Each week, national law firm Simpson Grierson answers commercial property questions which can be emailed and headed "Prime Asset question". This week's question is answered by senior associate Daniel Kelleher and associate Raj Patel, who can be contacted at daniel.kelleher@simpsongrierson.com and raj.patel@simpsongrierson.com
Q. We own a number of commercial premises in the central business district. Recently, we renewed a number of leases which were due to expire on May 30, 2009. After the leases were renewed we inspected the premises. In one tenancy we found the premises had not been maintained and that there were some serious issues requiring urgent repairs.
We have asked this tenant to complete a number of repairs on the property. The tenant has refused to do so. We have had lengthy discussions with the tenant and have got nowhere. We recently received a letter from this tenant's solicitors asking for consent to the assignment of the lease.
We have tried to resolve the repair issue while also dealing with this request. The tenant's solicitors have stated the renewed term is a new lease and not a continuation of the old lease. They go on to state because of this the tenant has no obligations under the previous lease. Is this correct? Are we left to deal with the repairs ourselves?
A. The tenant's solicitor may be correct. You have not stated what your lease says about these matters. We will assume for the sake of this answer the lease you use is the Auckland District Law Society (ADLS) form of lease.
Under the standard form ADLS lease, a renewed term is, in fact, a new lease, not an extension of the prior term of the lease.
This has important consequences for both the landlord and tenant in a number of areas. In terms of your question it has relevance where there is an assignment of the lease and also in relation to the condition of the premises.
Clause 8.1 of the ADLS lease provides the tenant has to maintain the premises in the same "clean, order, repair and condition" as they were in at the commencement of the lease. Clause 8.1 of the ADLS lease also provides the premises are to be handed back to the landlord in the same condition as at the commencement term - not the commencement of the lease. As a renewal of the lease operates as a new lease, any rights you have as a landlord need to be dealt with prior to the renewal.
Clause 35 of the ADLS lease deals with this issue. It states a tenant is not to be in breach of the lease when it requests a renewal. This expressly includes maintenance obligations. If the landlord overlooks any breaches when granting a renewal it is likely to have lost its rights to revisit or complain about that breach in the future.
In circumstances where the premises have not been "cleaned and repaired" at the end of the term it is important for the landlord to preserve their rights under the expiring lease. In your example this would mean inspecting the premises prior to the renewal and obtaining agreement from the tenant that the repairs would be carried out.
Where a renewal creates a new lease and there was an assignment of the original lease that earlier tenant (and guarantors if any), will in most instances, not be liable to the landlord under the new lease. However, where the new lease is an extension of the term of the lease, the landlord may sue either the earlier tenant or the current tenant or both.
In your position it may be that you should either ensure your leases do create an extension of the original term. If that is resisted by incoming tenants we strongly recommend you set up a process for inspecting premises and agreeing remedial works with the tenants. It will save you time and money in the future.
A final word of caution when renewing leases concerns the contamination provisions contained within the ADLS lease. Clause 22.1(b) of the ADLS lease provides the tenant must remove contamination which was caused by the tenant, not contamination which took place prior to the start date of the lease term. Therefore on renewal of the lease it is important for a landlord to reserve their position in relation to contamination caused by previous tenants or which occurred during the prior term of the lease.
The information contained in Prime Assets is intended to provide general information in summary form current at the time of printing. The contents do not constitute legal advice and should not be relied on as such. Specialist advice should be sought in particular matters.
