Understanding Recent Changes to the ADLS Lease: Key Points for Landlords
In November 2024, the Auckland District Law Society made changes to its Deed of Lease, and it's now issued under The Law Association of New Zealand.
The new Deed of Lease is already used by Real Estate agents and lawyers alike and although there are many changes that are fairly innocuous, there are a few new inclusions that Landlords need to contemplate.
INSIGHT EQUITY OPINION
Seismic Rating
The building’s seismic rating is to be included (with evidence), or struck out. We see a number of issues here as landlords need to consider how strong and how current their evidence is (if they disclose) and tenants need to consider what the seismic rating means for their occupation.
More importantly, there is no implication to the insertion however, it is will bring seismic ratings into the spotlight and may impact leasing prospects with sophisticated tenants or open landlords up to accepting a minimum seismic rating during the lease term.
Bank Guarantee
The different guarantee options have been included and those not applicable can be struck out. The default position of the Deed of Lease form sets the Bank Guarantee at 3 months net rent (no OPEX).
By the time a tenant defaults on their lease, the landlord has terminated the lease and absorbed costs to lease the tenancy, a three-month Bank Guarantee will not cover it. Our view is Landlords should not accept a three-month Bank Guarantee as a market position and should consider requesting a six-month Bank Guarantee.
Operating Expenses
Further provisions have been included to increase landlord accountability when recovering operating expenses.
More onus will be on landlords to demonstrate annual budgeted operating expenses, provide accounts and assessments to verify actual costs and charge operating expenses in a timely manner. Interestingly enough, a new clause specifies the landlord loses the ability to recover any costs that were incurred more than 24 months before. We have seen on multiple occasions, landlords that haven’t effectively recovered operating expenses and we have made successful attempts to recover costs from tenants years later.
Fair Proportion of Rent
The default lease position is now set at 50% and comes off the back of Covid-19 abatement trends. Although there is an ability for the parties to negotiate this after an event, it's impossible to know the circumstances that have caused this. The updated Deed of Lease now provides both parties with clear framework to work with.
Mortgagee's Consent to the lease
Historically, this has rarely been an issue. Given its inclusion, we may see increased discussion from Mortgagee’s on this issue and an appetite to approve and consent to an occupier in future.
What does this mean for landlords?
Although many of the changes provide more clarity for both parties, some amendments are significant and landlords may already have these items sorted however, for those landlords that don’t, they will need to form their position and get the necessary documentation organised or secure lease terms that suit their specific arrangements.
