Entering into a commercial lease requires careful consideration of a range of factors. Foremost, is the ability to meet the rent over a period of time taking into account that rental will increase with regular rent reviews. Other costs that can be expensive and sometimes more than expected relate to the cost of fitting out of premises, the cost of outgoings (sometimes called operating expenses or opex) and the cost of restoring the premises to an original state at the end of the lease.
Term and renewals. The term of a lease needs to be long enough to invest in the location goodwill but not so long that if you fail you are not tied to it until expiry. It is often better to have shorter terms with more renewals than one long term with no exit option.
It is common for lessors to insist that personal guarantees are given by the shareholders or directors of lessee companies but it is becoming more acceptable common for lessors to accept bank guarantees as an alternative.
With new or unbuilt premises you may enter into an Agreement to Lease first, and a formal Deed of Lease once the building is complete. The form and content of Agreements and Deeds of lease vary, but the standard form Auckland District Law Society documents (“ADLS lease”) are now commonly used by many landlords. That lease has a good balance to it but, like any leases, imposes firm controls on the tenants.
The ADLS lease has a first schedule at the start of the lease which sets out the standard features such as the term of the lease, whether or not there are rights of renewal, the annual rental, rent review dates, proportion of outgoings etc.
Over the page from the first schedule there is a list of outgoings which are quite wide and include management expenses. It is essential for any tenant to have in writing from the landlord prior to signing a lease a breakdown of the outgoings that will apply from the commencement date of the lease. This can avoid any unexpected nasty surprises.
The ADLS lease sets out a detailed rent review procedure which needs to be followed carefully at rent review times. If there is any doubt about how the procedure should occur then it is advisable to seek legal advice before embarking on such a procedure. Use of Valuer’s can be important in this procedure.
Without summarising every clause it is important to note that the lease contains certain features such as the obligations for maintenance and care of premises and typically this covers such things as repainting of premises when required by the landlord, replacing of floor coverings on the same basis and of course repairing damage to the lease premises. Again, it is a good idea to obtain some understanding of the likely maintenance costs prior to entering into a lease.
The ADLS lease goes onto deal with such matters as the business use for the premises. Note that the erection of signage and additions and alterations require prior consent of the landlord and remember that in making additions and alterations there may need to be a requirement to obtain a building consent and that can have its own set of complications. Indeed, obtaining such consents can be costly and a drawn out procedure so if a re-fit of the premises is anticipated then expert advice should be obtained before entering into a lease.
Insurance is always an important feature of any lease and there are certain obligations on a tenant to pay insurance as required by the landlord. Of course public liability insurance is essential. Obtaining good insurance arrangements can be obtained by reputable insurance brokers. The ADLS lease goes onto cover such things as damage or destruction of premises as well as default by the tenant.
There is a clause which covers a requirement for a tenant to remove fixtures and fittings and chattels etc at the end of the lease and to make good the premises.
The key clause in favour of the tenant in the ADLS lease is a clause which entitles the tenant to “quietly hold and enjoy the premises throughout the term without any interruption by the landlord or any person claiming under the landlord”. Whilst this is a powerful clause in favour of the tenant it does have some restrictions and be aware that landlords can, understandably, inspect premises from time to time.
The ADLS lease contains provisions for lease renewal and importantly the right to assign or sublet. There are a number of general conditions in the lease including a clause referring disputes to arbitration.
Entering into a lease is a serious financial commitment so it is essential to get proper legal advice before signing and to be aware of the true cost being a tenant. We also recommend the use of a property consultant when negotiating complex leases. The use of a consultant can save thousands of dollars, particularly in leases at shopping centres where inexperience can lead to serious financial mistakes if the lease if not structured properly.
MacDonald Pilcher Partnership offers franchisee legal advice and franchisor legal services.