The Deed of Lease (Seventh Edition) – a potted guide
Changes have been made to The Law Association of New Zealand Incorporated’s (Law Association) (previously the Auckland District Law Society (ADLS)) standard form Deed of Lease and Agreement to Lease to reflect industry feedback and current market practices which have evolved over the last 12 years. The Deed of Lease now incorporates several variables intended to address commonly negotiated terms, such as issues arising from the Covid-19 pandemic, inflation, earthquakes, health and safety legislation and common law developments.
What do you need to know?
The Deed of Lease (Seventh Edition) was released at the end of November 2024. From that time, it will be the default version that Landlords and Tenants will sign up to. This is the most widely used form of commercial lease in New Zealand, so it is vital for both landlords and tenants to understand the extensive changes from the previous versions.
Below are some of the key changes.
Rent reviews
In addition to the option for either market rent reviews or CPI-based rent adjustments, a third option of fixed rent adjustments has been added. This can give certainty to parties who want it, rather than the inherent volatility of the other options. The new form also includes the option to specify upper and lower limits on rent adjustments, and an option for determining interim rent whilst a new market rental is determined.
Outgoings
The list of recoverable outgoings payable by the Tenant has been revised. The main changes include:
- clarifying that for water, gas, electricity, telecommunications and other utilities or services, the Tenant is liable for any increases in charges attributable to increases in consumption, but that capital charges are not passed onto the Tenant; and
- for insurance, the Tenant must pay not only the insurance premium, but also any excess payable when a claim is made to repair destruction or damage (refer further comments below regarding insurance).
There is also now an obligation for a Landlord to provide a budget of expected outgoings for each year and, upon request, copies of assessments and accounts. The final outgoings may be changed by the Landlord, but this is intended to enable tenants to budget for expenses better, with fewer surprises.
Maintenance
The Deed of Lease retains the existing obligations on a Tenant to keep the interior of the premises in the same clean order, repair and condition as it was at the start of the lease. New maintenance obligations include:
- if a floor covering is worn or damaged and requires replacement, the Tenant must replace the whole of the floor covering unless the specific part can be replaced without adversely affecting the appearance of the whole floor covering; and
- a Tenant will be required to keep accessways in a clean and tidy condition.
No access in an emergency
This clause became widely used during Covid, as it allows for the abatement of a fair proportion of rent and operating expenses when the premises cannot be accessed. However, there was often disagreement over the extent of the abatement that was appropriate. The Deed of Lease now allows the Landlord and Tenant to pre-determine a fair proportion, with 50% being the default amount if no other amount is agreed.
The Landlord and Tenant can also review this amount, if it is later considered unfair, once there has been no access for 20 working days.
Bank guarantees and rental bonds
The Law Association considers that over time there has been a trend away from obtaining personal guarantees as security for compliance with a lease. As a result, two new options have been included:
- a bank guarantee, provided from a New Zealand registered trading bank, under which the bank undertakes unconditionally to pay the Landlord on demand any sum up to a pre-agreed specified amount (with the default amount being three months’ rent); or
- a rental bond, similar to a bond for a residential tenancy, where an agreed amount will be held by the Landlord or the Landlord’s solicitor (with the default amount being three months’ rent).
Health and safety
For the first time there is specific reference to health and safety legislation in the Deed of Lease. There is confirmation that the Landlord and Tenant are both Persons Conducting a Business or Undertaking (PCBUs) under the Health and Safety at Work Act 2015, and that they must consult, co-operate and co-ordinate activities in respect of health and safety.
Reinstatement, removal, and make good
The Tenant’s obligations regarding reinstatement, removal, and make good of the premises at the end of the lease have been reorganised into a clause of their own. Full reinstatement and make good obligations have been maintained (if required by the landlord).
Renewal of Lease
The parties now have flexibility to specify a notice period to renew other than the three calendar months default notice period.
Seismic Rating
There is now an option for the Landlord to provide the Tenant with information on the building’s seismic rating with the opportunity for more detailed provisions to be included should the parties wish. We consider that this change does not go far enough to provide certainty to the parties, and further amendments during negotiations are likely to be required.
Mortgagee consent
If the premises are mortgaged, the Deed of Lease now includes an option for the Landlord to (if required) obtain consent from the mortgagee in respect of the Tenant’s interest under the lease. This change has been made to protect the Tenant from the risk of a mortgagee looking to sell a property without a lease if the Landlord becomes insolvent.
Insurance
The default period for which the Landlord must maintain insurance cover for loss of rent has increased from 12 to 24 months. If the Landlord makes any claim to repair damage or destruction caused by the Tenant, the excess can be charged back to the Tenant up to $5,000 plus GST (increased from $2,000 plus GST).
Schedules
New schedules have been included for the Tenant’s fixtures and fittings, and a plan for the premises and car parks.
Agreement to lease
The Agreement to Lease has also been updated, to a new Sixth Edition. Many of the changes in the Deed of Lease are also included in the Agreement to Lease.
It is important to note that the Agreement to Lease provides that the Landlord and Tenant must enter into a formal Deed of Lease using the “current” version, which will now be the new Seventh Edition. Even if the Deed of Lease is not signed, the terms in the Lease will still be enforceable as if it had been. This means that many of the new provisions could apply by default to Landlords and Tenants, whether or not they have turned their mind to them. It is recommended parties take legal advice on their options.
We also expect the updated versions of other Law Association lease forms to follow, including forms relating to lease renewals, assignments and variations.
What action needs to be taken
If you are looking to enter a new commercial lease, it’s important to pay careful attention to the terms of the new Law Association Agreement to Lease and Deed of Lease and take advantage of additional provisions which may benefit you and your business.
Duncan Cotterill’s property team can support you with all associated lease advice. Contact us to discuss your unique situation.
Special thanks to Hayley Dale for preparing this article.
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.
