Lease reinstatement requirements – 7 tips to avoid a nasty surprise when your lease ends

Property

It is important to remember that a lease will usually obligate a tenant to ‘make good’ the premises before their lease ends. If you understand your reinstatement obligations at an early stage then this will save you time, money and stress at the end of your tenancy.

1. Obligations during the lease vs obligations at the end of the lease

A useful starting point is to remember that a tenant has several different obligations under their lease. Some ‘repair and maintenance’ obligations are ongoing throughout the entire life of the lease, while other ‘reinstatement’ obligations only kick in when the lease ends. The extent of the tenant’s obligations will depend on the wording of the specific lease documents.

Obligations during the lease

A lease will commonly require a tenant to maintain the premises in the same condition as the premises were in when the lease first commenced (excepting fair wear and tear from reasonable use). Leases will also usually obligate a tenant to repair any damage that occurs from the tenant’s unusual or careless use of the premises.

A tenant may have other obligations under a lease that aren’t automatic, but are rather only triggered if the landlord has reasonably requested that the tenant carry out work. For example a lease may state that a landlord can require a tenant to replace floor coverings or repaint the interior of the premises if such redecoration is ‘reasonably required’. Other leases may alternatively require that the premises is redecorated to a certain standard at regular agreed intervals.

If a tenant has not complied with any of their ongoing maintenance and repair obligations, then the landlord can require that these breaches are completed before the tenant is released from liability under the lease.

Obligations at the end of a lease

Leases will then usually contain further obligations that only take effect when the lease expires (or is earlier determined). These ‘lease end’ obligations will include an obligation to remove any additions, alterations, signage, fixtures, fittings and chattels.

It is important to remember that the lease end reinstatement obligations go beyond just removing the tenant’s items and leaving the premises clean and tidy. For example if the tenant has erected partitioning walls, then the landlord can require that these walls are removed and the surfaces reinstated. Similarly a tenant could be required to remove any racking which has been bolted to existing walls and this may require that the walls are re-plastered and repainted.

2. The benefits of a premises condition report

As we have highlighted above, a lease will usually require a tenant to yield up the premises with regard to its condition when the lease first commenced. This can lead to disagreements, particularly if the lease has run for a long time and there is no clear evidence as to how the premises used to look.

These sorts of arguments can be avoided if the parties sign off on a comprehensive premises condition report and attach it to the lease document. The premises condition report should contain photos and a detailed description of the condition of the premises before the lease started.

3. Fixtures and fittings lists

If possible, leases should also contain a detailed list of which fixtures, fittings and chattels belong to the landlord (and must therefore stay when the lease ends), and which belong to the tenant (and may have to be removed when the lease is determined).

4. The issue of assignments

A tenant who takes on a lease by way of an assignment from a previous tenant is obligated to reinstate the premises to the condition it was in when the lease commenced, rather than the condition of the premises as at the assignment date. This may come as a nasty shock to the new tenant who may be unaware of the extent of the works carried out by the previous tenant.

Such an unpleasant surprise could be avoided if the new tenant undertakes a comprehensive due diligence of the premises to ascertain exactly what has been going on in the premises. The assignee could then ask that the deed of assignment contains a clause requiring the landlord to confirm the list of alterations that are required to be reinstated when the lease ends.

5. What about renewals?

Renewals are treated the same way as assignments, in that the standard to which the premises must be reinstated is set at the commencement of the lease’s initial term, rather than the latest renewed term. Please see our earlier article on lease renewals and reinstatement for more details. 

6. Reaching a financial settlement in lieu of carrying out the reinstatement work

Rather than actually carry out the reinstatement work, it may suit the tenant’s circumstances better to negotiate a financial settlement with the landlord. A dilapidation report may need to be obtained in order to determine what sort of payment would be fair.

A dilapidation report cross-checks the original lease documentation and any evidence of the building’s initial condition, with the current state of the premises. The report will note any breaches and determine the cost of any remedial work so the tenant does not pay more than it needs to, while the landlord can be confident that they’re not being short-changed.

The report could alternatively allow the tenant to partly off-set its costs by identifying the worth of any fit out which the tenant is prepared to leave behind if it would have value to the landlord.

7. Seek advice early

Our 7th tip is that you seek advice as early as possible. If you are dealing with the end of an existing lease, it is important that you understand exactly what you reinstatement obligations are as early as possible so that you can plan accordingly.

If alternatively you are negotiating a new lease then a lot of the uncertainty around reinstatement obligations can be avoided if the lease is correctly drafted so the parties are clear on how the premises must be left. The parties could negotiate the extent of the tenant’s reinstatement obligations. For example:

  • It could be negotiated that the tenant is not required to reinstate any works which the landlord has consented to during the lease.
     
  • It could be negotiated that the tenant can choose to take, or leave its fit out at the tenant’s discretion.
     
  • It could be negotiated that the tenant will not have to complete any reinstatement if the landlord intends to demolish the premises once the tenant moves out. It could be negotiated that the tenant will be required to repaint the exterior of the premises as well as the premises’ interior when the lease ends.
     

If we can be of assistance, then please contact a member of our expert Commercial Property Team or you can contact David Fitchett directly at david.fitchett@cavell.co.nz or +64 3 339 5611.

For further advice on commercial leasing matters please click here.

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Copyright © Cavell Leitch. All rights reserved. Redistribution is only permitted with express written permission. For enquiries please contact us. This article by its nature cannot be comprehensive and cannot be relied on by clients as advice. It is provided to assist clients to identify legal issues on which they should seek legal advice. Please consult the professional staff of Cavell Leitch for advice specific to your situation.