New commercial lease form

The Law Association of New Zealand (previously Auckland District Law Society Inc, ADLS), has just issued a revision of its commercial lease form (Seventh Edition 2024). As a pro forma deed of lease used widely in the New Zealand commercial property market, the contents of the new version will be of interest to commercial property participants.

Although having first issued in 1984, the last time the ADLS lease was substantively reviewed was 2012 (Sixth Edition 2012). The Sixth Edition responded to changed market conditions at the time, but most notably issues resulting from the Christchurch earthquakes of 2011. Changes at that time included new provisions regarding landlords carrying out building upgrade works (such as seismic strengthening), removal of the landlord's right to charge improvements rent and changes to make it clear that the tenant is not liable for repairs due to defects in design or construction, inherent defects in the building and renewal or replacement of building services. That version also introduced the now famous 'no access in emergency' clause (which was primarily included to achieve fairness where a tenant could not access premises such as was the situation in the Christchurch cordoned-off red zone). That provision was spotlighted during the Covid-19 pandemic.

The Seventh Edition 2024 has sought to further move with the times by introducing a variety of commercial terms which are often negotiated but not contemplated by the earlier lease version.

Although there are numerous changes to the terms of the lease, key changes are:

Rent reviews

• The Lease now provides for set fixed rent increases as an option.
• Parties may now specify an upper (cap) or lower (collar, or ratchet) limit for rent reviews.

Additional security options

• Bank guarantee: The Lease now provides for the Tenant to provide a bank guarantee. Parties must 'opt in' to these provisions.
• Rental bond: The Lease now provides for the Tenant to provide a rental bond. Parties must 'opt in' to these provisions.
• Mortgagee consent: Landlords now need to expressly confirm or deny whether they are required to obtain mortgagee consent in respect the Tenant's interest in the Lease.

Seismic rating (item 25)

• The Lease now contains seismic provisions. The clause requires the Landlord to disclose any information that the Landlord becomes aware of that contains a 'materially different' assessment to the recorded NBS rating of the building. These provisions do not contain a warranty by the Landlord as to the NBS rating of the building, and parties need to 'opt in' to them by recording the seismic rating of the building in the First Schedule.

Outgoings

• The list of outgoings payable by the Tenant in the First Schedule has been updated.
• A Landlord may only recover outgoings within 24 months of the outgoing being incurred. This does not apply to outgoings for body corporate management expenses where the Landlord does not control the body corporate.

Insurance excess

• The insurance excess payable by the Tenant is now adjustable, with the default amount increasing to $5,000.
• If the Tenant causes damage, and if the cost of repair is lower than the excess, the Tenant must pay the cost of repair (subject to an upper limit).
• If the Landlord makes an insurance claim for damage that is not caused by the Tenant (or any other tenant of the building), then the amount of the excess applied to the cost of repair (not exceeding the maximum excess that the Tenant is responsible for under the Lease) will be an outgoing.
• If the Landlord's insurance excess is increased as a result of any act or omission of the Tenant such that it exceeds the stated cap on the Tenant's liability for insurance excess, the Tenant must pay the increased amount in respect of any future claim on the insurance policy.
• It is now a breach of lease for the Tenant to cause an increase in excess payable for any policy of insurance on the property.

Fair proportion of rent to abate

• If the Lease provides for a rent abatement due to a 'no access in emergency' situation, then the parties may agree in advance what a 'fair proportion' of such abatement may be. This can be reviewed following an abatement scenario. By default, the 'fair proportion' shall be a 50% abatement of rent and outgoings.

Rights of renewal

• Parties may specify the required notice of renewal period. The default period is 3 months.

Costs / disputes

• The parties shall pay the other party's legal costs of and incidental to the enforcement of the other party's rights under the Lease. Previously this clause only applied to landlords who were required to enforce the Lease against tenants.
• The obligation to submit to arbitration arises even if a party did not first endeavour to resolve the dispute via an agreement or mediation.

Landlord's liability

• The limitations on the Landlord's liability with respect to its maintenance obligations have been reduced. For example, it appears that the Landlord will now be liable for want of repair or defect in respect of building services, regardless of whether the Landlord is maintaining a service maintenance contract covering the works to be done.

Landlord's consent

• If the Tenant seeks consent for alterations which would prompt a requirement to upgrade the building, then the Landlord may refuse consent unless the Tenant agrees to meet all of the associated costs of those upgrade works.
• Where the Landlord's consent or approval is required under the Lease then, unless expressly stated to the contrary, the Landlord may grant consent or approval subject to reasonable conditions.

Health and safety

The parties now have specific obligations relating to health and safety, including an obligation to comply with the Health and Safety at Work Act 2015.

Conclusion

The ADLS (now The Law Association) lease form has generally been regarded as a fairly evenly balanced set of terms from both landlord's and tenant's perspectives. However, it should still only be treated as a starting point for negotiations as it is not a case of one size fits all. Care will be required in the negotiation, preparation, and completion of this important commercial contract.

This article was written with the assistance of Amy Christian, Solicitor in the National Real Estate team.

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