To lease a premises in conjunction with purchasing or starting your own business can be a daunting prospect – often with good reason.
What’s my exposure?
A good starting point for your likely “exposure” is to simply multiply the annual rent and outgoings you are required to pay by the length of your lease as follows:
Assume a five year initial lease term at (say) $50,000 plus GST a year. Add in other property expenses such as rates, insurance and maintenance totaling (say) $8,000 a year, and you get:
$57,500 x 5 years + $8,000 x 5 years = $327,500.00.
This example illustrates that, like buying a house, signing a lease requires care and attention – including asking yourself the basic question: “How am I going to meet these obligations?”
Many tenants also don’t understand that when they sign a seemingly innocuous Agreement to Lease (most commonly in the form published by the Auckland District Law Society (ADLS)) they are usually also agreeing to be bound to the much more fuller terms of the ADLS Deed of Lease – i.e. the terms of the lease are effectively ‘struck’ or finalised as soon as the agreement is signed.
For these reasons, we strongly recommend you consult your lawyer before you sign any lease agreement.
Tips for negotiating a lease
Some particular areas you should turn your mind to when negotiating a lease include:
Check the Plan and Car Parks
- Make sure the agreement contains a detailed plan of the premises including any common areas which you will have the right to use. You should be clear as to who else might have access to these common areas, and how that could impact on your use of the premises.
- Any plan should also include car parks, and should specify which car parks will relate to your premises (ideally those directly outside your premises).
Final Measurement of Premises
- Does the agreement contemplate a final measurement of the premises and if so, does this potentially affect the proposed annual rent?
- Often the “premises condition report” and “list of landlords fixtures and fittings” schedules are not filled out in the agreement to lease. You should insist these are completed as they may avoid a dispute on expiry of the lease as to what degree of reinstatement of the premises is required, and also “who owns what” in terms of whether fixtures belong to the landlord or the tenant.
- Make sure the “business use” set out in the lease matches your intended use for the premises, and potentially any different use in the future – the relevance is that if the intended business use is not covered, you will need to approach the landlord for consent to change this.
- In addition, make sure that your business use is permitted under the relevant City/District Council Plan (you may require specialist advice to determine this). If not permitted “as of right”, you might need a resource consent to carry out your proposed business activity.
- You will also need to make your own determination as to whether the current state of the premises are fit for your particular use. If there is to be a change in the building’s use after you move in, its possible the premises require upgrading – which could come at a substantial cost (and usually a big surprise). An example might be changing from a retail shop to a restaurant/cafe – the latter will likely require (at a minimum) disabled toilets – and any upgrade will be the tenant’s, not the landlord’s, responsibility under the lease terms.
Don’t forget outgoings
- Make sure you check the estimated annual outgoings for the premises. Since the Canterbury earthquakes, premiums for commercial buildings have increased significantly and the tenant is expected to bear these in full. In addition, be clear on what the excess under the landlord’s building insurance policy is. Some leases will limit the tenant’s contribution to $2,000, but others make the tenant liable for the full amount of the landlord’s excess. For older buildings, this is often expressed as a percentage of the overall building value, and can be extraordinarily high.
- Be aware as well that in addition to funding the landlord’s insurances, you will separately need to insure your own business assets and risk.
Repairs and Maintenance
- You should read the maintenance provisions of the deed of lease carefully, as tenants are often surprised to learn they are liable for most repairs, unless they are structural or due to a defect in design or construction of the building.
“Make Good” at Lease End
- Make sure you are aware as to what reinstatement obligations you have at the end of the lease. The standard ADLS provisions provide that tenants can remove additions/alterations they have made on the basis that they “make good” any damage to the premises in removing them. Even if you don’t want to remove them, the landlord can still require you to remove such items.
- It is helpful to try and anticipate at the outset of the lease what a sensible position on termination would be – for instance, it is often better to negotiate that your fit out will vest in the landlord without compensation at lease end, so that you are not later required to remove it (because the value of the fit out at the end of the lease will often be less than the cost to remove it/reinstate the premises).
- You might be able to renegotiate the terms of any guarantee – for example, if your spouse or partner is named as a guarantor but doesn’t work in the business, you could argue he or she should be excluded from the guarantee.
In addition to these matters, your lawyer will be able to take you through the standard terms of the ADLS Deed of Lease and fully explain your rights and obligations including rent reviews, assigning your lease and damage to the premises, as well as what happens if you are unable to pay the rent.