19th October

Commercial leases as a tenant: how can your lawyer help?

If you’re starting a business and you’re unfamiliar with commercial leases, the documents you are asked to sign will likely be completely new to you. You may also be being told that you must sign them urgently in order to secure the property!

Particularly if you’re starting a business, the documents and detail you will be presented with may feel overwhelming, very longwinded, and full of jargon and fine print.

Read on to find out more about Commercial Leases and what you can expect as a Tenant...What do I need to sign to enter into a Commercial Lease as a Tenant?

Once you have viewed the property and discussed the terms with the Landlord or agent and you think you want to lease the space, then the first thing you are likely to be presented with in relation to your commercial lease is an “Agreement to Lease”. Once you have signed the Agreement to Lease you will be asked to sign a “Deed of Lease”. The law usually has this somewhat unusual two-step process for commercial leases. In short, the Agreement to Lease is an agreement that you will enter into the (much larger) Deed of Lease document, however, if you have no idea what a Deed of Lease document is or what it says, then signing up to an Agreement for Lease and the whole leasing process may seem problematic even from the outset…

What is a Commercial Lease (and how does that compare to a Residential Tenancy)?

A commercial lease is usually between two businesses. Much like a personal residential tenancy, there is the Landlord party (also known as a Lessor) who usually owns the property and the Tenant party (or Lessee) who agrees to rent that space from them.

In residential leases, there is usually only two contracting parties - being the Landlord and the Tenant. In commercial leases you may have just two parties, but you may have many more. For example, in a commercial lease you may have someone personally guaranteeing the obligations of the Tenant (much like in bank lending) called a Guarantor, and you may also have a shopping centre or mall style lease and a Body Corporate to consider, and you may also be entering into a lease of a lease i.e. a sublease (where your Landlord also has a Landlord)! It can get confusing.

A commercial lease is of commercial premises so is usually a warehouse space, office space, retail or eatery space for example. The Tenants do not usually live in the leased space so the laws for residential tenancies, lodging bonds, and the Tenancy Tribunal do not apply to commercial leases.

What are the main terms of a Commercial Lease?

The terms of a commercial lease will answer the following questions and more: -

  • Where is the premises you are leasing?
  • Who are you leasing from?
  • Who are you? (Are you a company, family trust, partnership?)
  • Is anyone guaranteeing your obligations? If not, is there another kind of security being requested?
  • How long is the lease for? Is there a right to continue to lease, if so, for how long?
  • What are you leasing it for? What are you permitted to do there?
  • How much does the lease cost? (Keep in mind the “OPEX” (which means Operating Expense) is in addition to the rent, as is GST.
  • How often can the rent be increased and by how much?
  • What would happen if there was a ‘COVID-style’ lockdown?

How can a lawyer help with your commercial lease in New Zealand?

The best commercial leasing lawyers in New Zealand will be able to advise you based on your situation and your unique circumstances as well as the legal principles and general legal advice about commercial leasing as a Tenant. Ideally, you will not have signed anything (including the Agreement to Lease) when you engage your lawyer, as you have a considerable amount more bargaining power and leverage to negotiate before you enter into any lease documents rather than once you have already signed even just the Agreement to Lease.

There are many ways lawyers can assist you to ensure you get the most of your Commercial Lease as a Tenant.

For example, it is quite common that Landlords will ask Tenants for maximum security including a bank guarantee, personal guarantees from multiple people, rent in advance, etc. Of course, this is in the Landlords best interests, however, it may not be necessary and more balanced terms may be negotiable depending on your circumstances.

Another good example of where a lawyer may be able to help with your commercial lease as a Tenant, is by ensuring you will be able to do what you want at the premises. You do not want a situation where you lease the premises only to find out that Council will not let you operate that business in those premises, or the Landlord won’t allow you to do your fit-out the way you have imagined it. Another common issue is that the Landlord simply does not give you permission to operate your business the way you want to, at that location. This is very easily mitigated by your lawyer before you sign! Lawyers can take steps to ensure that those issues do not get in the way of you and your business even getting off the ground.

Another way Tenants frequently come unstuck is the term of the lease. Depending on your circumstances it is very common that Tenants often end up with Leases that are far too short or far too long! Your lawyer can provide you with guidance on what kind of term might be right for your business and how the right of renewal dates can be added or changed to your advantage. Your lawyer can also talk to you about the benefits of an added Cooling Off period and the possibility of providing you with a unique option to bring your expiry date forward to end the lease early if certain events occur and you need to bring the lease to an end.

Many of the above are not clauses in standard lease documents, but if you know your way around these documents (as the best commercial leasing lawyers do), these terms are frequently able to be negotiated in. When drafted with legal expertise they are as strong as all the other normal clauses and give you as the Tenant a much stronger position than if you simply went ahead with whatever was presented to you.

Once you have signed the documents your bargaining power is significantly diminished, however, and it may be that the other party simply becomes entirely unwilling to discuss any variations with you at that point.

… Added complications?

There are a number of ways commercial leases can get more complicated and tie you in knots!

If you’re a franchisee, if you’re entering into a shopping mall lease, or a lease with body corporate rules, or a sub-lease for example, you are going to need some particularly tailored advice as these leases are often much longer and written specifically for the Landlord’s business. They often also come with added documents to consider. A good New Zealand commercial lawyer will have navigated these sorts of leases before and will be able to help you negotiate in terms that will work for you. For example, franchises often require the leases to be well-timed and compliant with various obligations in the franchise agreement.

We recommend that you consult with a lawyer before you sign if you’re thinking of entering into any commercial lease. Most leases can be greatly improved with even just a small amount of input and tweaking from a New Zealand lawyer who cares and has considerable commercial leasing experience to draw on. We look forward to talking with you soon.