Leases and what we have learned since the Earthquakes

Property

The Christchurch earthquakes demonstrated the need to provide certainty around some of the issues that arose for landlords and tenants after the disaster. The sixth edition of the ADLS Deed of Lease (“the sixth edition”), released on 5 November 2012, addressed amongst other things these concerns and also included changes related to rent review processes.

There is now provision in an emergency situation for landlords to enter premises with no written notice, in order to inspect and carry out work. Such a clause could be relied on where earthquake strengthening work is required. The landlord can also require the tenant to vacate the premises to enable the works to be carried out, should this be reasonably necessary in the landlord’s opinion.

Should a tenant’s business use of a premises be materially disrupted as a result of the landlord entering the premises, the tenant is entitled to a reduction of a “fair proportion” of the rent and outgoings paid under the lease. In addition, the costs of such work are to be borne by the landlord, as there is no longer an “improvements rent” provision, which was the case under the previous edition. Another issue dealt with by the sixth edition is payment of rent where premises are undamaged, but are inaccessible for the purposes of a tenant’s business – for example, where premises are cordoned off.

There is now allowance for a “fair proportion” reduction in rent in such circumstances. In the case that such a situation endures for the nine month default period in the lease, there is also provision for either party to cancel the lease. A further issue that arose in the wake of the Christchurch earthquakes was the term “untenantable”, and the need for clarity around its meaning. This is unfortunately not something that has been clarified in the sixth edition, and the term will continue to be the source of much debate in lease disputes.

Another key change in the sixth edition is the introduction of Consumers Price Index (CPI) rent reviews, as an alternative to, or as well as market rent reviews. Market rent reviews have at times resulted in costly disputes, so the CPI option is one that should be considered by landlords and tenants. The CPI rent review would only increase rent over time, and would not allow for decreases in rent. A commonly suggested solution is to allow for both CPI rent reviews and market rent reviews, to ensure that the rent a tenant pays does not end up out of kilter with the market rent for a lease.

The amendments to the sixth edition have sought to provide some clarity to lease agreements in relation to significant natural disasters, such as the earthquakes in Christchurch, as well as offering some options for parties to consider with regards to rent review. These will be important factors for landlords and tenants to take into consideration when entering into a commercial lease.

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