The much-anticipated Seventh Edition of The Law Association of New Zealand Deed of Lease has finally been released, addressing the evolving challenges faced by commercial landlords and tenants. From navigating pandemic-induced access restrictions to managing seismic compliance, health and safety obligations, and rising inflation, this new edition aims to deliver practical and balanced solutions to the leasing market.

In this article, we will unpack some of these updates and their impacts for commercial landlords and tenants in New Zealand.

Rent review flexibility

A fixed rent review option has been introduced into the standard lease wording, complementing the existing CPI and market rent reviews. Additionally, the template ratchet clauses have been expanded, offering a menu of options including soft and hard ratchets, as well as customised ‘caps and collars’. This will simplify the drafting process; however, parties will still need to consider if other rent review ratchets better suit their transactions – for example, the new lease does not include an option where the rent on a market review cannot be less than the amount adjusted by the fixed increase percentage.

Additionally, there is now an option to specify the rent payable from the rent review date until the new rent is determined. The default is to continue paying the immediately preceding rent until final determination.

Outgoings accountability

Outgoings provisions have been restructured for clarity. Tenants are only responsible for usage-driven increases, while landlords bear the capital costs including in respect of structure upgrades. Outgoing budgets must now be provided annually, and landlords are required to reconcile and disclose outgoings within a 24-month window. Failure to do so could result in the landlord becoming unable to recover its older and unclaimed outgoings.

Body corporate management fees are now explicitly included as a separate line item in management expenses, separated from the body corporate charges for insurance and valuation fees. New clause 3.10 specifies that the tenant’s liability to pay body corporate management expenses is limited, particularly when the landlords control the body corporate and appoints itself or a related party as manager. Landlords are expected to review the charges that make up the levies and only pass on to tenants those costs that fall within the list of outgoings.

Insurance

The revised insurance clauses provide greater clarity in allocating responsibilities between landlords and tenants. Landlords are now required to notify tenants in writing if insurance is unavailable and provide reasons as to the unavailability. Tenants are now responsible for repair costs that fall below the insurance excess due to their actions, and any insurance excess applied to general damage repairs is treated as an outgoing recoverable from tenants.

Importantly, if the insurance excess increases due to the tenant's omission, the tenant will be required to cover that increase for any future claims. Otherwise, if the excess increases over time or spikes due to a natural disaster, the landlord will bear the difference. The default excess has increased from $2,000 to $5,000, which is a reminder for the parties to check and amend this figure to reflect the actual excess. Of course, premiums (which are recoverable from tenants provided they are reasonable) can be set to account for the applicable excess. While there is no obligation for landlords to consult tenants about the insurance premium, tenants can request this requirement be included in the lease.

No access and rent abatement

The "No Access in Emergency" clauses have been re-evaluated in light of the COVID-19 lockdowns, and a default rent and outgoings abatement of 50% now applies unless otherwise specified. The parties are able to reassess this proportion for extended disruptions under a newly prescribed process, on the basis that a “fair proportion” could vary depending on the circumstances. It is important to note that this abatement may be locked in when an agreement to lease is signed without legal advice, so parties should carefully assess on a case-by-case basis whether a 50% abatement is appropriate.

Bank guarantee and rental bond

The new edition provides more security options, including standard provisions for bank guarantees and rental bonds. Both options provide the landlords with quicker access to funds if the tenants are in default, while also offering tenants alternatives to personal guarantees. For bank guarantees, while it can be common practice to calculate a guarantee amount with reference to a specified number of months of rent and outgoings, it is considered best practice to specify the dollar amount for the security. This creates certainty as to the required bank guarantee sum, after which the bank guarantee regime applies for any further adjustments. Rental bonds (less any deductions) must be refunded in the case of assignments. 

Seismic ratings and compliance

Largely as a prompt to ensure the parties are turning their minds to it, a new clause has been included allowing the landlords to record seismic ratings, with a corresponding obligation to disclose relevant seismic assessments. The clause is short and does not itself impose any particular obligations on the parties, and it anticipates further details being outlined in the Third Schedule following appropriate legal advice. This update reflects the growing importance of seismic performance in lease negotiations, particularly for insurance and regulatory compliance.

Health and safety obligations

The new edition explicitly acknowledges the duties of both the landlord and tenant under the Health and Safety at Work Act 2015. Both parties are required to consult and co-operate with each other and keep each other reasonably informed on health and safety matters relating to the premises and the building. While the included clauses are concise, parties may wish to consider incorporating additional health and safety provisions in the further terms to address specific risks or operational requirements.

Partial destruction

In the event of partial destruction, the premises must now be reinstated to a standard that is “reasonably adequate for the Tenant’s occupation and business use", ensuring the tenants are in no worse position than before the damage. Additionally, if the lease is terminated due to partial destruction, the tenants are no longer obligated to make good or reinstate the premises. However, the landlords retain the right to require the tenants to remove their fixtures, fittings and chattels, as outlined in clauses 23.4 and 23.5. Both parties are advised to agree on reinstatement standards in advance and clearly document their expectations in the lease.

Mortgagee consent

An option is now available to specify whether mortgagee consent is required for the lease. Tenants may want to make this a requirement, particularly when planning significant fitout investments or long-term occupation. Landlords should ensure the clause aligns with their mortgage terms, as proactively securing consent can help prevent future conflicts.

New schedules

A new Sixth Schedule has been introduced to record the tenant's fixtures and fittings. This will act as a prompt for the parties to record which items belong to the tenant, which may assist with make good obligations as well. Another benefit of completing this Schedule is that the tenant’s items are explicitly excluded from the definition of "Premises" and will therefore be disregarded during rent reviews.

A new Eighth Schedule has been added in which parties can insert plans defining the premises and carparks, providing additional clarity on the space being leased. This formalises a schedule many parties have already been inserting as standard practice.

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Special thanks to Nova Huang for her assistance writing this article.