New Zealand: Commercial leases – Top 10 tips for landlords entering into a new lease agreement

Last Updated: 11 March 2016
Article by David Fitchett

We've previously written about some of the things tenants should consider when entering into a new lease agreement (click here for the article). A landlord will of course have different priorities, and it is equally important that a landlord takes care when negotiating and preparing a new lease.

Here are our top 10 tips for a landlord who is entering into a new lease agreement.

  1. Ask for a guarantee

We suggest that you carefully vet your prospective tenants to ensure that they will have the resources to meet their financial obligations under the lease. You should ask questions about the tenant's business plan and previous lease experiences.

We also suggest that you obtain a personal guarantee from the tenant company's directors or shareholders. It is reasonable to ask for a statement of the prospective guarantor's assets and liabilities.

As an alternative to a personal guarantee, you can ask the tenant to provide a bank guarantee, or ask the tenant to pay a security bond which is held in escrow during the lease's term.

  1. Take action quickly if things go wrong

If the tenant does then miss a payment or otherwise breaches the terms of the lease, then we suggest that you act quickly. Please see our article on the process which must be followed if you need to terminate a lease for non-payment of rent (click here).

  1. Terms and renewals

You should carefully consider the length of the lease terms and renewals which you are willing to grant. From a certain perspective it would seem like a good idea to have your tenants locked into long lease terms, but what if your circumstances change and you want to redevelop the building? You would need to include a lease clause which allows you to terminate the lease early for redevelopment purposes.

  1. Rent reviews

It is important that the procedure for reviewing the rental is clearly set out before the lease is signed. You will need to consider how often you'd like an opportunity to review the rental, and whether the rental should be increased on those occasions by a fixed percentage, in accordance with CPI, or to the then current market rental.

It will be vital that your agreed rent review (and renewal) dates are then diarised so that they aren't missed.

  1. Fit out of the premises

Your new tenant may wish to alter the premises to suit their particular business needs. We suggest that you make it clear that you first have a chance to review and approve the proposed works.

There are several issues which you may need to consider before allowing your new tenant to alter your building:

  • We suggest that you include a clause in your lease which requires your tenant to reinstate the premises at the end of their lease i.e. if your tenant creates a doorway between two rooms you should retain an ability to have them reinstate the affected wall before they move out.
  • We strongly recommend that a 'premises condition report' is attached to the lease before the new tenant moves in. This report should contain a thorough description and photos of the premise's condition when the lease began. A detailed report will hopefully prevent an argument as to how the premises needs to be reinstated before the lease ends
  • You should consider who will pay for the fit out:
    • If you pay for the fit out it will remain your property when the lease ends. There may however be tax implications if the IRD considers your offer to fit out the premises equates to a 'lease inducement'. It would be prudent to seek specific advice from your accountant before you agree to fit out the premises at your cost.
    • Alternatively if your tenant pays for the fit out, you will need to include a specific clause if you want to assume ownership of the fit out when the lease ends or the tenant will be able to remove it (provided they remedy any damage caused by this removal).
    • As a third option, you could agree to fund the fit out at the outset, provided that the tenant pays back the capitalised cost of the works during the initial lease term as an additional fit out rental.
  • We strongly suggest that the lease clearly records any item which is provided by the landlord for the tenant's use as a "landlord fixture, fitting or chattel". This will avoid an argument when the lease ends over which items must remain on-site. This can be especially relevant if the lease is assigned as the incoming tenant may otherwise mistakenly believe that they have purchased an item which actually belongs to the landlord.
  • We suggest that you consider whether the tenant's proposed fit out may trigger an obligation on your part to upgrade the building. For example, if the building has previously been used as an office, but the new tenant intends to use it as a retail space, then this 'change of use' can sometimes trigger an expensive requirement that the building's structural and fire safety standards are upgraded.
  • We finally suggest that you check that your tenant has organised adequate contractors insurance in case something goes wrong during the renovations.
  1. Arrange adequate insurance

A commercial lease will usually require a landlord to maintain full replacement insurance at all times. We suggest that you take care to arrange cover that is sufficient to rebuild the building should the worse happen, and then regularly revisit the level of cover to ensure it remains adequate. Your tenant will usually be responsible for the cost of your insurance premiums and any insurance valuations.

We also recommend that you put an adequate level of 'loss of rents' insurance in place. The cost of this insurance can also be passed onto your tenant provided this is agreed before the lease is signed.

  1. Agree on a business use

The tenant's proposed business use should be recorded in the lease agreement, and we suggest that you make the permitted business use as specific as possible. This will allow you to ensure that the tenant doesn't switch to operating a business which is undesirable or isn't synergised with your other tenants.

  1. Retain approval of the tenant's right to transfer the lease

We suggest that you ensure that your lease contains a clause outlining that your tenant may only sublet their space or assign the lease with your express consent. This will let you continue to control the tenancy mix of your property, and allow you to check that the new tenant has sufficient financial resources to meet their obligations under the lease.

  1. Insist that the lease terms are documented in writing

Once you have reached a general agreement on the lease's terms, it is essential that this is recorded in a Deed of Lease which is signed by both parties before the tenant is allowed to access the premises.

We also suggest that any subsequent renewals, rent reviews or variations of the lease are also recorded in a written deed. Not only is it important that both parties are on the same page as to how the lease will operate, but have these written records may also be vital if you decide to sell the building or seek to use the leased premises as security for a bank loan.

Cavell Leitch can help you prepare the necessary lease documents.

  1. Seek advice early

Our 10th tip is that you seek advice as early as possible. Once an agreement to lease is signed it is too late. If you need assistance in ensuring that your new lease is the best fit for your property, then please contact a member of our expert Commercial Property Team or you can contact David Fitchett directly at david.fitchett@cavell.co.nz or +64 3 339 5611.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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