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The Law Association released the seventh edition of its standard commercial deed of lease template at the end of 2024.
The new edition marks the first major overhaul of the template since 2012, and looks to reflect the current commercial property landscape as well as other recent challenges (including Covid-19 and high inflation).
Whilst the form of lease still looks (largely) familiar to its predecessor and continues to strike a fair balance between the parties, there have been significant changes that will be of interest to landlords and tenants alike. Overall the template is more fulsome, and prompts the parties to turn their attention to several new areas which were commonly negotiated but previously absent from the template.
We set out the key changes below and comment on what such changes mean in practice.
Rent reviews – First Schedule & Clause 2
Key changes are:
- standard caps on rent reviews, including:
- hard ratchet (rent cannot decrease)
- soft ratchet (rent cannot be lower than at the original commencement date)
- semi-soft ratchet (rent cannot be lower than at the commencement date of the immediately preceding lease term), and
- a fixed rent adjustment mechanism, allowing standard percentage (or other fixed) increases.
This reflects what has become standard market practice as landlords have responded to tenant demands for more certainty in the recent high inflation environment.
Outgoings - First Schedule & Clause 3
Landlords are now required to provide tenants with an outgoings budget for the upcoming year but are no longer required to provide the outgoings accounts for the previous year unless specifically requested by the tenant.
The new template deed of lease also clarifies that the tenant’s liability to pay management expenses is limited to “reasonable administrative expenses” relating to “reasonable and proper” management of the tenancy.
The standard list of outgoings payable by the tenant has also been updated. The most notable changes are:
- the introduction of “Emergency” levies, although it is slightly ambiguous as to what this would encompass (noting Emergency is only defined for the purposes of the “no access” provision in clause 29)
- the explicit exclusion of “inherent defects” and “renewal or replacement of building services”, both of which are fairly common carve outs
- clarification that the outgoing covering general cleaning, maintenance and repair charges includes repainting the “exterior of the building” only.)
Consent to Alterations and Additions – Clauses 20.1 & 20.2
It is now explicit that landlords cannot unreasonably withhold or delay their consent to proposed non-structural alterations only.
Additionally landlords can now withhold their consent to a proposed alteration if it would prompt a requirement to upgrade the building, unless the tenant agrees to meet all of the associated costs.
Health and Safety at Work Act 2015 (HSWA) – Clause 21.6
There are now explicit obligations on both parties to:
- do “all things reasonably necessary” to comply with the HSWA and any related approved codes of practice, standards or guidelines, and
- consult, cooperate and coordinate with each other in relation to health and safety matters (so far as is reasonably practicable), including informing each other of any notifiable event under the HSWA.
Insurance – First Schedule & Clauses 24.3 – 25.1
The default insurance excess payable by a tenant has increased from $2,000 to $5,000 (+GST) although the parties may agree to record a different sum in the First Schedule. If any act or omission by the tenant causes the excess to be increased, the new amount will be applied to any future claims against the tenant. Causing an increase in the excess is a breach of the lease.
Tenants are liable for any damage where the cost of the repairs is less than the insurance excess.
If the landlord makes a claim for destruction or damage not caused by the tenant or any other tenant, the excess applied to the repairs is an outgoing and payable by the tenant, subject to the maximum excess specified.
The default period of insurance for loss of rent and outgoings has increased from 12 to 24 months.
Damage and Destruction – Clauses 28.1 – 28.5
The lease terms now clarify that the landlord is not liable to spend more than the total insurance moneys received and any excess under the insurance policy in reinstating the premises after a damage event. The repairs must be sufficient to ensure that the tenant is in a no worse position than before (a strengthening from the previous requirement that the remediation be “reasonably adequate for the tenant’s occupation and use”).
Clause 28.5 expressly provides that the tenant is not required to comply with the usual end of lease make good and reinstatement obligations (clauses 23.1 – 23.3) where the destruction is such that the required consents are not obtainable or the insurance moneys are inadequate to the repair task. In these circumstances, the tenant may remove its fixtures, fittings and chattels, but cannot be required to by the landlord.
Rent Abatement in an Emergency – Clauses 29.1 – 29.5
At lease commencement, the parties can agree the “fair proportion” of rent and outgoings that will abate where an emergency has rendered the premises inaccessible. The default amount is 50%.
The sum can be reviewed during the term of the lease if the tenant is unable to access the premises over a sustained period. The process and timeframes for reviewing the proportion are set out at clauses 29.3 to 29.5.
Assignment – Clause 33
Several clarifications have been made to the conditions that must be met to ensure landlords cannot unreasonably or arbitrarily withhold or delay consent to a proposed assignment or subletting. The key clarifications are:
- when considering whether an assignee/subtenant is “reputable” (previously “respectable”), responsible and has sufficient financial covenant, the landlord must now have regard to any existing securities for the performance of tenant obligations available after the assignment/sublease. Where the proposed assignee or subtenant has a weak financial covenant (such as a newly incorporated SPV) but is supported by a relatively strong parent guarantor or a substantial bank guarantee, the landlord must take this into consideration (previously landlords could withhold consent regardless of the strength of such security)
- in the case of a non-listed company, the landlord may require the provision of “any one or more” of a deed of guarantee, a bank guarantee or a rental bond (it was either/or - not both). But the landlord must (i) be acting reasonably and (ii) have regard to any existing securities for the performance of tenant obligations available after the assignment. Also it is now clear that any bank guarantee must be for a “reasonable amount” (which may differ from any amount previously required under the lease)
- the proposed assignment cannot be in relation to part of the premises only, and
- there cannot be any “material” subsisting breach of the tenant’s covenants (as opposed to any breach, regardless of materiality).
Security Provisions – First Schedule & 38.1 – 38.19
New provisions enable the landlord and the tenant to use a bank guarantee or a rental bond as security for the tenant’s obligations under the lease, the amounts to be specified in the First Schedule. In the absence of a specified sum, the default amount will be equivalent to three months’ rent plus GST.
Further requirements are that the bank guarantee/rental bond be increased on a rent review, and replaced in the event that the landlord transfers its interest in the property during the lease term.
The First Schedule expressly requires the parties to confirm whether or not the landlord is required to obtain mortgagee consent to the tenant’s interest in the property under the lease. If yes, the landlord must use reasonable endeavours to obtain this. This is in contrast to the previous provision which expressly stated that the landlord was not required to obtain mortgagee consent to the grant of the lease.
Seismic Rating – Clauses 39.1 – 39.4
The lease includes an option for the landlord to provide a seismic report to the tenant, to be recorded in the First Schedule. Where this is done, the landlord must disclose any information that contains a materially different assessment to the recorded seismic rating.
The lease expressly states that the seismic provisions (clauses 39.1 and 39.2) do not constitute a representation or warranty as to the seismic rating of the building and there are no consequences if a building is found to have a different seismic rating than specified.
New Sixth and Eighth Schedule
A new Sixth Schedule has been introduced, which allows the parties to record any tenant fixtures fittings and chattels, which the tenant may (and must if required by the landlord) remove at the end of the term. Importantly, the tenant’s fixtures fittings and chattels are explicitly excluded from the premises and so they will not be captured by the maintenance provisions in clause 8 and will be disregarded as part of any market rent review. The new definition of “tenant’s fixtures fittings and chattels” is wide and will capture any such items installed by the premises during or prior to the term, and so a failure to complete this schedule is not fatal.
A new Eighth Schedule has been introduced allowing the parties to annex a premises plan and/or car park plan to the deed of lease, reflecting common practice.