Commercial leases: What happens when they come to an end?

Reinstatement

The current version of the Auckland District Law Society (ADLS) commercial deed of lease form provides that the tenant will, at its own expense, if required by the landlord, no later than the end or earlier termination of the lease, reinstate the premises to their condition as at the lease commencement date.  If the tenant fails to reinstate then any costs incurred by the landlord in reinstating the premises will be recoverable from the tenant.

Under the ADLS form of lease, if the lease is assigned to a subsequent tenant, then the subsequent tenant as at the expiry or earlier termination of the lease is liable to reinstate the premises to the condition of the premises as at the commencement date of the lease to the original tenant.

Reinstatement obligations are potentially wide-ranging and may, for example, include the removal or reinsertion of office partitioning, cabling, wiring and other office fit-out, computer systems, bathroom and kitchen facilities together with repainting, redecoration and replacement of floor coverings. This can lead to significant costs for a tenant. Where possible, the potential reinstatement costs should be factored into the calculations made by a tenant when considering the financial viability of the letting.

In addition, both the tenant and landlord can incur costs (such as professional fees, internal management costs and the like) in attempting to resolve any dispute between them around reinstatement issues and as to exactly what the state of the premises was at the commencement date of the lease. As many years may have elapsed since the original lease term commenced, it can be very difficult to establish the condition of the premises at the commencement date without any supporting evidence.

Premises condition reports

The inclusion of a premises condition report (sometimes also referred to as a schedule of condition) in a deed of lease is potentially very useful in determining the state of the premises at the commencement date of the lease.

The current version of the ADLS commercial deed of lease form includes the option for the parties to include a “premises condition report” and provides that where such a report is included, it will be “evidence as to the condition of the premises at the commencement date of this lease”.

The inclusion of a comprehensive premises condition report in the deed of lease means that the parties have clear evidence as to the condition of the premises at the commencement date.

Summary

Before entering into lease arrangements, landlords and tenants should thoroughly check the reinstatement obligations under the proposed lease.  If you have any queries in relation to reinstatement obligations either before entering into a new lease or when approaching the expiry of a lease we recommend you obtain legal advice.  

If you would like further information please contact Dale Thomas on 07 958 7428.