More than you bargained for? Repair and reinstatement in standard form leases

Forewarned is forearmed when it comes to a lessee’s obligations in relation to the condition of a premises – both during and at the conclusion of a lease.

Property

Lessees have numerous obligations with regard to the maintenance, repair and reinstatement of leased premises. These obligations depend on the express wording in the parties’ agreement to lease and can differ substantially between leases. However, often both parties misunderstand what their obligations mean and the standard that is required of them.

Today, the standard form leases tend to cover off the majority of contentious issues regarding maintenance, repair and reinstatement obligations. However, if the parties’ obligations are not expressly addressed in the lease, then the common law position may apply. On that basis, the parties should be wary of any tags or amendments to the standard form leases.

This article will examine key, and often misunderstood, obligations with reference to two of New Zealand’s most common standard form leases – the Auckland District Law Society Inc. deed of lease sixth edition (ADLS Lease) and the Property Council New Zealand Retail Property Lease (PCNZ Lease) – as well as the common law position. In particular, this article will address:

• the standard of maintenance or repair required during and at the conclusion of the lease;

• the lessee’s liability for the cost of repairs when the lessor will suffer no damage, for example when the lessor is going to demolish the premises in any event; and

• whether the lessee can be liable for structural repairs or latent defects.

Many of the lessee’s obligations are ongoing

Clause 8.1(a) of the ADLS Lease and clause 5 of the PCNZ Lease provide that the lessee is required to keep the premises maintained throughout the term of the lease, as well as to yield the premises up on lease expiry with regard to the condition of the premises at the commencement date.

In addition, both the ADLS Lease and the PCNZ Lease place an ongoing obligation on the lessee to repair damage to the premises throughout the term of the lease.

In contrast, the reinstatement obligation typically only arises at the expiry of the lease term or its earlier determination.

Clause 20.1 of the ADLS Lease and 5.7.1 of the PCNZ Lease provide that the lessee is required to remove any alterations or additions prior to expiry and reinstate the premises (this will include making good any damage).

The standard of maintenance or repair required

Maintenance

As a starting point, the standard of repair that is required during the term of the lease and following its expiry will depend on the express wording of the lease itself. Absent express wording, the implied covenants that are contained at Schedules 2 and 3 of the Property Law Act 2007 (PLA) will also be relevant. These implied covenants tend to be mirrored in the standard form leases.

Both the ADLS Lease and the PCNZ Lease include an obligation to maintain and yield up the premises with regard to “the condition of the premises at the commencement of the lease”. Therefore, records evidencing the standard of the premises at commencement of the lease term are crucial (preferably from a reputable building surveyor). However, there is a key difference in the standard of repair required in these leases, because the ADLS Lease excludes fair wear and tear from the obligation to maintain.

Pursuant to clause 8.1(a) of the ADLS Lease, the lessee is obliged to keep and maintain the interior of the premises in the same clean order repair and condition as it was in at the commencement date, but is not liable for fair wear and tear arising from reasonable use.

However, the PCNZ Lease does not contain a fair wear and tear exception, but rather requires the lessee to hand over the premises in the “same first class condition” (having regard to the condition of the premises at commencement). The PCNZ Lease also excludes the implied covenants contained in the PLA.

The exclusion or inclusion of the fair wear and tear exception is a material consideration for any party considering entering into a commercial lease – particularly a long-term lease.

Note, however, that where the fair wear and tear exception does apply, this only releases the lessee from liability to repair. It does not necessarily create an obligation for the lessor to repair fair wear and tear damage or deterioration (see, for example, Collins v Winter [1924] NZLR 449). It simply makes such repairs a matter of commercial negotiation between the parties.

Repair

Issues around the standard of repair required arise when the lease does not refer back to an objective standard of repair or to the commencement date (although reference to the commencement date may be implied on the words of the lease – see Anstruther-Gough- Calthorpe v McOscar [1924] 1 KB 716, Proudfoot v Hart (1890) 25 QBD 42 and New Zealand Insurance Co Ltd v Keesing [1953] NZLR 7). This was the position in Auckland Waterfront Development Agency Limited v Mobil Oil New Zealand Limited [2015] NZCA 390.

In that case, the Court of Appeal held that, based on the wording of the lease, the lessee’s obligation to reinstate extended beyond the state of repair of the land as at the date of commencement of the 1985 tenancy. This placed an increased burden on the lessee over and above what it expected to be responsible for at the commencement of the tenancy.

The parties excluded the implied obligation that regard must be had to the condition of the premises at commencement of their 1985 tenancy. At clause 9, the parties included a term that upon termination the land and improvements should be left in good and tenantable repair and condition and clean and tidy to the reasonable satisfaction of the lessor. Accordingly, the Court of Appeal had to decide what was meant by delivering the land in good order and clean and tidy.

Citing Brew Brothers Ltd v Snax (Ross) Ltd [1970] 1 QB 612 (CA), the Court noted that “the question is whether on a fair interpretation of the tenancies the remediation work required of the tenant can be considered reasonable”. The Court held that:

• The lessee’s obligations extended to the subsurface of the land and Mobil was required to remediate hydrocarbon contamination of the land caused by Mobil NZ and its predecessor companies in the Mobil Group since their occupation began in 1925 (i.e. before the 1985 tenancy in question). The Court noted that a new lease does not excuse a tenant from liability for past breaches; and

• The remediation was only required to be to an industrial standard given that residential and light commercial use was not reasonably in prospect at the date of commencement of the lease.

