Here's a common scenario: You've found the perfect premises for your business and, after a little back and forth over the lease terms, you've signed an agreement to lease which was put together by the landlord's agent. However just as you're moving in you're asked to sign a second document called a deed of lease. You may be thinking "hang on, haven't I already signed the lease? Why do I need to sign something else?".
What have I already signed?
To start with you need to be really clear on the sort of document that you have already signed. You may have just signed a heads of agreement which isn't actually binding on you or the other party. Alternatively, you may have signed an agreement to lease which will only lock you and the other party into the lease once certain conditions are met.
So, you firstly want to make sure you've got a fully binding and unconditional agreement to lease. Cavell Leitch can help you ensure that you're fully aware of all the obligations you're signing up for so you don't make any commitments you're unable to keep.
However, the agreement to lease only tells you part of the story. To fully understand your commitments, you will need to be familiar with the contents of the deed of lease as well.
What's the difference between an agreement to lease and a deed of lease?
The agreement to lease and the deed of lease are then different documents:
- An agreement to lease sets out the broad commercial terms of the lease – things like how long the lease will run for, how much rental will be paid, and how often that rental will be reviewed.
- The separate deed of lease document repeats all the commercial terms, but also goes into more detail about the day-to-day operation of the lease. For example, the deed of lease covers off how you're expected to look after the building, what happens if you want to leave the premises, and what process will be followed if the tenant is ever late in paying rental, amongst other things.
Clause 4.1 of a standard ADLS agreement to lease document anticipates that a further deed of lease document will be drawn up by the Landlord's solicitor. Each party will normally pay their own legal costs associated with the negotiation and preparation of both the agreement to lease and deed of lease documents.Do I really need a deed of lease?
In short, no, you don't need to sign a deed of lease if you already have an unconditional agreement to lease in place.
It is useful to sign a deed of lease as well as an agreement to lease. If the parties sign a deed of lease document then there shouldn't be any ambiguity as to how the lease will work day-to-day.
However, it is not essential to sign a final deed of lease. Clause 4.3 of a standard agreement to lease states that the terms and conditions of a standard deed of lease will apply even if an actual deed of lease document hasn't been signed.
So why should I bother signing a deed of lease then?
We always suggest to our clients that they do take the next step and sign a deed of lease. There are several benefits to signing a deed of lease document:
- You will have a document which you can quickly and easily refer to for answers if there was ever a problem with the lease. As outlined above, when you sign an agreement to you you're bound by the terms of a deed of lease as well, so doesn't it make sense to know exactly what a deed of lease contains? A deed of lease provides certainty and comfort.
- Your agreement to lease may be conditional upon certain matters. For example, your lease may not start until the landlord has finished building the premises. In this case the agreement to lease will only state an estimated commencement date. The deed of lease will then record when the building was finished and the lease started. It is always good to know exactly when your lease started so you know exactly when it will end!
- If you are borrowing money your bank may require that the agreement to lease is converted into a final deed of lease so all the paperwork is in order.
- Having a final deed of lease in place is critically important if you ever wished to assign the lease to someone else. Clause 6.1 of a standard agreement to lease states that the agreement to lease cannot be assigned. The aim of this clause is to prevent someone using their bargaining power to secure special lease terms, and then they assign the lease to someone who the landlord isn't prepared to deal with. If you do want to assign a lease, then you will need to sign a deed of lease. An agreement to lease cannot be assigned, but a deed of lease can be assigned if you meet the right criteria.
- The standard deed of lease form has changed over the years, and likely will again. For example, several new provisions were added to the standard deed of lease form following the Christchurch earthquakes to deal with what should happen to the lease if the building was damaged or inaccessible. You want to know exactly what form of deed of lease will apply to you.
In conclusion it is incredibly useful to sign up a deed of lease document, even if you've already signed an agreement to lease. In fact, it is a very good idea to understand exactly what a deed of lease contains before you sign an agreement to lease. The leasing process may sound a little convoluted, but it needn't be confusing. Cavell Leitch's expert property team can guide you along each step of the process.
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.