The recent bout of stormy weather inflicted serious damage on some Auckland commercial property owners.  If you are either a landlord or a tenant under a commercial lease, this article may be of interest.

Insurance
Under a commercial lease, a landlord cannot recover losses from a tenant where the landlord is required under the lease to insure against the risk or the landlord’s insurance cover extends to that risk.  A tenant should always check the landlord’s insurance policy to ensure it covers damage that the property has suffered, even though the lease document itself may not expressly state that such risks are insured.  If the landlord has insured against that risk, then the cost of repair will either be the landlord’s responsibility, or the landlord’s insurers.

Repair and Maintenance Obligations
The vast majority of commercial leases entered into in this country are on the standard ADLSi form of lease.  The general position under this document is that repair and maintenance obligations for the interior of the premises fall upon the tenant, whereby repairs of a substantial and structural nature are the responsibility of the landlord.  That also includes expenditure on the property of a capital nature.

However, the tenant is not liable for fair wear and tear arising from reasonable use of the premises.  However, this does not necessarily mean the landlord must repair fair wear and tear damage or deterioration to the premises.  It merely excludes the tenant from such liability, and is frequently a matter of commercial negotiation between the parties.

When the lease has ended, the tenant has obligations to remove alterations or additions to the premises and reinstate the premises if required by the landlord.  The standard deed of lease gives three possible reinstatement scenarios.  These are:

The tenant removes its alterations and additions and pays the cost of reinstatement; or
The tenant removes its alterations and additions and fails to reinstate the premises; or
The tenant does not remove its alterations and additions.

The first scenario is uncontroversial.  The second scenario is more difficult for the tenant because the landlord in that case can recover the costs incurred in reinstating the premises.  Under the third and final scenario, if the alterations or additions in the premises become the property of the landlord, the landlord can remove those and recover the costs of doing so from the tenant.

What is also important in this context, and often overlooked, is if the tenant is a company then the principals behind the tenant company will often give guarantees of the tenant’s obligations under the lease.  This guarantee will extend to the recovery of the landlord’s losses in the event of scenarios 2 and 3 above applying.

Summary
Fortunately, most parties to a commercial lease have good business relationships and there are not frequently major disputes between the parties, or if there are, they can be resolved over polite communications.  However, if those negotiations break down, the wording of the lease becomes critical and that is when lawyers earn their money.