Key points when negotiating leases 11 Sep 2018
We often have clients coming to us wanting to lease a property and end up discussing the same key issues to consider so we thought it would be helpful to set them out here! If you would like to discuss any point in more detail then please contact us and we would be happy to do so.
Initial thoughts - Is this the right place?
- Do due diligence on the property – are there competitors nearby?
- Is it worth getting a LIM to check consents on property?
- What else is important eg how is the foot traffic if the business involves retail?
Heads of Agreement/MOU – can be either binding or non-binding and could include clauses around exclusivity and confidentiality.
Agreement to Lease – this is the key document and you should think about it covering the following matters/conditions before lease takes effect (often a Deed of Lease is not actually signed but the Agreement to Lease will have the terms necessary so the Lease is in place):
- Due diligence on the building itself (Engineer reports / DEE).
- Resource or other consents.
- Approval of plans and agreement around what Landlord will do and what Tenant will do.
- Approvals such as from a board, bank or franchisor.
- Solicitor approval – note that this is not for “anything” it is a limited remit based on legal reasons (compared to more general due diligence conditions).
- Have a sunset date so if conditions not met then the Agreement can be terminated (particularly if premises under construction).
- Finance / Insurance cover
Incentives that may be offered to tenants could include:
- Rent free period;
- Cover fit out costs; or
- Discounted rental for a period.
How much will be paid in future?
- Rent reviews are very common – what will you negotiate eg market rent review or CPI rent review? How will it be calculated eg take into account improvements or other factors?
- How often will this take place? On renewal dates or set periods?
- Ratchet clauses may also be used to ensure that rent cannot fall below the current rent amount.
Other key points to consider:
- Premises: It’s good to be clear about exactly what area is being rented! Make sure that is clear.
- Security: May be a bank guarantee, security deposit or personal guarantee – we particularly see that where a company is renting and the Landlord wants the owner to be personally on the hook as well. Try to limit the amount and time frame if possible and that they do not continue if lease is assigned to another.
- Landlord works: What exactly is going to be done and what time frame? What will happen if there is some delay?
- Tenant works: When can fit out begin and will it be rent free? What are the obligations around make good at the end of the tenancy?
- Start Date: Be clear about when this will actually begin particularly if there are fit outs or landlord works to be done. If can often be difficult to have a date when premises is under construction.
- Signage: What restrictions will there be on signage and approval required? If the building is ‘named’ by another entity then there may be additional approvals needed.
- Outgoings: Consider the % that will be paid by the tenant here and also, for example, the amount of insurance to be paid. You should obtain an estimate of outgoings from the Landlord.
- Competitors: Consider if there should be some exclusivity at the location (particularly if in a mall or similar).
- Sub leases: Are there any special provisions needed regarding sub leasing or assigning that may depend on the context?
- Purchase: Does the tenant wish to have a right to purchase the building if the landlord wants to sell?
We hope this list of issues to think about is helpful. Every situation is unique and we would be happy to discuss your unique situation with you if that would be helpful.