Tenants need to know leases

The recent sequence of earthquakes in Wellington has seen a number of tenants trying to get out of their commercial leases.

In some cases, this may be because the tenant has genuine concerns about the building or their staff are unwilling to return to a potentially risky building.

Commercial tenancies generally have a fixed term, which means that you will need to reach an agreement with the landlord to end the lease before the term expires.

If you simply walk out, the landlord has an obligation to try and re-let the premises as soon as possible but may find this difficult to do if there is a possibility that the building has been damaged or is perceived as an earthquake risk.

As a result, you could end up being liable for the rent until the term of your lease expires.

Even if the landlord can re-let the premises, if the market rent is lower, you could find yourself having to pay the difference for the balance of your lease term.

Even if you are able to assign your lease, you could still be liable for the new tenant’s obligations if that tenant defaults. You could also end up liable for any shortfall in rent. You should therefore give careful consideration to choosing any such new tenant.

Generally, you cannot cancel a lease because there has been an earthquake or other natural disaster.

The standard that needs to be reached before cancellation rights can be exercised is that the premises are untenantable. This is a very high standard to reach.

Because of this, the most common scenario for tenants is entering into negotiations with the landlord to terminate the lease early.

You may be able to negotiate a fixed sum payment to the landlord to buy out the remainder of your term. In negotiating this sum, you should carefully weigh up the costs you may be liable for under the remaining term of your lease.

In any event, before you decide to leave you should also carefully check your lease to see what your obligations are to reinstate the premises.

Most standard leases will require that you reinstate the premises to the condition it was in when you first took on the lease, which could be a substantial cost if you made significant modifications to the premises.

Check if your lease has a no access period clause.

After the Christchurch earthquakes, no access periods were inserted into the standard form lease. This records that if a tenant is unable to gain access to the premises for a certain period either party can terminate the lease. Therefore, if your premises were in a cordoned off’ zone but undamaged, you could still cancel the lease after a certain period.

If your lease is an old form of lease without this clause, you may want to think about negotiating such a clause with the landlord.

Make sure you and your landlord have appropriate insurance cover.

You should check your lease to see what insurance cover you and your landlord are obliged to provide and make sure there are no gaps. This should include business continuity cover in the event that you are unable to continue to operate at the premises for a period.

If you do have genuine concerns about the safety of the building, make sure you raise them with the landlord.

Under the standard lease, the landlord has obligations to use any insurance money with all reasonable speed to make the necessary repairs to a damaged building.

Column courtesy of RAINEY COLLINS LAWYERSphone 0800 733 484 www.raineycollins.co.nz