Commercial Leases

Reinstatement obligations for tenants

There are many rights and obligations that affect both tenants and landlords at the beginning, during and at the expiry or earlier termination of a commercial property lease.

The obligations on a tenant to reinstate the premises are usually set out in clause 20.1 of the ADLS Deed of Lease and are important terms for both tenants and landlords to understand. Essentially the tenant is obligated to return the premises to the landlord in the same condition and state that it was at the beginning of the lease.

Tenants be careful before undertaking work

It is crucial that tenants understand their obligations before undertaking any work, and that your landlord must approve any alterations in writing. Having written approval does not mean that you won’t be required to remove any fixtures or alterations that have been made to suit your business needs or use of the space.

However, it is not an automatic requirement for you to reinstate the premises. Only where your landlord requires it to be reinstated does this obligation apply to you.

If your landlord does require reinstatement of the premises, you have a number of things to consider when deciding whether to make any alterations to complete a customised or business-specific fitout. These include the cost of potentially having to remove fixtures or reverse alterations, the benefit that any such alterations or fitout will have for your business, the length of your lease and/or how many rights of renewal there may be. These aspects of the lease are essential for you to consider before you complete any works given that you may be required to reinstate the premises.

As a tenant, you also need to understand that any reinstatement is entirely at your cost, and any fixtures or fittings you do not remove by the expiry or termination of the lease may become your landlord’s property without any need for them to compensate you.

Further to this, any cost that your landlord incurs in removing your fixtures or fittings or carrying out reinstatement work you have not completed can be recovered from you by your landlord.

Finally, you must also repair any damage caused in the process of removing your fixtures and fittings from the premises. This can be problematic if you have completed significant structural alterations where reinstatement may be difficult or even impossible to complete without causing some damage to the building or premises you are vacating.

Disputes

Where a dispute arises about the cost or compensation claimed by either party to the lease for reinstatement or damage caused in the process, the default position in the lease is that the parties submit the dispute for arbitration.

Arbitration can be a costly and drawn-out process so having a firm grasp on obligations around reinstatement either at the beginning of the lease or before undertaking any fitout works or alterations is absolutely essential. This is particularly important if you are considering significant alterations that could be costly to remove to reinstate the premises.

Take care

The proposed lease should be carefully reviewed. This includes the standard terms of the deed of lease as they relate to reinstatement and the dispute resolution process and any specific terms or variations to the default terms which may reduce liability or impose stricter obligations on both parties.

Commercial leases can be tricky things and it’s essential to get advice to avoid costly mistakes.

If you are a prospective tenant or landlord, we will work with you through this process.

DISCLAIMER: All the information published is true and accurate to the best of the authors’ knowledge. It should not be a substitute for legal advice. No liability is assumed by the authors or publisher for losses suffered by any person or organisation relying directly or indirectly on this article. Views expressed are those of individual authors, and do not necessarily reflect the view of this firm. Articles appearing in this newsletter may be reproduced with prior approval from the editor and credit given to the source. Copyright, NZ LAW Limited, 2019. Editor: Adrienne Olsen. E-mail: adrienne@adroite.co.nz. Ph: 029 286 3650 or 04 496 5513.