Obligations to make good and reinstate a premises at the end of a lease are not usually at the forefront of the mind of someone who is about to enter into a new lease or take an assignment of an existing lease. This is particularly the case where a business is in its early phases – it is easy for the business owner to get caught up in the excitement of their new venture and often their optimism and eagerness to get into the premises and start trading can cloud their judgement when it comes to negotiating the finer terms of the lease.
Hesketh Henry’s Ben Hickson examines the obligations which typically characterise the end of a commercial tenancy, obligations which, if not considered at the outset, can come as a costly surprise to an outgoing tenant.
What are my obligations as Lessee at the end of my lease term?
The Auckland District Law Society lease is the most commonly used commercial lease form in New Zealand. The form is now in its Sixth edition, and imposes the following obligations on the lessee on the expiry (or earlier determination) of the Lease:-
- The lessee must yield up the premises in the like clean order repair and condition as at the commencement date. This obligation is qualified in that the lessee shall not be liable for ‘fair wear and tear’ arising from reasonable use. For example, a lessee will be obliged to clean a carpet, but will not be liable to replace the carpet which has some wear arising out of the lessee’s reasonable use.
- If the lessor authorises any alterations or additions the lessee must, at its expense, reinstate the premises. Reinstatement goes beyond simply cleaning and ‘making good’, and can including works such as replastering and repainting walls where, for example, a lessee undertakes internal fitout work such as partitioning and internal cabling, or has damaged the premises whilst removing its chattels.
If the tenant fails to meet its obligations in terms of its make good and reinstatement obligations generally, the lessor can undertake the work itself and pursue the lessee for such expense.
What is your position as Assignee?
A lessee who has taken an assignment of a lease from a prior lessee can be required by the lessor to reinstate the premises to the standard it was in at the time of the commencement of the lease to the original lessee, rather than the condition of the premises at the assignment date. Obviously any argument by the lessor that a premises has not been reinstated to a satisfactory standard will be reliant on the lessor’s evidence of what was done by the original lessee.
Renewals are treated similarly. It is now clarified in the latest ADLS Lease that, in the event that the lease is renewed, the benchmark for the standard of repair by the lessee is determined at the commencement of the initial term of the lease, and not the latest renewed term.
Best Practice Approach
Parties to the ADLS commercial lease are now assisted by the inclusion of a ‘Premises Condition Report’, which will be the best evidence of the condition of the premises at the commencement of a lease. Photos and schedules may be compiled and signed off by both parties to accurately record the state of the premises at the lease commencement, and this can avoid disputes and costly litigation at the end of a lease in the absence of such a report.
If you are about to enter into a lease or take an assignment of an existing lease we suggest it is appropriate to clarify your ‘make good’ and reinstatement obligations before you take possession of the premises. We can assist.