-mandatory earthquake strengthening works remains, and it is also unclear what rights of access will be available to the landlord where some work is required by statute, but a landlord wishes to go beyond minimum legal requirements.

Untenantability

Many were expecting the new deed of lease to refine this concept.  However, untenantability has been deliberately left undefined in the new lease form, largely because situations where untenantability issues arise are very fact specific. 

If there is damage to premises, the rights of the parties will therefore still turn on the concept of “untenantable” – inability to use the premises having a degree of permanence – taking into account the purpose of lease, the remaining term (including renewals), the extent of damage, time to repair, and time unable to occupy.

Lack of access during an emergency

The damage and destruction clauses have been refined to address the previous absence of provisions addressing the situation where premises could not be used due to a lack of access. 

Where there is no access to premises during an emergency, there is a rent abatement.  If the situation continues or will continue for a set period (the default period is nine months), either party may terminate the lease. 

The new clauses do not provide any relief where premises cannot be used because of a lack of utilities, or danger from neighbouring buildings.  In addition, the right of termination due to a lack of access does not apply where there is also damage to the premises (which would often be the case).  Initial views are that this clause still requires some adjustment to meet the situations commonly being encountered as a result of the Canterbury earthquakes.

Our thanks to Stephanie Muller for writing this Brief Counsel.

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