Leases and the Property Law Act 2007

The Property Law Act 2007 (referred to as ‘the Act' from here on) came into operation on 1 January 2008, and affects most leases, whether they were entered into before, on, or after that date.

Whether you are a landlord or a tenant, you should be aware of your obligations under a lease.  You need to know about the changes that the Act has brought about, to make sure that you take them into account when entering into your own lease  arrangements.

Certain obligations implied in leases

Under the Act, every lease has certain obligations that are automatically implied unless your lease specifically excludes them.  So if you want to exclude any of these obligations, you need to raise this with your lawyer when they are drafting your lease.

The implied obligations are that:

• the tenant must pay rent regularly and on time;
• the tenant must not alter any building comprising part of the premises without the landlord's consent;
• the tenant must not do anything on the premises which is likely to cause nuisance, damage or disturbance to the landlord, other tenants or the neighbours (such as using the premises for illegal purposes);
• the tenant may terminate the lease if they can no longer use the premises for a specific purpose that they leased it for (for example, the use becoming illegal by statute, such as the manufacture of BZP party pills);
• for leases other than short-term leases, the tenant must maintain the premises in their existing condition, except for reasonable wear and tear or damage by fire, flood or explosion (subject to the insurance provisions);
• the tenant is entitled to quiet enjoyment of the property;
• the landlord can enter the premises to inspect and carry out repairs as long as they do not unreasonably inconvenience the tenant;
• the landlord can cancel the lease for non-payment of rent or other breach (new procedures for cancelling a lease are discussed later in this article);
• if the premises become unfit for occupation, the landlord must reduce the rent in fair proportion to the destruction or damage; and
  the landlord must not act contrary to the terms of the lease.

Maintenance not required under short-term lease

The term ‘short-term lease' applies to an unregistered lease with a term of a year or less, and also to a lease where no term has been agreed, or where a tenant remains in possession after the term of the lease has expired.

A short-term lease does not carry the automatic condition that the tenant must maintain the premises and repair any damage caused by fair wear and tear, or by fire flood or explosion and certain other events, even if caused by the fault of the tenant.

To provide added certainty for both the landlord and the tenant about whether the landlord expects the tenant to repair damage, you should put a short-term lease in writing as you would a long-term lease.

Termination of lease may be tied to future event

Before the Act, a valid lease required certainty as to the date of the lease end.  Now, a lease can provide for termination when some specified future event takes place - for example, the construction of a neighbouring building.  If the event does not occur within ten years of the start of the lease, then the lease expires on that date.

Term of sub-lease clarified

Where the term of a sub-lease is longer than the term of the head lease, this has always caused confusion.  The new Act has tidied this up.  If the term specified in a sub-lease goes beyond the term of a head lease, the sub-lease will now expire at the same time as the head lease.  Any extension of the head lease will extend the sub-lease to the final expiry date of either the sub-lease or the head lease, whichever is earlier.

Tenant benefits from landlord's insurance

On the basis that a tenant who pays the insurance premiums for premises should have the benefit of that insurance, the Act specifies that the tenant cannot be responsible for the costs of repairing damage by fire, explosion, lightning, storm, earthquake or volcanic activity.  This means that, as a minimum, the landlord is responsible for insurance for these risks, and any other risks they agree to insure under the lease.

If a landlord also holds insurance for additional risks not specifically agreed to under the lease, the tenant will obtain the benefit of that ‘extra' insurance.

The tenant will not, however, get the benefit of any insurance if the loss or damage has been caused intentionally or as a result of the tenant's act or omission.

Given the above, it's important that both the landlord and the tenant assess the risks they are taking on under a lease and consider the special nature of the premises. For example:

• are the premises in an earthquake or flood risk area that makes it impossible for a landlord to get insurance for those risks?
• are the premises a retail store that requires additional insurance for plate glass windows?
• are there any special characteristics of the premises or their use?

If you as a landlord want to amend the minimum insurance requirements, or as a tenant want to make specific insurance requirements, then you need to make sure those amendments or requirements are specified in the lease.

