Commercial lease agreements are contracts that define the relationship between the landlord and the tenant and sets out both parties' rights and obligations.
In New Zealand, there is no prescribed form of commercial lease, the parties are free to draft their own lease agreement tailored to their specific situation.
However, the Auckland District Law Society (ADLS) and the Real Estate Institute of New Zealand (REINZ) provides a standard template of lease agreement and it is the most commonly used form of lease in New Zealand. The ADLS lease is a useful lease template for both the landlord and the tenant as it provides a set of terms and the option to add further terms in order to meet specific needs of the parties.
Please note that the Property Law Act 2007 implies rights and obligations into all form of leases.
Common commercial lease disputes
Even the best prepared contract can't prevent there being disputes between landlords and tenants. In our experience the rent review process and the landlord's right to enter and repair, create the most procedural issues. It is important to understand the correct procedure behind them in order to avoid and manage conflicts effectively.
Rent review process
One of the most challenging and costly aspects of the relationship between a landlord and a tenant is the process of rent reviews. This is understandable since rent payments are usually an essential term of the agreement, with rent being the main source of income for the landlord and one of the tenant’s major business expenses.
In the latest ADLS standard form lease (6th edition 2012), there is an express rent review provision under clause 2.1 titled "Market Rent Review". It is common for the landlord to initiate the rent review process as there is a ratchet clause which gives no benefit to the tenant in initiating such rent review. Landlords must give formal notice to the tenant specifying the proposed new annual rent. Such rent proposed is usually based on a fair market valuation by a competent valuer. If the tenant disputes the proposed rent, then they will need to provide a formal written notice in response expressing their disagreement, along with their own rent proposal within 20 working days after the landlord's notice. Time is of the essence, meaning if you do not follow the strict timeframes required under the lease you may lose your rights to any protection the process gives you.
If the landlord and tenant cannot agree with the proposed rent within 10 working days, then such matter will either be determined by arbitration with one party giving notice or the parties agreeing to use registered expert valuers.
We recommend informal discussions before conducting the formal process.
Some landlords like to obtain a registered valuation - This will ultimately support any proposal that they make for the increase in rent. Be aware of the cost and the tension that may be created by the review being conducted badly.
Rights of entry and repair
With recent natural disasters, and increases in weather-related damage, the issue around landlord’s rights to carry out repairs and maintenance has come to the forefront of the landlord-tenant relationship.
A landlord cannot enter their commercial premises without giving prior notice or obtaining permission to do so. Clause 15.1 of the ADLS lease provides the landlord and their employees or contractors the right to enter the premises at all reasonable times for the purpose of any repair works, after reasonable written notice has been given. What is reasonable will depend on the circumstances but be aware that the tenant is entitled to what is known as "The right to quiet enjoyment". It has been shown in case law that there is a need to balance the tenant’s right to quiet enjoyment and the landlord’s rights to repair and maintain in the lease, and neither of the rights are subordinate.
In order to avoid disputes, it is important for landlords to understand what actions would constitute a breach of the tenant’s right to quiet enjoyment. For a breach of quiet enjoyment by the landlord, the tenant must prove on the facts that there has been a substantial disruption or interference caused by the landlord’s work which prevented the tenant from enjoying the property for the purposes for which it was leased. Examples of qualifying acts could include the landlord cutting off the gas and electricity while completing work and interfering with the tenant's right to operate.
If the tenant is successful in establishing a breach, they will be entitled to a wide range of remedies such as damages for pecuniary loss and/or an injunction stopping the works.
Generally works that are outside of the tenant’s premises are unlikely to breach the tenant’s right of quiet enjoyment. While work done to common areas may breach the right if the works are noisy and percussive it is typically work done inside the tenant’s premises that are better subject to dispute.
Before performing work on a commercial property, as a landlord it would be practical and prudent to consider:
- Whether the work would be mere interference or disturbance with convenience or amenities, which would not constitute a breach;
- Whether the work to be carried out is also for the benefit of the tenant;
- The cumulative effect of the works; and
- Any reasonable steps to be taken to minimise interruption or disturbance to the tenant.
It is recommended that before the commencement of the work, landlords should have an open dialogue with their tenant to discuss the work to be done and should keep the tenant informed at all times. Behaving in a professional and courteous manner towards the tenant will also ensure an ongoing healthy professional relationship.
Alternative Dispute Resolution (ADR)
Unfortunately, in the best of relationships there are sometimes disputes which need independent resolution, and it is essential for both parties to learn about the different Alternative Dispute Resolution (ADR) methods that are available. ADR could be a good alternative as most parties in a litigation process are keen to resolve their disputes without the need to incur time, cost and stress associated with formal hearing processes. The most common ADR methods used are mediation and arbitration.
Mediation is a voluntary process where a neutral third party, called a mediator, helps the parties in a dispute to reach a mutually acceptable settlement. The mediator does not make a decision or impose solutions on the parties, but rather helps the parties to communicate, identify their underlying interests and needs, and find a common ground.
Mediation is a creature of contract and does not have statutory basis, it depends solely on the contract and the parties willingness to get together and talk things through. The advantages of mediation are that the process is without prejudice and discussions at mediation are confidential. This means that the parties can freely discuss and debate their disputes without the fear of it becoming public or prejudicing their ultimate positions. The result of mediation however, can be legally enforceable if written agreement is reached between the parties.
In our experience, the appointment of the right mediator certainly helps in most instances.
Arbitration is a process where an independent third party makes a decision which is binding and enforceable on the parties. Arbitration in New Zealand is governed by the Arbitration Act 1996. The Act sets out the framework and mechanisms to support effective and consistent arbitral processes. The standard ADLS lease contains an arbitration clause which sets out how it is to work.
The advantages of arbitration is that it is quicker, more flexible and less costly than a formal Court hearing. Arbitration is also confidential, that means the public would not be able to attend a hearing, and the facts and the award of the arbitration will not be publicised. The arbitral award is enforceable through the Courts and the award is always sufficient to issue a statutory demand if enforcement is required.
- Be careful when reading and preparing your lease.
- Do not simply rely on the entitlements under the lease if the result will impact your tenant’s commercial viability.
- Be careful when doing work in repair and entering the premises.
- Consider the best form of dispute resolution.
If you need advice on commercial lease agreements or disputes, contact our Business and Commercial Law Team.
Author: Eason Chen