New ADLS Lease
How will the new ADLS lease form affect landlords and tenants?
A new edition of the Auckland District Law Society Inc‘s (ADLS) Deed of Lease, which is commonly used throughout New Zealand for leases of commercial property, has been released. If you are a landlord or a tenant entering into a lease using the new form, the changes will affect you. This article highlights some key changes.
The ADLS Deed of Lease (sixth edition), referred to here as the ‘new ADLS lease’, was released in November 2012. Many of the changes made in it address problems which came to light with the destruction of commercial buildings in the Christchurch earthquakes. Others reflect changing leasing practice.
CPI rent reviews
The new ADLS lease gives landlords and tenants the option of choosing CPI-based rent reviews instead of (or in addition to) market rent reviews.
In previous versions of the ADLS lease, rent reviews are based on a ‘current market rent’ test. This means the rent can be adjusted on each rent review date or lease renewal date to reflect ‘market rent’ for the property. If the landlord and tenant can’t agree on the rent, they can resolve the dispute by going to arbitration or determination by registered valuers. This can be costly.
With CPI rent reviews, the rent will be adjusted by increases (but not decreases) in the Consumer Price Index (All Groups). This removes the risk of expensive disputes over market rent.
It’s possible to combine both market rent and CPI rent reviews. For example, you could elect to have regular CPI rent reviews, with market rent reviews at longer intervals. This may guard against the possibility that CPI adjustments cause the rent to deviate too far from market rent over time.
There are pros and cons to each of these rent review mechanisms, as well as other possible methods. We can advise you on these, and help you to navigate your way through the rent review process.
Insurance
Building insurance costs have soared in the wake of the Christchurch earthquakes. The new ADLS lease, like previous editions, makes the tenant liable to pay the landlord’s insurance premiums for the types of cover specified in the lease. In the event of a claim, however, the tenant is required to pay only a portion of the insurance excess – up to $2,000. (The tenant’s contribution has been increased from the $500 payable under the previous edition of the ADLS lease.) The landlord is obliged to insure the building against damage and destruction for the usual range of risks (including earthquake cover), with an option in the lease to select between full replacement and reinstatement, or indemnity to full insurable value. The lease also allows the parties to agree that the landlord will take cover for some additional risks.
If you’re entering a lease, you’ll need to carefully consider the insurance provisions. They may need to be modified to suit your particular circumstances. Examples would be if insurance cover isn’t available for some risks, the premium is unaffordable for the tenant, or the insurance excess is too high or reimbursement of part of the excess isn’t suitable.
Outgoings
The new ADLS lease, like previous editions, allows the landlord to pass on certain costs to the tenant as ‘outgoings’. A change from the previous ADLS lease is that the landlord is now required to vary the proportion of outgoings payable by the tenant to ensure that it remains fair, for example, if circumstances change.
The list of outgoings hasn’t changed greatly. The new ADLS lease, however, specifies that the following costs will not be passed on to tenants:
- Repairs to a building due to defects in design or construction, inherent defects in the building or renewal or replacement of building services
- Charges for repaving or resealing a car park, and
- Costs of upgrading, or other work, to make the building comply with the Building Act 2004.
Many landlords and tenants focus on rent, but don’t give enough attention to outgoings, even though outgoings can be costly. It’s important to ensure the list of outgoings is modified where appropriate.
Legal costs
The new ADLS lease requires each party to pay their own legal costs in relation to the preparation of the lease, and subsequent variations and renewals. This differs from the previous edition, which required the tenant to pay these costs.
Landlord’s maintenance
There have been a number of changes to maintenance provisions, including the addition of a specific requirement that the landlord keep the building weatherproof. The landlord is also required to maintain building services and to replace them if they can no longer be maintained through regular maintenance.
Landlord’s access for inspection and works
The Christchurch earthquakes have highlighted issues that can arise if a landlord needs extended access to premises to perform works. The new ADLS lease allows the landlord to require a tenant to vacate the premises if this is reasonably required to enable works to be carried out. If a tenant is required to vacate, or the tenant’s business is materially disrupted, there will be a fair reduction in the rent and outgoings while the disruption continues. The landlord must act in good faith when exercising this right of access.
Who bears the cost of earthquake-strengthening work?
The cost of earthquake-strengthening work has become an important issue for many landlords. Under the previous edition of the ADLS lease, a landlord may be able to pass a percentage of earthquake-strengthening costs on to a tenant under the ‘improvements rent’ provision until the next rent review. However, landlords don’t have this ability under the new ADLS lease, as the improvements rent provision has been removed.
Access in emergencies
The Christchurch earthquakes exposed another problem in previous editions of the ADLS lease, which arose when premises were undamaged but couldn’t be accessed. In this situation the lease arguably required the tenant to continue to pay rent and outgoings, even if they couldn’t access their premises. This led to disputes about whether the tenant could cancel their lease.
The drafters of the new ADLS lease have tried to address this issue. If the tenant can’t access their premises due to an emergency, for example, if a cordon is in place, the tenant will be entitled to a fair reduction in the rent and outgoings until the premises can be used again. If the situation continues for too long (nine months is the default period in the lease), either party will be entitled to terminate the lease.
Reinstatement and chattels removal
The new ADLS lease contains several changes relating to the requirement for the tenant to remove its alterations and chattels, and reinstate the premises at the end of the lease.
One useful addition is the option to attach a Premises Condition Report, which is a report of the state of the premises at the start of the lease. This is a good way to reduce the risk of costly disputes at the end of the lease about the state of repair to which the tenant is required to restore the premises.
Bank guarantees
If a tenant assigns their lease to an unlisted company, there is a new option for security to be given to the landlord in the form of a bank guarantee, instead of personal guarantees from the new tenant’s principal shareholders.
Some landlords are now requiring a bank guarantee from the original tenant, although the new ADLS lease doesn’t provide for this. Personal guarantees may be of limited worth if the people giving them have limited assets, or have their assets tied up in family trusts. In addition, some directors are unwilling to provide personal guarantees.
See a lawyer before you sign a lease
Landlords and tenants often enter leases without giving enough attention to the fine print. once the lease has been signed, it’s too late to make changes. You may wish you had done so once you become aware of the full implications of the lease terms later on.
Standard form leases are only a starting point. The ADLS lease isn’t always suitable and, when it’s used, it should be tailored to your situation. Whether you’re a landlord or tenant, you can benefit from customising your lease.
If you see us early in the process, we can work with you to negotiate lease terms which best suit your needs.