Tips for tenants entering into a commercial lease

Cavell Leitch


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A commercial lease is a business partnership, so you will benefit by maintaining a good relationship with your landlord.
New Zealand Real Estate and Construction
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Top tips for commercial tenants

In this article we set out our top tips for tenants who are entering into new commercial leases. It is very important to get this right from the outset. If you are a landlord instead, then please refer to our separate article "10 tips for landlords entering into a commercial lease".

1. Focus on the important stuff and seek advice early

Most leases in New Zealand use the standard 'ADLS deed of lease' form which is designed to be equally weighted between landlords and tenants. In reality however you and the landlord will often have different priorities and bargaining power.

It is important to keep in mind that a lease boils down to a business partnership, and you will benefit from maintaining a good relationship with your landlord. We suggest that you focus on what is really important to your business when you are entering into a lease. Cavell Leitch will negotiate a commercially advantageous lease terms to ensure your lease contains everything you need.

Please don't hesitate to contact one of Cavell Leitch's lease specialists for advice as early as possible if you are planning to do works.

2. Fitout and make good

If you're planning to fitout the premises, then you'll need to obtain the landlord's approval of your fitout and signage plans, and also obtain any necessary Council consents.

You will want to understand what condition you'll need to eventually leave the premises in. Unless your lease says otherwise, a landlord can make you reinstate the premises back to the configuration it was in when the lease commenced. We strongly recommend that you and the landlord co-operate to prepare a premises condition report and then attach this to your new lease. This report should record a snapshot of the premises when your lease commenced (including photos). This will hopefully prevent any arguments around how the premises needs to be left when the lease ends.

3. Term and renewals

Shifting to a new premise is a big commitment so you'll want to negotiate a lease term and renewals which anticipate your likely future needs. A short lease may give you more flexibility to move on if your needs change. Alternatively, if you're investing a lot of resources into the premises or its location, then a longer lease may give you greater security (and will likely be the landlord's preference).

There are other ways you can negotiate flexibility into a lease. You will want to be able to assign the lease or sublet space if the premises ends up being less than ideal. You could also attempt to negotiate a right of first refusal to take on extra space if it became available, or have a right to end the lease early by giving the landlord notice.

4. Guarantees

It is likely that you'll be asked to provide a personal guarantee, however there are ways of limiting your guarantee. There are also alternatives to providing a personal guarantee, including a bank guarantee or a security deposit which is returned to you when the lease ends.

5. Rent reviews

You'll obviously need to consider whether the initial rent is affordable, but you should also forecast future rent reviews. For example, a landlord may offer you a reduced rental to begin with, but the rent may jump considerably when it is next reviewed. There are many different ways of reviewing a lease's rental. Please refer to our separate article setting out the pros and cons of each option.

6. Outgoings

Most leases are 'net leases', meaning that you will pay a proportion of the building's expenses (called outgoings) in addition to paying rent. We recommend that you obtain an estimate of the likely outgoings before you sign up to a new lease so you understand your total commitment.

7. Permitted use

Leases often limit the type of business activities the landlord will permit in the premises. As a tenant it may be preferable to list the permitted use as something general like "retail" or "any use permitted under the relevant district plan". This will allow your business to evolve over time.

We suggest that you also think about what other businesses are nearby. Will they complement or compete with your business? You may wish to include an exclusivity of trade clause which gives you the sole right to conduct a type of business within the cluster of shops owned by the landlord.

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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