Improvements Rent Percentage: When is it chargeable?

Improvements Rent Percentage: When is it chargeable?

It is not only in Christchurch that local authorities are coming under renewed pressure to identify and address the issue of earthquake-prone buildings. These efforts by local authorities, however, are having ramifications not only in terms of expense for building owners, but also in terms of the relationship between landlord and tenant. In respect of that relationship, two key questions consistently arise:

  1. Is a landlord able to enter a tenant’s premises to undertake structural improvements?
  2. When does the Improvements Rent Percentage become chargeable?

This article addresses only the second of these questions. For more information on the first please see “When can a Landlord make structural repairs or improvements to a tenanted building?”.

What is an Improvements Rent Percentage?

The Improvements Rent Percentage concept allows a landlord to charge an amount additional to the agreed rent if improvements, additions or alterations are required by law to be made to the property. The specific amount a landlord is able to charge should be agreed at the outset between the parties, but is usually in the range of 8-12% of any expenditure incurred.

The clause dealing with Improvements Rent Percentages in the most recent Auckland District Law Society (ADLS) Deed of Lease (fifth edition, 2008(2)) states (emphasis added):

If the Landlord is obliged by any such legislation or requirement to expend moneys on any improvement addition or alteration to the property then the Landlord shall be entitled to charge up to the next rent review date in addition to the rent an annual sum equal to the Improvements Rent Percentage of the amount so expended by the Landlord and the monthly payments of rent shall increase accordingly from the first day of the month in which such improvement addition or alteration is completed. If the Landlord would be obliged to expend an unreasonable amount then the Landlord may determine this lease and any dispute as to whether or not the amount is unreasonable shall be determined by arbitration. In the case of a multi tenancy building, the annual sum payable shall be assessed in respect of a fair proportion of the amount so expended.

What does this mean for landlords and tenants?

The key words in the above clause are “obliged” “legislation” and “requirement”:

  • Oblige, on a plain dictionary meaning is to “require” or to “bind”, while
  • Legislation and requirement possibly extend to cover any statute, bylaw, regulation, or notice issued under the authority of any statute, bylaw or regulation.

In practical terms, this means that a landlord who undertakes structural improvements not arising from a direct legal requirement will be unable to charge an Improvements Rent Percentage. Our view is that the Improvements Rent Percentage is probably not chargeable, for instance, on structural work undertaken on the basis of an Initial Evaluation Process (IEP).

Instead, a landlord wanting to charge an Improvements Rent Percentage must wait until receiving a section 124 Notice under the Building Act 2004.

Other points to remember

  • Improvements Rent Percentages are only chargeable from the first day of the month in which the structural improvements are completed until the date of the next rent review.
  • Local authorities are only able to require a building reach 33% compliance with current earthquake code levels. As such, a landlord will only be able to charge an Improvements Rent Percentage on bringing the building up to that level, even if the building is actually strengthened to a much higher level of compliance.

Disclaimer:
This article relates to a clause in the fifth edition ADLS lease. Your lease may be different. In any event, advice specific to your lease must always be obtained. Articles on this website provide a general review of the law and should not be relied upon when dealing with specific issues. Please contact us for advice specific to your circumstances.