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Commercial Leases – Tenant’s obligations of reinstatement on expiry of a lease term

Where a lease term ends either due to expiration of the lease term or an earlier date as a result of a default by the tenant, there are a number of issues that arise for consideration by the landlord and/or tenant. The tenant’s obligations of reinstatement of the premises to their original condition is an example of one of these issues that can have significant consequences.

Under a standard lease, the tenant has an obligation to maintain the premises in the same state as they were at the commencement of the lease. In the case of leases that were formed prior to 1 January 2008 there is an implied term pursuant to s 106(b) of the Property Law Act 1952. For leases that came into force after 1 January 2008, this implied covenant is pursuant to the Property Law Act 2007.

Essentially both Acts require the tenant to maintain the premises in the same condition as they were at the beginning of the term and yield up the premises in their original condition upon termination of the lease. A tenant often considers improvements to commercial premises such as office partitioning, installation of toilets and other facilities, mezzanine floors, racking systems and the like are in addition to the value of the premises and they should be compensated for adding value to the premises on behalf of the landlord.

The provisions of the Property Law Act 1952 or the Property Law Act 2007, which are mirrored in most commercial lease documents, require the tenant to reinstate the premises to their original condition at the cost of the tenant. This can involve obtaining resource/building consents for the reinstatement work which can greatly increase costs.

This is well illustrated in the recent case of Prime Commercial Limited v Capital Chambers Limited. The dispute was between the landlord and the tenant regarding the extent of the tenant’s obligations to reinstate the premises to a bare shell of open plan layout. Although there was an express term in the lease and the term specifically set out what must be done and to what standard, the parties’ approach in how to reinstate the premises was different. The Court held the building’s original design plan and other terms of the lease were to be considered in deciding the extent of reinstatement required. Also, in this case the tenant did not seek approval from the landlord before carrying out alterations and improvements to the premises, causing more serious dispute between the parties.

Our advice to both landlords and tenants considering entering into a commercial lease is to carefully consider the reinstatement issue. If a tenant is effecting significant improvements to the premises then negotiations can involve waiving the right of reinstatement and perhaps some compensation to the tenant for any significant expenditure in relation to improvements.

Where a lease has been assigned, the tenant may not be aware of the original condition of the premises as at the date of commencement of the original lease term. Enquiries should be made of the landlord as to their expectations of reinstatement at termination of the lease.

Finally, we note there can be taxation issues which may turn on who owns the fit-out. This is an issue that should be discussed with a client’s accountant to ensure there are no unforeseen consequences.

If you would like to discuss any aspect of this article with our firm please do not hesitate to contact either Mike Newdick or Jane Min.

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