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If you work in the commercial property sector - involving retail shops, office buildings, industrial facilities, or hospitality venues - you’ll want to know about the latest updates to the ADLS Deed of Lease ('DOL'). Released on 27 November 2024, the Seventh Edition introduces significant changes to reflect the evolving commercial landscape of the past decade. These updates are designed to meet the needs of today’s business environment, addressing challenges such as Covid-19, natural disasters, and inflation, while also incorporating feedback from industry practitioners. This article outlines some of the most notable changes introduced in this edition.
The inclusion of Consumer Price Index (CPI) adjustments in the 6th Edition DOL allowed for rent adjustments based on inflation. However, with recently high CPI rates, rent adjustments have sometimes far exceeded market rent levels. The new DOL now allows parties to select specific dates for fixed rent adjustments, which if desired can be combined with market rent reviews and CPI adjustments. Fixed rent reviews provide certainty to the landlord and tenant and are a welcome improvement.
Another significant update is the introduction of various ratchet options for market and CPI rent reviews, to ensure rent adjustments cannot fall below agreed-upon levels. This includes an option that allows the parties to set their own lower and/or upper limits, known as "caps and collars," providing flexibility to tailor rent adjustments based on market conditions or specific needs. These clauses offer greater financial certainty while balancing the competing commercial interests of both landlords and tenants.
The outgoings provisions have also been refined to better clarify the responsibilities of tenants and landlords. The new provisions broaden the range of costs landlords can charge, including those for utilities, emergency levies, service maintenance contracts, cleaning, maintenance, and repairs. However, they are also more specific requiring separation of usage, which is chargeable, and capital costs, which are not chargeable. Another change requires that tenants be charged a fair allocation of outgoings, which may vary depending on their usage or occupation. Overall, the changes intend to offer greater transparency and fairness in the allocation of costs, helping both landlords and tenants better manage their responsibilities and avoid disputes.
"No Access" provisions were initially introduced in the 6th Edition to address situations where tenants are unable to access their premises due to emergencies such as natural disasters. This proved essential during events such as the Covid-19 lockdowns, allowing rent and operating expenses to be abated when tenants could not operate their businesses. The revision acknowledges the varying impact of emergencies on different types of businesses, recognising that some, like professional services, may be less affected than others requiring in-person operations by introducing the concept of a "Fair Proportion of Rent." The default proportion is 50%, depending on the impact of the emergency. Provisions include reassessment of this proportion, adjustments for longer periods of no access, and more specific dispute resolution pathways. These updates ensure flexibility and provide a structured approach for handling rent adjustments during emergencies.
The Seventh Edition also introduces significant changes to security provisions, shifting from traditional guarantees to more accessible options like bank guarantees and rental bonds. These changes are in response to the challenges landlords face in enforcing personal guarantees. Landlords can now require a bank guarantee from a registered New Zealand trading bank, typically equal to three to six months' rent. This security is designed to ensure that the tenant has sufficient funds to cover their rent obligations, with the guarantee sum increasing proportionally during rent reviews.
Alternatively, an equivalent level rental bond can be used as security and may cover outgoings. The bond is held by the landlord or their solicitor, with interest accrued being added to the security amount. If the tenant defaults, the landlord may access the bond to cover outstanding amounts, provided they give a written statement of expenditure. The tenant is then required to restore the bond. At the lease's conclusion, the bond is returned to the tenant, subject to lawful deductions, or in the case of lease assignment, the bond is released to the outgoing tenant and replaced with new security if needed.
The introduction of bank guarantees and rental bonds as alternative forms of security reflects a shift towards more efficient, cost-effective methods of securing leases. These changes provide greater flexibility and security for landlords, while also offering tenants a clearer and more straightforward process for managing lease obligations.
A seismic rating clause has been introduced in response to the increasing demand from insurers, financiers, and authorities for seismic assessments. These assessments are now often required for earthquake risk evaluations before buildings can be insured or financed, and some tenancies may also require specific seismic ratings for operation. The clause ensures landlords disclose seismic reports and updates to tenants, but it does not warrant the accuracy of the rating, meaning there are no legal consequences if the rating differs from the initial disclosure. The clause encourages transparency but leaves room for customisation based on the parties' needs. Tenants should proactively inquire about seismic assessments before entering into lease agreements to ensure they are fully informed about the risks associated with the building's seismic performance.
The most recent itineration of the Deed of Lease is a comprehensive update, addressing the evolving needs of the commercial property market. The changes offer greater flexibility and transparency while remaining balanced for both landlords and tenants. With an emphasis on providing more predictable terms and clearer responsibilities, the new edition helps mitigate risks for both parties and fosters more efficient lease management.
If you have any enquiries relating to this topic or article, or require assistance with leasing matters, please contact:
DDI: 09 966 3609
Email: bcullen@mcveaghfleming.co.nz
© McVeagh Fleming 2024
This article is published for general information purposes only. Legal content in this article is necessarily of a general nature and should not be relied upon as legal advice. If you require specific legal advice in respect of any legal issue, you should always engage a lawyer to provide that advice.
