Condition report for fairer leasing

Latest legal advice for landlords and tenants aims to protect both parties' interests at the lease expiry.

A recommendation to both landlords and tenants that is contained in a new legal form is a positive step for the commercial property industry, says David Guy, a director of Colliers International's project and building consultancy division.

Guy says the Auckland District Law Society (ADLS) recently released its updated Agreement to Lease document, which is a standard contract used to form the majority of lease agreements entered into in the New Zealand commercial property market.

He says the new document advises both landlords and tenants to acquire "condition reports" on commencement of commercial-property leases that will help to protect the interests of both parties at a lease expiry.

"Dilapidation or 'make good' claims which can arise at the end of leases are a complex and contentious part of the landlord and tenant relationship," Guy says. "Acquiring a condition report at the start of the lease, to be agreed by both parties, protects the interests of both parties and avoids unnecessary protracted arguments occurring later."

Guy says "perceived cost" is one of the main reasons why tenants and landlords do not always commission condition reports when entering into lease agreements.

"Neither the landlord nor the tenant want to incur additional fees in relation to lease agreements. However, if they engage the services of chartered building surveyors to produce a condition report to be agreed to by both parties, this can mitigate potentially large costs when dilapidation or make-good disputes arise."

If a landlord and tenant jointly commission the condition report, that will significantly reduce their individual costs, Guy says.

"We suggest the parties commission a single condition report between them. This results in a fair, unbiased report which can then be agreed by both parties with the fee split 50-50.

"Tenants are often unaware of the potential financial liability that may be looming upon lease expiry," Guy says. "They can be in for a significant shock when they receive a hefty claim from their landlord for 'dilapidations' when their lease ends."

In a dilapidation claim, the landlord alleges that the tenant has breached some or all of the lease terms relating to the building's state of repair, and stakes a claim on the tenant to "make good" the property. The agreed repair/remediation works can either be undertaken by the tenant prior to lease expiry, or be settled financially by a payment made in lieu.

"Tenants who believe that the property was already damaged before they moved into the premises often find themselves unable to prove it. A condition report protects tenants against potentially large dilapidations claims, as it sets out the condition of the property in detail at the start of the tenancy."

From a landlord's perspective, condition reports set out the tenant's repair standard from the outset of the lease. In the current market, vacant space must be well presented to enable successful re-letting, Guy says.

"Condition reports allow landlords to serve more accurate dilapidations claims on tenants, and to justify that their claims are valid. The reports make the dilapidations claim process fairer for both parties."

Agreement to Lease

What: New commercial lease form
Recommends: Joint landlord/tenant condition reports
Why: Obviates end-of-lease disputes
Benefit: Cuts independent costs.