We note that this has been appealed to the Supreme Court and a decision is anticipated later this year. However, what can be taken from this case is that parties need to expressly consider their respective obligations with regards to maintenance, repair and reinstatement at the outset of the lease and ensure that the lease agreement reflects their respective understandings as to the extent of their obligations. To this end, it is worth noting that an obligation to “repair” can extend to an obligation to renew or replace if repair is not possible, as was noted in the case of New Zealand Insurance Co Ltd v Keesing.

Liability for reinstatement when there is no damage

Both the ADLS Lease and PCNZ Lease include obligations on the lessee to remove any alterations or additions and reinstate the premises if required by the lessor.

The obligation to reinstate makes sense if the lessor intends to re-let the premises. However, it is not unusual at the end of the current lease for the lessor to demolish the premises to make way for a new development, or undertake repairs that will make the lessee’s reinstatement work redundant. In that instance, if the lessee failed to undertake reinstatement works, a potential issue is whether or not the lessee will remain liable for that work, or damages associated with the failure to reinstate.

Clause 20.1 of the ADLS Lease contemplates three possible reinstatement scenarios:

• The lessee removes its alterations and additions, either prior to expiry of the lease or later with the permission of the lessor, and pays for reinstatement; or

• The lessee removes its alterations and additions, either prior to expiry of the lease or later with the permission of the lessor, but fails to reinstate the premises. In this case, the lessor can recover the costs incurred in reinstating the premises from the lessee; or

• The lessee does not remove its alterations and additions. Ownership of those alterations or additions then vests in the lessor. To the extent that the lessor then chooses to remove those alterations or additions, the lessor can recover the costs incurred of doing so from the tenant.

(emphasis added)

Arguably, a lessor under the ADLS Lease has no right to claim compensation for anything other than the actual incurred costs of reinstatement. This means that, if the lessee does not remove its alterations or additions, or removes the alterations or additions but fails to reinstate, it will only be liable for the costs of reinstatement if the lessor does in fact reinstate.

This position appears to be consistent with clause 5.7.2 of the PCNZ Lease, which also refers to the costs and expenses incurred by the lessor.

However, a lessee’s obligation of reinstatement will ultimately depend on the wording of the lease and, unlike in the United Kingdom, there is no statutory protection for a lessee in the event that the lessor demands reinstatement costs where it does not intend to carry out the work (see section 18(1) of the Landlord and Tenant Act 1927). This means that in New Zealand, a lessee may be liable for the cost of reinstatement if the parties entered into an agreement that simply referred to costs, or to quotes or estimates prepared for the reinstatement work, regardless of whether that work has been undertaken. This will be a particular risk where the parties have drafted their own bespoke lease agreement.

Liability for structural repairs or latent defects

Lessees should be wary of their potential liability for structural repairs, which can prove to be a significant obligation.

Ultimately, the question of who is liable for structural defects under a lease will be a matter of interpreting the particular clause and will depend on the facts and circumstances of the case.

The Court of Appeal considered a lessee’s liability for structural repair in the case of Weatherhead v Deka New Zealand Limited [2000] 1 NZLR 23. In that case, the lease required the lessee to “well and sufficiently repair maintain amend cleanse and keep the premises ... in good and substantial repair with regard to the condition of the premises at commencement”. The lessor claimed that the lessee was responsible for the repair of the structural concrete bands running through the walls (which were made of a material that naturally broke down over time), and of the mortar between the bricks in the walls, which had begun to deteriorate and erode.

The Court of Appeal noted the importance of the reference in the repair obligation back to the condition of the premises at commencement of the lease, referring to this as a “benchmark” which “provides a ceiling on the lessee’s obligation”.

The Court ultimately held that “the inherent defects at the time of commencement, the structural character of the work required, and the nature and extent of the of the work necessary to remedy those defects are all factors pointing strongly to the conclusion that the words in [the clause] giving rise to the lessee’s obligation were not appropriate to describe the work required”. In other words, repairs of a substantial and structural nature did not fit within the wording of the repair obligation.

Although there is no express exclusion for structural repairs in the ADLS Lease, helpfully, clause 8.1(a) of the Second Schedule of the ADLS Lease limits the lessee’s maintenance obligations to the interior of the premises. The ADLS Lease can be contrasted with triple net leases where structural repairs are expressly the responsibility of the lessee who also pays all outgoings.

Conclusion

Many of the contentious issues which arise during the term of the lease, or upon its expiry, are now expressly addressed by the standard form leases. However, often parties do not take the time to understand those obligations or longterm financial implications of them (particularly where the expiry of the lease is not for some years). Accordingly, despite the attention now paid to these issues in current standard forms, it is important for parties to be aware of the effect and desirability of these obligations so that they are not surprised by unexpected maintenance, repair and reinstatement costs. 

Contact Us
Phone 09 303 5270
Fax 09 309 3726
Email reception@adls.org.nz