Repair covenants in leases: get it right

Friday, July 28, 2017

A recent case¹ has again highlighted the importance of clear drafting in relation to lease provisions and the danger of not documenting these correctly, relying on standard forms or covenants implied by statute. One of the common areas for disputes between landlords and tenants both during the term of and on the expiry of a lease is the interpretation of tenant repair obligations.

The current statutory position is that an obligation on the tenant to keep leased premises in a good condition (or similar words) does not require the tenant to put the premises into a better condition than as at the start of the term. However, the parties are free to agree that a different position will apply. If a different position is to be adopted then this needs to be clearly set out in the lease or, if agreement follows the grant of the lease, documented in writing as a deed between the parties. Failure to document such provisions correctly risks them being held not to be binding and therefore unenforceable regardless of the intention of the parties. A deed should be used as a letter, memorandum of agreement or other informal agreement may raise the question of enforceability.

The statutory position and the court’s interpretation of it makes it clear that if there is an intention that the tenant is to be obliged to put premises in a better condition than at the start of the lease then there needs to be an express clause in the lease or other binding document clearly stating so.

Even where the intention is in line with the statutory and standard lease position that the tenant is not obliged to put the premises in any better condition than at the start of the lease, the question arises as to how that will be ascertained on renewal or at the expiry of the lease. It is not unusual for the landlord, the tenant or both to change during the term of a lease and even if they do not how easy will it be to reference the condition that the premises were in 10, 20 or 30 years ago?  This can be easily solved by attaching a thorough photographic report to the lease showing the condition of the entire premises as at the start of the term (as is envisaged by the current Auckland District Law Society (ADLS) standard form). This then provides a clear reference point when required in the future.

If there are specific fixtures, fittings or elements of the premises that require special treatment then this should be set out explicitly. This may be particularly important in relation to newly constructed properties where the landlord wants to impose an obligation to replace certain items at the end of the term.

Care should be taken in relation to how liability for repairs is apportioned between the landlord and the tenant. The usual assumption is that the tenant will be liable for the internal elements of the premises whilst the landlord retains liability for the exterior and structure. However, this simple division may not always be appropriate when considering the nature of the premises being let and the term of the lease. One frequent area where this split proves inadequate is in the case of mezzanine floors but is also relevant where there are elements of the structure that should be the tenant’s responsibility to maintain and repair.

It is important to note that tenant obligations in relation to repair are an ongoing obligation during the term of the lease and are not just relevant on renewal or expiry. Action can therefore be taken in relation to breaches at any time and should not be left to worsen risking further damage occurring, increasing the cost of repair above that which the tenant can afford and leaving the landlord no option but to seek costly and time consuming enforcement action.

There are also key differences between the obligations depending on whether the ADLS or the Property Council New Zealand (PCNZ) standard form of lease is used which parties also need to bear in mind. For example, the ADLS form and the PCNZ form have different positions in relation to the exclusion of fair wear and tear from the tenant’s obligations and the reference standard for the condition of the premises that the tenant is expected to adhere to.

The key, as with all lease provisions, is clear drafting, documenting such provisions correctly and understanding the meaning and consequences of the covenants being entered into.

If you are contemplating entering into a lease, have leases nearing renewal or expiry, require advice on enforcing lease covenants or have any other queries arising out of this article, please contact a member of our property team.

¹ Brian Green Properties (1971) Ltd v Bindon Holdins Ltd [2017] NZCA 284.

 

Disclaimer: the content of this article is general in nature and not intended as a substitute for specific professional advice on any matter and should not be relied upon for that purpose.

 

 

 

 

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