Most businesses going into a commercial property spend time and money focussing on the start-up obligations in a lease, but often minimise coming to grips with what happens when a lease comes to an end, and it’s time to move out.
The make-good and reinstatement obligations are often not front of mind at the outset of a lease. But with a little understanding of how a commercial lease ends, before it starts, could save significant headaches and costs down the road.
Maintenance
At the end of a commercial lease, tenants are commonly obliged to hand back the premises to the landlord in the condition it was in at the commencement date of the lease, save for fair wear and tear.
This means the removal of chattels, fixtures and fittings and repairing any resulting damage. Tenants are also expected to comply with the maintenance and repair obligations throughout the term of the lease. Generally this includes general maintenance of the interior, as well as specific obligations such as fixing damage caused by the tenant and potentially repainting and recarpeting. Where the lease encompasses the entirety of a property however, the tenant’s maintenance obligations can be much more extensive, including maintenance of the grounds and potentially maintenance of the exterior of the building, if this is stated in the lease.
Alterations and Additions
If the tenant made alterations, or additions to the premises, the landlord can require the tenant to remove them, and reinstate the premises to its previous layout as at the commencement of the lease, and repair any resulting damage. Of course, the cost of this can add up to be significant at the end of a lease when it may already be a very stressful time (exiting and entering a new lease), and may be an unwelcome surprise. For landlords, enforcing a tenant’s obligations can be frustrating and costly, particularly when the parties are poles apart in their assessment of the tenant’s liability.
Minimising Nasty Surprises
It is recommended that tenants and landlords understand, at the outset, the terms of the lease by knowing the obligations of both parties during and at the end of a lease. While obvious, many tenants often sign up without fully understanding their obligations and when moving on, may have underestimated the reinstatement and making good costs. Take time to fully understand tenant obligations and budget for these when deciding not to renew. Another helpful document at the outset is a premises condition report to evidence the condition of the premises at the commencement date and any existing damage, both internal and external, and supported with photos attached to the lease.
This report can become particularly useful when a landlord sells the property part way through the lease, or the original tenant assigns its interest to a third party. Where tenants are installing permanent or a difficult to remove fitout, the parties can agree at the outset for it to remain in place and become the landlord’s property. If of value, the parties can agree for the landlord to pay for it or contribute to it. With short leases, the parties could agree, for example, that redecorating is not required. The parties should however be specific when agreeing to make-good and reinstatement terms. A tenant can always reduce the end of lease costs by designing their fitout with the make-good and reinstatement obligations in mind by, for example, not building in fixtures and having moveable items that are easy to remove, and which can reduce nasty surprises at the end of the lease.
New Lease – Same Tenant & Same Premises
Where landlords are granting a new lease of the same premises to the same tenant after the original lease has expired, care must be taken in the new lease to ensure it states the premises are to be returned to the condition it was in at the start of the original lease, not the new lease, as most likely the property is in a worse condition that it was under the original lease. Need help? Tenant or landlord? Feel free to connect with us by phone, email or via our website at www.ginajansen.co.nz.
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