For the first time in more than a decade, The Law Association (formerly Auckland District Law Society) template has had a significant face lift, with The Law Association releasing an updated version of its template deed of lease just this week.

One of the most commonly-used templates in the New Zealand commercial leasing market, the template has generally been regarded as achieving a balanced position between landlord and tenant. While the changes do not fundamentally alter that aim, some are noteworthy for setting a new direction on matters where the template previously left parties in a position of silence or stalemate.

A new seismic clause assumes the landlord will disclose the seismic rating

One of the most significant changes is the addition of a new seismic rating clause. The parties can record a seismic rating for the building as at lease commencement, based on information or reports that may be provided by the landlord. Importantly, the rating is not mandatory, and can be left out (in which case the lease will be silent on seismic terms).

If a seismic rating is included, then the landlord must disclose to the tenant any information it becomes aware of which materially differs from that recorded seismic rating during the lease term. However, the clause expressly states that any reports or information provided by the landlord do not constitute a representation or warranty as to the seismic rating of the building. This clarifies that the landlord’s obligation extends to disclosure only, without disrupting the starting position of “tenant beware”.

The clause then invites the parties to agree and include further seismic provisions in the schedule of Further Terms.

The seismic clause sits at the less radical end of the spectrum of options available. It is difficult to see how the clause provides any meaningful remedy for a tenant if the landlord fails to observe its continuing disclosure obligation. The Law Association has said that the clause is intended to act as a prompt for parties to consider their respective appetite and requirements for further seismic terms, but not to force a template position on those terms.

We agree that now is not the right time to establish a stronger precedent position for seismic terms. With the government only recently underway with its review of the earthquake-prone building regime, it is likely any changes to that regime will affect market appetite for seismic risk (see our previous alert on this here).

Notwithstanding the low-stakes nature of the clause, parties still need to be cautious about its application, including because:

1. there are no accompanying definitions to the concept of “seismic rating”. Parties will need to be careful to define “NBS” and the particular version of the Engineering Assessment Guidelines that underpins the seismic rating specified by the parties; and
2. the emphasis on the NBS rating is likely inconsistent with movements in industry best practice to focus on a deeper understanding of any identified seismic vulnerabilities to inform overall risk and occupancy decisions. Parties will still need to be prepared to have these conversations in line with their obligations under the Health and Safety at Work Act 2015 (see our previous alert on this here).

A default 50% rent abatement will apply if the premises are inaccessible due to an emergency

The new template prompts the parties to specify the proportion of rent and outgoings that will abate in an emergency when the tenant can’t fully access the premises to conduct its business. This has been particularly relevant after events like the Christchurch earthquake and COVID-19 lockdowns.

The updated template establishes a default 50% rent abatement, unless the parties specifically agree otherwise. It also allows either party to seek a review of the agreed proportion during a specific emergency, if it is clearly unfair. The review process starts with negotiation, and may escalate to arbitration. The outcome of the review applies to the particular emergency only, and does not reset the default 50% abatement.

While the 50% default rent abatement provides some market certainty to tenants, and acknowledges that in these scenarios it may be appropriate for the risk to be shared, it is a fairly blunt approach and we think it is unlikely that the clause will be accepted by large or institutional landlords as the new market standard.

A new suite of security provisions provide greater options to protect against tenant default

The updated template introduces options for rental bonds and bank guarantees, in addition to personal guarantees. While these new options generally align with industry standard clauses in circulation, we expect that these alternative securities will now become more common simply by virtue of being front of mind.

Importantly, the updated template also includes a new requirement for the landlord to have regard to any existing securities when considering its consent to an assignment of the lease. This allows for the continuation of bank guarantees or covenants from outgoing tenants in order to get the proposed new tenant over the financial capability threshold. Parties should be careful that this clause is not misinterpreted to either fetter the scope of the landlord’s potential considerations on assignment, nor to imply the landlord is automatically entitled to require new security where none was given previously.

A suite of other updates refine the template and bring it more in line with current practices

• a new fixed rent adjustment option;
• options for including different caps and collars for rent reviews; 
• clarifications to the list of outgoings, and a more formal, time-bound process for outgoings budgets and wash-ups; 
• a new schedule for listing the tenant’s fixtures and fittings; 
• consolidation of all tenant reinstatement and make good obligations into one place; 
• each party must pay the other party’s reasonable legal costs in enforcing a breach of the lease; 
• making landlord’s maintenance obligations more absolute (removing exceptions for not carrying out maintenance if it is not reasonably necessary for the Tenant’s use and enjoyment, or where the services are provided by a third party); 
• an express requirement for both parties to comply with health and safety legislation (in addition to the tenant-only obligation to comply with laws); 
• updated notice service provisions (removing fax and updating email service provisions); and
• new prompts in the First Schedule for drafters to consider, such as: renewal notice periods, guarantee options, ratchet options, interim rent options, insurance excess amount, rent abatement (discussed above), and seismic standard (discussed above).

Engage us as your experts

With the new lease templates now in circulation, landlords and tenants who are unaware of the updates may be caught off guard. Landlords in particular will want to consider whether they are comfortable with the position on seismic terms and the default rent abatement.

If you are considering entering into a new lease, or updating your organisation’s own template lease(s), get in touch with one of our experts.