How to minimize your repairing liability at the end of a lease

The New Zealand property market is experiencing a boom in international investment. According to Andrew Reed, international director of capital markets at Colliers International, “…in 2014 almost half the total value of properties sold for $5 million or more in New Zealand, was sold to offshore investors – representing one fifth of all transactions.” As such, tenant reinstatement obligations have become an important topic of conversation among New Zealand business owners. Repair and maintenance obligations in commercial leases have the potential to cost tenants thousands of dollars. Small to mid-sized business tenants may underestimate the significant additional costs of repair and maintenance and do not include these expenses in their budget. Kaizon has comprised a list of pragmatic steps that can be taken by the tenant to minimise their repairing liabilities and any future disputes at the end of their lease.

1. Schedule of Condition
The Auckland District Law Society (ADLS) and Property Council leases generally require the tenant to keep the premises in the same state of repair as “the condition of the premises at the commencement date of the lease,” with obligations limited in respect of reasonable wear and tear. More often than not, both parties to the lease fail to record the condition of the building at the commencement date. To avoid future disputes, a Schedule of Condition or Condition Survey should be performed by a registered, independent building surveyor.

A Schedule of Condition should provide a detailed description, accompanied by photographic evidence, of each section of the property. A Building Surveyor will include floor plans to exhibit the level of fit-out, noting every defect present. As independent experts, Building Surveyors will be able to present the facts based on their unbiased inspection of the property. Both parties will be required to sign the document, thereby agreeing to their proposed obligations. If a Schedule of Condition is not attached to a lease, the premises will be considered in good condition at lease commencement.

Kaizon’s team is well-versed in leasehold repairing and reinstatement obligations which makes us qualified to carry out a pre-acquisition inspection or a condition survey with due diligence.

2. Dilapidations
If tenants fail to keep up with maintenance of their commercial property, the landlord can serve them with a schedule of dilapidations requiring them to make the necessary repairs. If the repairs cannot be made, the tenant will be required to cover the costs. A Building Surveyor will be able to assist you in minimising, and in some cases, avoiding the liability for repairs.

Kaizon are experienced at negotiating on behalf of the Tenant. We will assist in resisting the Landlord’s requirements concerning the commercial building at the end of their lease especially when the schedule served by the landlord proves to be artificially onerous.

3. Maintenance Planning
It is important to note that under the terms of some leases, the landlord does not have to let the tenant back on the property after the lease period has ended. The tenant will be unable to carry out any maintenance or reinstatement work and the landlord can demand money from the tenant for the cost of remedial work. Under the terms of these leases, the landlord has no obligation to actually carry out the remedial work or even spend that money on the property.

The best way to avoid astronomical fees for repair work is to hire a Building Surveyor before you sign a lease. Not only will the Building Surveyor be able to provide you with a meticulous report concerning the state of the property, he will also be able to provide a maintenance plan and budget forecasting. He will be able to advise you concerning the potential financial liabilities of complying with the repairing and reinstatement obligations on the lease.

Regardless of the type or size of the commercial property, Kaizon is able to provide pragmatic, cost-effective advice concerning on-going maintenance management. We will create a budget that encompasses not just present issues but all possible maintenance concerns in the future. Don’t wait until the end of the lease to hire a Building Surveyor to do damage control. Being proactive will not only minimise your repairing liability at the end of the lease, maintenance planning eliminates the need for last minute repairs. Contact Kaizon before you sign the lease!