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With all the time, effort and cost that goes into taking on a new lease of commercial premises, what happens when it comes time to move on can seem unimportant. It is not surprising, then that make-good and reinstatement obligations are often not front of mind for landlords or tenants. But a little time spent thinking about the end of the lease before signing up could save both parties significant headaches down the road.
Most commonly, at the end of a commercial lease the tenant is obliged to hand back the premises to the landlord in the condition they were in at the commencement date, save for fear wear and tear, remove all of its chattels, fixtures and fittings and repair any resulting damage. Tenants are also expected to have complied with their maintenance and repair obligations throughout the term of the lease which will usually include general maintenance of the interior as well as specific obligations such as replacing worn floor coverings, fixing damage caused by the tenant and repainting and decorating. Where the tenant leases the entirety of the landlord’s property the tenant’s maintenance obligations can be more extensive, including responsibility for maintaining the grounds and if the landlord requests, any landlord maintenance for which the tenant is liable to pay outgoings under the lease, such as maintenance of the exterior of the building.
If the tenant has made alterations or additions to the premises the landlord can usually require the tenant to remove them, reinstate the premises to their previous layout and repair any resulting damage.
The cost of all of this can be significant, and it can come as an unwelcome surprise for many tenants at an already stressful time of exiting premises and setting up new ones. For landlords this can be a source of frustration and cost as they look to enforce the tenant’s obligations, with the parties sometimes poles apart in their assessment of the tenant’s liability. The following are some measures parties can take at the outset, to avoid nasty surprises at the end of a lease:
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- Know your obligations.
This seems obvious, but all too often tenants sign up to leases not fully understanding the extent of their lease end obligations. Of course, when it comes time to move on, they have not allowed for or have severely underestimated the expense of reinstating and making good the premises. If you take the time to fully understand those obligations (including getting good legal advice) you will be able to properly prepare and budget in the lead up to the expiry of the lease.
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- Premises condition reports
A premises condition report is essentially a document that evidences the condition of the premises as at the commencement date and any existing damage. It can be as simple as a series of photos appended to the lease (though some commentary can be helpful). If you don’t have one, come the end of the lease you will be relying on the parties’ memories of something that in most cases is several years in the past. It also opens the matter up to dispute where the parties have differing ideas of the condition of the premises at the outset, meaning further time and cost for both sides. Premises condition reports can be particularly useful if the original landlord has sold the building, or the original tenant has assigned its interest in the lease as one or both of the parties may never have seen the premises in the condition it needs to be returned to.
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- Agree specific obligations at the Outset
Often parties simply rely on the reinstatement and make-good terms of a standard form lease such as the Law Association of New Zealand Deed of Lease without thinking about their particular situation. If the tenant is installing a permanent or difficult to remove fitout, for example, they might want to allow for it to be left in place at the end of the lease and become the landlord’s property. If the fitout is of value to the landlord, they could even provide for the landlord to pay for or contribute to the cost of it. If the term of the lease is short the parties could agree that no repainting, redecorating or replacement of floor coverings is required. Where a tenant might cause contamination to the land, for example, where the tenant runs a petrol station or chemical storage facility, the landlord will want the lease to include prescriptive terms around the removal and remediation of contamination and an objective standard against which to measure the tenant’s compliance.
Parties should try to be as specific as possible when agreeing make-good and reinstatement terms. Is the tenant required to replace the entire floor covering or only the part that is worn or damaged? Does all contamination need to be removed or does the contamination need to be remediated to a certain standard (which should be clearly defined in the lease)? Can holes in walls caused by the removal of the tenant’s fixtures simply be plastered over or does the wall need to be relined?
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- Consider end of lease when designing fitout
A tenant can reduce cost at the end of the lease by designing their fitout with their make-good and reinstatement obligations in mind. Including fewer large or built-in fixtures and more small or moveable items. Designing the fitout in a way that makes it quick and easy to remove is an easy way cut costs at the end of the lease. A tenant can also get an assessment of the cost of removing their planned fitout before undertaking the actual fitout work, to assist in its decision on the fitout design.
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- Link make-good and reinstatement obligations to the start of the original lease.
All landlords should be aware of what happens if they grant a tenant a new lease of the same premises once the original lease finally expires. Unless otherwise specified, most leases will only require the tenant to return the premises to the condition they were in at commencement. So, where a tenant has entered into a fresh lease, the tenant would only have to return the premises to the condition they were in at the start of that new lease, which, in most cases, would be worse than the condition they were in when the landlord originally leased them to the tenant. Landlords should be careful to include provision for the tenant to return the premises to the condition they were in at the commencement of the original lease.
This is a sample of the matters that need to be considered when it comes to lease-end obligations, and they can be a confusing aspect of a lease. If you are considering entering a commercial lease or your existing lease is coming to an end, and you need help understanding your obligations, please get it touch with our Commercial Property Team.
Disclaimer: The information contained in this article is current at the date of publishing and is of a general nature. It should be used as a guide only and not as a substitute for obtaining legal advice. Specific legal advice should be sought where required.
