We often see clients who have, without much thought, entered in to a lease for commercial premises. Typically a tenant will underestimate the effect the terms of the lease may have on them or be unaware that the terms of a lease can be negotiated to better suit their needs.
Commercial leases in New Zealand are typically drafted using the Auckland District Law Society (ADLS) Agreement to Lease or Deed of Lease. Below are just a few of the considerations to make before entering into a lease.
Rent-free period
A rent-free period will allow you to take possession of the premises without the obligation to pay rent to the landlord for a period of time. Depending on factors such as the length of your lease, a landlord may be prepared to consent to a rent free period while your business gets up and running. If you are going to be undertaking work or fitting out the premises, the landlord may see future value in these improvements, and this may be your negotiating point to have them agree to the rent free period (see our comments below regarding reinstatement). Typically during a rent-free period, you will still be liable to pay the outgoings.
Outgoings
Under the ADLS Lease, there are outgoings which you will be responsible for over and above the rent payments. Often, as a tenant you will assume the only outgoings you would need to pay are rates and insurance. However, the standard wording includes a broad list of outgoings which could see you liable for the cost of resealing the car park or repairs to the building.
Fit-out and Reinstatement
The standard ADLS Lease requires you remove any fit-out and reinstate the premises if required by the landlord at the end of the lease. The ADLS Lease contemplates the following:
- The tenant removes its alterations and additions, either prior to expiry of the lease or later with the permission of the landlord, and pays for reinstatement; or
- The tenant removes its alterations and additions, either prior to expiry of the lease or later with the permission of the landlord, but fails to reinstate the premises. In this case, the landlord can recover the costs incurred in reinstating the premises from the tenant; or
- The tenant does not remove its alterations and additions. Ownership of those alterations or additions then vests in the landlord. To the extent that the landlord then chooses to remove those alterations or additions, the landlord can recover the costs incurred of doing so from the tenant.
To avoid the cost of reinstatement you may be able to negotiate to remove your obligation to reinstate the premises especially if the fit out will come at some value to the landlord or other future tenant.
Guarantees
If the tenant entity under the lease is a company, it’s likely you (plus any other directors and shareholders of that company) will be required to provide a personal guarantee to stand behind the obligations of the tenant. If the company fails to pay the rent or causes a breach, the personal guarantors will be personally liable to pay the rent or remedy any default. If possible you should try to limit your guarantee to a set amount or have it recorded that your guarantee will cease if the lease is assigned.
Seek Legal Advice
There are many terms in a standard lease which should be considered and possibly negotiated before you enter into the lease. Any changes to your lease must be made during a negotiation process before the lease is signed and it becomes legally binding. Once it’s signed, it’s too late to make changes. It’s best that you are clear in regards to your obligations and it’s highly recommended that you seek legal advice prior to entering into any lease documentation.
Odette Cottle is an Associate in the Business, Rural & Property Team at Norris Ward McKinnon. Contact Odette at [email protected]
