Significant Development in Commercial Leasing Space: New Standard (ADLS) Form of Deed of Lease Released

Geoff Caradus & Clare North

16 December 2024

The Law Association of New Zealand Incorporated (formerly the Auckland District Law Society) released a new standard form Deed of Lease known as the “Seventh Edition 2024” on 25 November 2024 (together with an associated updated form of Agreement to Lease).

Both documents reflect the evolving market conditions and commercial leasing practices since the release of the previous major re-writes back in 2012. In particular, both documents have been updated to include as optional variables many of the sorts of provisions that tenants and landlords have (until now) often included as amendments to the standard form. We anticipate that the provision of these additional options within the market standard form documentation will:

1. Make recording the agreed position between the parties regarding their subject matter quicker and cheaper (for example, it will no-longer be necessary to draft and include a bespoke bank guarantee clause where it is agreed that a bank guarantee is to be provided); and

2. Bring the subject matter of these additions to the forefront of both parties’ minds – which may well ultimately have the effect of slowly altering market practice.

While there is no substitute for reading the entire document, some of the more notable amendments include:

1. Security options – more options for landlords

The new form introduces greater flexibility for landlords when it comes to security options. In addition to the traditional personal guarantors, the new form provides options for the inclusion of bank guarantees and/or rental bond.

2. Seismic rating – a prompt for discussion but not compulsory

The new form introduces an option for landlords to provide Seismic Rating information to tenants. If a Seismic Rating is inserted (which is optional), the landlord has a continual obligation throughout the lease term to disclose to the tenant any report or information that they are aware of that contains a “materially different assessment” as the initially provided report. Any Seismic Rating stated does not constitute a representation or warranty about the Seismic Rating of the building, and no consequences arise from the building being found to have a different Seismic Rating (although it may well be that the presence of this option causes tenants to turn their mind to this matter more often, and potentially insist upon further amendments).

3. Outgoings – clarified scope and additional landlord’s obligations

The new form clarifies the scope of various outgoings that landlords may recover, but without making any real fundamental changes. Additionally, and more importantly, landlords must also now provide tenants with a detailed budget of outgoings for the upcoming year. Landlords must now also notify tenants of the estimate or actual amount of an outgoing within 24 months of the outgoing being incurred, otherwise the cost will be unrecoverable.

4. Rent reviews – introduction of fixed rent increases

The new form introduces fixed rent increases as an option alongside market and CPI rent reviews. This addition provides parties with greater certainty about future rent payments (as market or CPI adjustments can potentially be more volatile). While fixed rent increases are already common in the market, this additional option makes it easier for parties to incorporate them into the lease without the need for additional extensive drafting.

For market and CPI rent reviews, the new form also provides for a wider range of options beyond the default soft ratchet. The available options have been expanded to include:

• a hard ratchet option (reviewed rent will not be less than the rent payable immediately prior to the relevant rent review or adjustment date),
• a softer ratchet option (reviewed rent will not be less than the rent payable at the commencement date of the initial lease term), and
• an ‘other’ option – allowing for bespoke options, such as caps (upper limit) and collars (lower limit).

5. Tenant’s fixture and fittings – clearer demarcation between landlord’s and tenant’s property

The new form provides for a new Schedule 6 to list the tenant’s fixtures and fittings. This inclusion provides for a clearer distinction, making it easier for valuers to exclude the tenant’s fixture and fittings when conducting a rent review and help enhance clarity when the tenant vacates the premises, reducing potential disputes between the landlord and tenant over ownership and removal.

6. Mortgagee’s consent

Landlords now need to expressly confirm whether they are required to obtain mortgagee’s consent regarding the tenant’s interest under the Deed of Lease.

7. Renewal Notice Period

Parties now have the option to specify a notice period for renewal that is longer or shorter than the previous 3 calendar month requirement.

8. Landlord’s consent to additions and alternations by tenant

The new form now provides that a landlord may withhold consent if an alteration or addition by the tenant would prompt a requirement to upgrade the building, unless the tenant agrees to meet all of the associated costs.

9. Insurance excess

The new form now allows parties the option to specify an insurance excess amount, with the default option increasing from $2,000.00 to $5,000.00. If the insurance excess is increased by the landlord’s insurers as a result of any act or omission of the tenant, the tenant must pay the landlord the increased amount in respect of any future claim on the insurance policy.

10. Compliance with statutes and regulations

The new form introduces specific obligations relating to health and safety on landlords and tenants, including an obligation to comply with the Health and Safety at Work Act 2015. Notably, landlords should also be aware that the right to terminate the lease has been removed if legislation or a competent authority requires them to expend unreasonable sum of moneys to undertake additions or alterations to the premises.

11. No access in emergency rent adjustment

The new form now allows parties the option to specify the percentage of rental abatement in the event the tenant is unable to access the premises in an emergency, with a default abatement of 50% of rent and outgoings. Previously, abatements were based on a ‘fair proportion’ of the rent and outgoings, which could lead to uncertainty or disputes. Parties are now also able to review this percentage for a particular emergency, on grounds that it has become apparent that the percentage specified is not a fair proportion.

12. Damage or destruction of premises

The new form now requires landlords to apply the insurance proceeds they receive, plus the insurance excess, towards reinstating the premises in the event of destruction of the premises. Additionally, if the lease is terminated due to destruction of the premises, landlords now cannot require tenants to reinstate the premises or remove their fixtures, fittings, and chattels from the premises.

Overall, the Seventh Edition Deed of Lease remains a reasonably balanced document for both landlords and tenants. However, given the diversity of landlord – tenant situations, it will continue to be

used as a base document, with amendments and customisation tailored to suit each particular client or situation.

Want to know more?

If you have any questions about how these changes will affect you or your future commercial leasing arrangements, please contact Clare North (clare.north@pittandmoore.co.nz) or Geoff Caradus (geoff.caradus@pittandmoore.co.nz).

Disclaimer: The information contained in this publication is of a general nature and is not intended as legal advice. It is important that you seek legal advice that is specific to your circumstances.