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SEPTEMBER 2016

Commercial Leases

What you need to know about repairs, maintenance and reinstatement.

The July 2016 Supreme Court decision in Mobil Oil New Zealand Limited v Development Auckland Limited is a timely reminder for all landlords and tenants to consider their respective rights and obligations relating to repairs, maintenance and reinstatement of premises in their commercial leases. Whilst we do not intend to discuss that case in this article, the resulting lessons from it are important.

The Auckland District Law Society Incorporated’s (ADLSI) Deed of Lease Sixth Edition (which appears to be the most commonly used form of commercial lease) covers maintenance, repair and reinstatement obligations in relatively sufficient detail. The ADLSI Lease is a “well-legalled” document which has been prepared to accommodate both a landlord’s and tenant’s reasonable concerns - as opposed to a lease drafted by a large commercial complex’s developer’s lawyers which tends to be quite one-sided (in the landlord’s favour obviously!).

Tenant must keep and maintain the interior of the premises

Clause 8.1(a) of the ADLSI Lease provides that a tenant must, in a proper and workmanlike manner, and to the reasonable requirements of the Landlord keep and maintain the interior of the premises in the same clean order, repair and condition as they (i.e. the premises) were at the commencement date (or where the lease is renewed, the condition as at the commencement of the interim term).

Both landlords and tenants should therefore ensure that they complete, or have completed for them, a Premises Condition Report contemplated by the Sixth Schedule of the ADLSI Lease when they enter into a lease – it may also pay to prepare another report when the lease is assigned or renewed. Such report should ensure the parties commence their leasing arrangements on relatively good terms as opposed to having disputes from even before the lease is signed if the matters noted by one party in the report is not agreed-to by the other! (See the box below for more detail on Premises Condition Reports).

Fair Wear and Tear

Clause 8 further provides that at the end or sooner determination of the lease, the tenant must quietly yield up the premises in the same clean order repair and condition as at commencement. It goes on to clarify that a tenant is not liable to maintain premises due to fair wear and tear from its reasonable use of the premises but it does not (fairly, we think) go on to impose the obligation on the landlord instead to maintain or repair damages or deterioration brought about by fair wear and tear.
Landlords particularly should be wary about the fair wear and tear exception at clause 8 in light of their tenant’s permitted use of the premises. For instance, a tenant’s reasonable use of a premises for an industrial undertaking would have a vastly different fair wear and tear effect on the premises as opposed to a professional services firm or retail outlet being the tenant.

Alterations or additions to the premises

Clause 20 of the ADLSI Lease provides that where a tenant has made alterations or additions to the premises, it must reinstate the premises on expiry of the lease or its sooner determination. Failure to reinstate by the tenant allows a landlord, within six months from the expiry or termination of the lease, to recover the costs incurred by it to reinstate the premises. Thus, landlords may be reasonably entitled to ask their tenants to pay a security deposit to cover itself where the tenant asks for its consent to alter or add to the premises. Likewise tenants should factor their reinstatement costs when considering whether or not to renew a lease in order to move to other premises.

Conclusion

In short, you need to read and understand your rights and obligations in relation to repairs, maintenance and reinstatement in your commercial lease. If in doubt, please contact us and we would be happy to assist.