The Law Association of New Zealand’s Deed of Lease which contains significant amendments.

Last month saw the release of the Seventh Edition of The Law Association of New Zealand’s Deed of Lease (previously known as ADLS) which contains significant amendments for both Landlord and Tenants to be aware of. This pro forma deed has been a staple in the New Zealand commercial property market, having been a foundation for lease negotiations since its initial release in 1984. In its latest revision, it assumes a dynamic approach to addressing emerging challenges and opportunities associated with commercial leasing. Understanding these changes is crucial for stakeholders in commercial property and those advising them. This article explores some of the updates, the rationale behind them and what the impact maybe on the Occupier in particular.

The Sixth Edition responded in 2012 to significant events such as the Christchurch earthquakes of 2011 with seismic-related provisions, such as fairness-focused clauses-for example, no access in emergency and protections against liability for tenants for defects in construction or building services. During the COVID-19 pandemic, these clauses took on new poignancy, giving a fresh reason to focus attention on the fairness of lease terms.

The Seventh Edition 2024 draws on this but further refines them with the benefit of modern commercial practices and a keen eye for areas where the earlier editions were silent. It aims to provide an improved balance for both landlords and tenants in their dealings.

Key Updates at a Glance

Greater variety of options for Rent Reviews
The lease now offers a wider list of options to choose from including Market rent reviews, CPI rental adjustment, and Fixed rent adjustment dates. It then goes further to include a section which defines how a market review will work. This includes the most Landlord favoured option being the traditional ‘Upward Only’ rent rachet to the rent payable immediately prior to the review. There are however alternative options listed such as review to the commencement rent, as well as the ability to add in cap and collar rents as could be agreed between the parties.

The inclusion of these Review Clauses in the Deed will enable the parties to engage in discussion and agreement at an early stage in the negotiation and arguably will aid the Tenant to ensure they have a rent at review that is more likely to reflect market conditions. This is especially important in a weak leasing market and, providing the Tenant understands these options, is a welcome addition for the occupier by stating options that previously an unadvised Tenant may not have realised were there. In reality it is often the case that the Landlord will be drafting the lease and as such will default to the most favourable options available, with the onus on the Tenant and to challenge that.

Insurance and Liability Adjustments
The new amendments allow for flexibility on insurance excess with a default increase to $5,000 (from $2,000 in the 6th Edition). In addition there are additional clauses which protect the Landlord further and which the Tenant needs to be aware of. For example, Tenants are now liable for increases in insurance premiums caused by their actions and, in some cases, the Landlord being able to include an insurance excess as an outgoing.

Pre-Determination of ‘Fair Proportion of Rent’
The Sixth edition of the Deed of Lease saw the introduction of a clause which enabled a Tenant to claim a ‘fair proportion’ as rental rebate should a situation arise where there is ‘no access in an Emergency’. This edition goes further in defining what a ‘Fair proportion’ of rent and outgoings could be, with the default being 50%. The lease allows the parties to pre-agree alternative proportions, and review this following an emergency event within strict timeframes.

This is a welcome addition for a Tenant who will now know what they are liable for in such an instance and as such will help greatly with planning and budgeting for alternative accommodation in the unfortunate event that it be needed. The inclusion also of the ability to further review this amount during an event demonstrates a level of flexibility within the Deed that should be applauded. It allows either party to serve a notice within strict time limits to initiate this process, as well as the next steps if there is no agreement.

Landlord Liability
Reduced limitations on landlords’ liability for maintenance obligations are a welcome change for the Tenant. It seems that the Landlord will be liable to maintain and repair faulty or defective building services, irrespective of whether the landlord has a service maintenance contract covering the works required.

Tenant Maintenance, Reinstatement and Make Good Obligations
Conversely and not surprisingly, the Tenants obligations have also been expanded in this edition. The lease permits a Landlord to refuse tenant alteration requests if these alternations result in a need to upgrade the building and the tenant is not prepared to bear those associated upgrade costs. These costs could be significant should they extend to the requirement to upgrade fire, passive fire, accessibility or seismic requirements, in particular for large multi-tenanted buildings.

In respect to floor coverings, it requires the whole floor covering to be replaced if ‘any part’ of the floor needs replacing unless that part may be replaced without adversely affecting the appearance of the whole floor covering. How this subjectivity will be applied in practice remains to be seen.

Seismic Ratings
The Landlord can now elect to specify the seismic rating on a building within the lease. Should they do this, they are then under an obligation to disclose to the Tenant new information on any ‘materially different’ assessments of the building’s NBS rating.

Understandably there has been an increased focus on the Seismic ratings of a building from Tenants over recent years and this addition is a reflection of this. The importance of the clause will vary depending on the building’s location, form of construction, condition for example, and as such we would recommend advice taken for each scenario.

Conclusions
The Seventh Edition 2024 has continued to add clarification and options for negotiation into the Deed of Lease. While the guidelines seem fair and reasonable, these updates emphasise the importance for an occupier to have an in depth understanding of the implications of these options.

New and amended clauses dealing with seismic ratings, pre-defined emergency rent rebates and Landlords liability to repair building services are all welcome additions to help give a Tenant occupational and financial certainty throughout the term of the lease. The biggest and most favourable changes to the Tenant are the inclusion of the Rental Uplift clauses which at a minimum highlight that such options exist. The importance for the Tenant is to understand the potentially significant difference in each and have the capability to negotiate their position.

While the ADLS lease form is comprehensive, it should not be used as one size fits all. Each commercial property is unique and has its specific peculiarity that will often call for considerations that capture the needs of the Tenant and circumstances surrounding the property.

How Hampton Jones can help?

Hampton Jones is here to assist with navigating these changes, ensuring commercial property stakeholders are well-equipped to manage the complexities of lease negotiations. Matters we can assist with include;

• Advising on the most suitable lease conditions that suits your business.
• Negotiations with the landlord on the terms of the lease.
• Dilapidations/make good advice from your existing lease and your new lease.
• Preparation of Premises Condition Reports.
• Due diligence for the new premises, including test fit, concept plans and budgets.
• Project Managing the fit-out and exit of the your current lease.

Reach out to us for tailored advice and support in this dynamic landscape.