If the tenant needs landlord's consent

Where a lease requires the tenant to get the landlord's consent, the Act says that the landlord cannot ‘unreasonably' withhold or delay that consent.  Any considerations or obligations to consent set out in a lease must also be reasonable.

This means that the only way a landlord can avoid giving consent to a ‘reasonable' request is to prohibit absolutely in the lease terms the actions concerned, such as assignment of the lease or change of use of the premises.

A landlord can still withhold consent, but in the case of an assignment, a sublease and certain other transactions, the tenant can now request that the landlord provide reasons for refusing or for imposing obligations or pre-obligations, a landlord's decision will always be open to review.

The test of what is ‘reasonable' is what a reasonable person would do in the circumstances.  So a landlord needs to give full consideration to the circumstances. This kind of test is sure to give rise to many arguments between landlord and tenant in the future.

If a person (the Act does not specify just the tenant) suffers loss because the landlord withheld consent unreasonably, then that person may be able to recover damages against the landlord.

Assignment of lease

An assignment of a lease may now take effect whether the landlord has consented to it or not, and a new landlord-tenant relationship is created immediately on assignment.  This is actually helpful to a landlord, as the new tenant will be bound by the lease, and the landlord can take action directly against them if they need to.

In most situations, the terms of the lease will still require a tenant to obtain the landlord's consent to an assignment, and the landlord keeps the right to take action against a new tenant for breaching the lease obligation prohibiting assignment.

The old tenant remains liable under the existing terms of the lease, but not for any subsequent variation to the lease or after renewal.

Landlords should always insist on a written deed of assignment to bind any new guarantors into the lease obligations.  It would also be prudent for the new tenant to have the assignment in writing, to provide certainty as to the landlord's consent.

New code for cancellation

Landlords need to be careful if they want to cancel a lease.  The Act now has a code for how a landlord can cancel a lease.  These rules apply no matter when the lease was created, and you cannot contract out of this part of the Act.

A landlord can cancel the lease only if:

• the tenant is at least 15 working days in arrears with the rent (unless the lease specifies a shorter term, which must not be less than 10 working days) or has breached some other condition of the lease;
• the landlord has given the tenant notice of an intention to cancel the lease in accordance with the Act requirements; and
• the breach has not been remedied, or the compensation required under the cancellation notice has not been paid, within the specified time.

The landlord must give the tenant at least 10 working days to remedy their breach of rent payment.  For other breaches the landlord should consider what is a reasonable period, given the nature of the breach.

The notice of intention to cancel a lease requires careful drafting.  We suggest that landlords get legal advice to make sure they meet the requirements of the Act before serving the notice.

Landlords should note that in practice the right of cancellation for non-payment of rent is effectively no more than a security for the rent.  Even if a landlord proceeds to cancel, the courts will nearly always restore the tenant to possession as long as the tenant pays all arrears and costs.

Once the necessary notice has expired, the landlord can apply to the court for an order for possession, or re-enter the property ‘peaceably'.

Landlords need to assess the situation very carefully before re-entering a property.  To enter peaceably requires that you enter without force, in a way that will not cause, or make anyone reasonably apprehensive that it might cause, a breach of the  peace.

The landlord no longer has a right to take any of the tenant's property in lieu of rent.

Consult your lawyer about the changes

The changes in the Act will affect the procedures landlords have in place with their tenants, including notice periods, the form of notice, and termination and consent procedures.

Both landlords and tenants should give their lawyer as much information as possible to ensure that the lease suits the use and nature of the property.

Make sure you consider:

• any specific insurance requirements;
• obligations you want in the lease, and what obligations you are wiling to take on;
• what are you using the property for;
• your future plans for the property;
• timeframes;
• whether the landlord wants to limit their consent obligations to tenant requests.

Remember leases deal with property, so mistakes can be costly. Landlords and tenants should consult their Lawlink lawyer if any queries arise in relation to a lease.  In particular, be sure to seek advice on the drafting of your lease and on the remedies and relief that may be available.

© Harkness Henry & Co

Email shiree.blackwell@harkness.co.nz

Website www.harkness.co.nz

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