Lessons from Christchurch: Commercial leases

Privates Te Mana Ekoi, (l)and Leon Griffiths man a cordon in Christchurch after the earthquakes. What happens when a tenant can't physically get to their business? Photo / NZPA

Over the past 2½ years, Christchurch's business environment has challenged many assumptions and contracts. In this six-part series, lawyers from Christchurch legal firm Malley & Co look at some of the lessons all businesses can learn. In this article lawyers Julica Krause and Lucy Glausiuss look at the implications for commercial leases.

The Christchurch earthquakes have raised real issues for landlords and tenants of commercial premises across New Zealand. Many are now carefully considering their lease terms and positions to cover situations they previously never really thought they would have to deal with.

The first of these is: What happens when the tenant cannot access the premises or fully conduct its business from the premises because of an emergency that causes or may cause loss or life or serious injury? Leases may now provide rent and outgoings are not payable until the tenant can gain access, or allow the landlord or tenant to terminate the lease after an agreed period if access is still not possible.

As landlords and tenants have different interests and expectations it is important that during lease negotiations they discuss what will happen in an emergency, and record their agreement in the lease. Both parties should have insurance to protect themselves from losses when this happens - with the landlord taking out loss of rent insurance and the tenant taking out business interruption insurance.

Compulsory building works

Before the earthquakes, many leases allowed landlords to charge improvements rent - a charge to cover the amount they spent on building works required under statute or by local authorities.

With more landlords now having to spend money bringing their buildings up to code, post-earthquake leases do not contain such provisions. Instead, they allow landlords to terminate leases where the works must be carried out and the cost of doing so is unreasonable.

As early termination could cause major disruption for tenants, they should find out during lease negotiations whether any works are likely. A tenant could also look to negotiate a compensation provision if works are carried out contrary to what has been represented.

Alternatively, tenants should also consider taking out business interruption insurance to cover any losses resulting from early termination.

Landlord's insurance

Tenants should look carefully at the landlord's insurance position during lease negotiations and at the premiums and excesses payable by the tenant.

Since the earthquakes more landlords have taken out indemnity insurance to cover loss of rent and outgoings for longer than 12 months. This may make insurance more expensive for tenants. As well as paying landlord's insurance, tenants should take out their own business interruption cover for situations such as where they cannot access the premises.

Condition of premises

Earthquakes and other natural disasters change the condition of buildings. That may seem an obvious statement, but it is important that landlords and tenants complete a premises condition report during lease negotiations, to avoid any arguments about reinstating or making good the premises to the condition it was in before the disaster.

As well as disputes over the condition of premises, after the earthquakes, there were disputes over who owned fixtures, fittings and chattels, with some landlords claiming insurance for items that belonged to tenants, and vice versa. This showed how important it is for the landlord and tenant to include in the lease a list of the landlord's fixtures, fittings and chattels - to avoid ownership arguments when the lease expires, or with insurers after a disaster.

Julica Krause and Lucy Glausiuss are lawyers at Malley & Co and specialise in commercial and property law.