When landlords and tenants agree to lease a building, a form often used by lawyers to record that agreement is the Auckland District Law Society (ADLS) commercial deed of lease. This form is a standard form lease which sets out the rules that apply during the lease term. The form should be amended as necessary to meet the needs of the parties involved and reflect their specific arrangement.
The current ADLS Lease form is the sixth edition version 4. Many leases will be on earlier forms. For the purposes of this article, any references to the ADLS lease refer to the latest version.
Whether you are a landlord or a tenant, matters to consider and discuss with your lawyer include:
If you are a landlord, will you be able to obtain the type of insurance that you have agreed to provide? Insurance may, as a result of insurance events such as flooding or earthquakes, become more difficult to obtain for certain buildings and in some areas. The ability to provide “indemnity to full insurable value” (i.e. insurance at a pre-determined figure) if “full replacement” insurance (i.e. full replacement regardless of the value of the building) is unavailable will provide a landlord with greater flexibility. The ADLS lease form will need to be amended if this is required.
Clause 23.1 provides that if insurance cover becomes unavailable (other than due to an “act or omission” of the landlord), the landlord will not be in breach of the lease provided the Landlord has used all reasonable endeavours to obtain cover. This could put a tenant in a difficult situation - leaving the tenant bound to continue to lease an uninsured building. Consideration should be given to the tenant’s right to terminate if insurance is not available and/or the tenant obtaining business interruption insurance.
Clauses 26 and 27 deal with situations where the premises are partially or totally destroyed, or where access is not able to be obtained even if the building itself is not destroyed. These cover situations such as those that occurred in Christchurch. If there is an emergency, and in certain situations access cannot or will not be able to be obtained for 9 months (being the ADLS default period) the tenant will be able to terminate the lease. However, if a (usually) lesser period is required, amendment will be necessary.
In addition to paying rent, a tenant is usually required to pay a percentage of the “outgoings” of the building (e.g. rates, insurance etc.). The actual figure the tenant would be liable for may not be known until further into the lease term. The new form ADLS lease enables the parties to specify an estimate of the likely outgoings. For tenants, this will provide greater certainty of the likely outgoings to be incurred. The estimate is not however a warranty and the tenant needs to be aware that the eventual figure could differ from the estimate. For landlords, careful consideration needs to be given as to the figure estimated – some commentary has suggested that a claim could be made against a landlord if the actual figure differs significantly from the estimated.
Rent review procedures
Will a market rent review or a CPI rent review (or a combination of the two) better suit your needs? How often should this take place and are you aware of the process and cost of one option as opposed to the other (generally if there is a dispute, the market rent review process will be more costly with valuers involved to determine the rent). Should the rent be subject to a “ratchet” (whereby the rent cannot go any lower than for example the rent at the commencement)? Amendment to suit the individual circumstances should always be made.
A lease is a binding agreement. The terms of the ADLS lease are not merely fine print. They are binding terms which impose obligations, rights and responsibilities on both parties. Whether a landlord or a tenant, it is essential that the ADLS lease form is amended specifically to your needs. This article sets out some of the matters to consider when entering into a commercial lease – but each situation will differ and whether you are a tenant or a landlord, we recommend you talk to us to assist with your leasing needs.
Published: 05 June 2014