Signing a Commercial Property Lease? Speak to your Lawyer First!
Too often we encounter clients who have not received legal advice before signing an Agreement to Lease or Deed of Lease for their business premises. A Lease is often one of the most important business decisions when starting a business or moving your business and can have serious ramifications because of the long term nature of the commitment and potential personal liability which can last even after you have sold your business and assigned the lease to the new owner.
As with all legal documents, we recommend a Lease, whether it be an Agreement to Lease or a Deed of Lease be reviewed by your solicitor prior to signing.
An Agreement to Lease can be conditional on certain pre-tenancy matters being completed before the lease commences, such as landlord or tenant works. Usually, by entering into an Agreement to Lease you will be deemed to have entered into a Deed of Lease even if that Deed of Lease is not signed later on. This is why it is vital that you get advice before you sign the Agreement to Lease. Once you have signed the Agreement to Lease or the Deed of Lease it is too late to change things.
Having your lawyer review the terms of your ATL (and Deed of Lease) may be able to limit your liability and could even save you costs. Here are some of the issues which we look at when advising our client:
- Are there any conditions which you require to be in the Agreement to Lease, for instance; does the Agreement need to be conditional on you getting resource and/ or building consent? Landlord approval of your fitout?
- Have the premises been accurately described? Are you getting everything you think you are getting - for example; exclusive car parks? adequate access rights? external areas of the premises?
- When can you access the premises? Do you have a fitout period? Are rent and outgoings payable during this period?
- What are the rent review provisions? Is there a ratchet clause which could mean that your rent will never reduce even if the market rent is lower than your current rental? Can you negotiate for a soft ratchet which allows for the rental to go back to the commencement rental or rental at some other point? Is there a rent free period?
- Are you getting a fitout contribution from the landlord? If yes are you aware of the terms applying to this – for example do you have to pay it back if you end the lease? We suggest you get tax advice on the effect of receiving this payment?
- What are the likely operating expenses? You should have a pretty accurate idea before you sign on the dotted line. You should be wary about paying outgoings for maintenance of items which are old such as air conditioning units. What other costs will you be up for – e.g.; landlord’s legal costs, tenancy coordination costs, initial marketing costs etc?
- What guarantees or personal guarantees are you providing? Can these be limited and will these be released when you sell the business and assign the lease?
- What rights of renewal do you have? Usually it is better to have multiple rights of renewal rather than one long term.
- Is the business use for the premises permitted under the district plan, appropriate and give you flexibility if you make changes to your operations?
- Do you have the resource consents you need to operate your business at the premises?
- Are your signage rights protected? We recommend getting advance consent for future signage, so you don't have to keep asking the landlord. Signage will also need to comply with Council restrictions. If your premises are in a unit title development and the signage is located on common property, you will need to ensure you have a licence from the Body Corporate to use the signage.
- Have you inspected the premises to ensure that they are structurally sound and there are no potential health and safety issues? Is there anything the landlord needs to do to make sure your premises are safe? What condition is the premises in – i.e. is there any damage or areas that require repair before your term commences?
- What are your maintenance and refurbishment obligations – you should try to limit these as much as possible.
- Do you have any obligation to pay additional rental if the landlord is legally required to do further works to the premises (e.g. earthquake strengthening works)?
- What maintenance obligations does the landlord have? Are there any works the landlord needs to do before you can access the premises?
- Are there any restrictions on when you can operate your business from the premises? Will your business cause any issues with any other nearby tenants?
- What happens if your premises are damaged (e.g. as a result of a natural event) and you can not operate your business?
- What do you have to do at lease end? Typically, a lease will provide that the tenant has to reinstate the premises to their condition when the lease commenced (see paragraph 9 above). This can be a very expensive liability and should be limited as much as possible especially if you have undertaken an extensive fitout of the premises.
There are many other issues which must be taken into account before you decide that the premises and the Lease is right for you. Our advice is to never sign a Lease or an Agreement to Lease without getting legal advice first.
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