Trustee vs Executor
June 19, 2013Is Your Will Valid? Don’t Get Caught Out
September 18, 2013The earthquakes in Christchurch in 2010 and 2011, and the more recent earthquakes in Wellington have affected the commercial leasing landscape throughout New Zealand. The earthquake strength of a building, the requirement for strengthening works and the possibility of a tenant having to vacate premises for those works to be carried out, are all things that a tenant should turn its mind to before entering into a lease.
The safety of all commercial buildings in the event of an earthquake is assessed using the New Building Standard (‘NBS’). The minimum NBS compliance standard for a commercial building is currently 34%. However, many local authorities are (or are considering) imposing a more robust minimum compliance standard of 67% of NBS. The higher the NBS rating of a building, the lower the risk of the building needing to be demolished following an earthquake event and, more importantly, the lower the risk of the building causing injury or death.
Due Diligence
The seismic performance of a building is an essential question to consider before taking a lease of premises. Although many landlords provide engineer’s reports to prospective tenants in respect of their buildings, it is important to check when they were undertaken and the degree of assessment undertaken. A prudent tenant should obtain their own engineer’s report or at the very least, have the landlord’s engineer’s report reviewed by a suitably qualified engineer.
The earthquake strength of the building that a tenant is proposing to lease is not the only consideration. It is also important to look at the strength of surrounding buildings. There is little benefit of your 7 story building being 100% of NBS when the neighbouring 20 story building with unreinforced masonry and parapets is only 20% of NBS.
Other important considerations for a tenant, as part of their due diligence, are the issues of insurability and the availability of finance. In many cases, full replacement insurance is no longer available, which means that many landlords are opting for indemnity insurance. This may effect a tenant’s finance arrangements as lenders are likely to have specific requirements around insurance. Lenders are also now querying the seismic strength of a building as part of their lending criteria.
Auckland District Law Society Lease
The most common form of commercial lease used throughout New Zealand is the Auckland District Law Society Deed of Lease form (‘ADLS Lease’). As a direct result of the aftermath of the Christchurch earthquakes, it became very clear that the then current ADLS Lease form did not adequately provide for these sorts of natural disasters. As a result, it has since been updated to address many of the difficulties that tenants and landlords faced following the earthquakes.
Tenants need to be aware that the 6th edition of the ADLS Lease now allows for a landlord to enter premises with no written warning in the event of an emergency. This means that landlords can access premises to carry out earthquake strengthening works and, if necessary, can require tenants to vacate the premises while those works are carried out. However, if such works cause material disruption to a tenant’s use of their premises, then the rent and outgoings will be reduced by a ‘fair proportion’.
A common issue that arose out of the Christchurch earthquakes was that of tenantability. The 6thedition ADLS Lease has addressed this by providing for payment by the tenant of a ‘fair proportion’ of the rent where the premises are undamaged, but inaccessible for reasons such as the ‘red zone cordon’. If those premises are not accessible for a period of time nominated by the parties (or the default period of 9 months), then the lease may be cancelled.
The seismic nature of our country can no longer be ignored and it is important that tenant’s bear this in mind when they are proposing to enter into a commercial lease. We strongly recommend that you contact your legal advisor before entering into a commercial lease, so that you are fully informed and properly advised.
