What To Look For In A Commercial Lease - Guidelines For Tenants 07 Dec 2011

"An ounce of prevention is worth a pound of cure."

For most small businesses, your lease will be one of your most important contractual documents.  Get it wrong and the profitability of your business may be seriously affected.  Even so it is common for business to sign up agreements to lease without getting legal help. The lawyers at Parry Field have considerable experience in helping tenants to negotiate lease terms that fairly protect the tenant from undue risk and cost.

 Is it safe to sign an Agreement to Lease?

Frequently small businesses are required to find premises or to renew a lease of their existing premises. Often they are approached by an agent and asked to sign an Agreement to Lease. The form is usually referred to as a "standard document" and refers to an Auckland District Law Society lease. You may be assured by the agent that this lease is one which "everyone agrees on".

Beware this unqualified "advice" Although the Auckland District Law Society ("ADLS") form is a common type of retail lease there are still a number of factors in it which can be better negotiated on your behalf if you see your Parry Field lawyer first before signing any agreement to take a lease or to renew. It is important that you see us before you sign as even a clause stating that the Lease form is subject to solicitors approval is not enough for us to open doors to negotiate additional terms for your benefit.

What points should I check before signing an Agreement to Lease?

The following factors can be negotiated to your advantage before signing:

  1. Guarantees:
    If you are to take the lease in the name of a company or a trust, the landlord may require a personal guarantee from someone obtaining a benefit from the lease. This guarantee means that the person signing as guarantor is fully and completely liable for the whole of the lease obligation for the term of the lease. If you talk to your Parry Field lawyer first before signing we would want to negotiate this position so that if for example, you sell the business or transfer the lease, your liability under that guarantee ceases at that point rather than continuing on for the whole term. A guarantor should also consider an asset protection plan with Parry Field before signing any guarantee.
  2. Assignment:
    Similarly, even if you transfer or assign the lease, liability of the tenant remains in place for the duration of the lease even though a new party will be the tenant. If you talk to your Parry Field lawyer before you sign we can attempt to negotiate that position so your liability as tenant ceases when you are no longer the tenant.
  3. Rent Ratchets:
    The ADLS form has a provision where on each rent review the new reviewed rent will never in any case be lower than the rent paid in the twelve months prior to the review. This can have the effect of a tenant paying rent in excess of the market value. Again, by contacting us before you sign, this clause can be negotiated on to a different footing. For example limiting any increase to C.P.I. adjustment or limiting the maximum rent to that paid in the first term.
  4. Landlord's Solicitor's Costs:
    Tucked away in fine print of the Auckland form is a clause requiring the tenant to be responsible for the landlord's solicitor's costs. This can be like signing a blank cheque in favour of those solicitors and again if you contact us before signing any lease agreement we can arrange to have that fee negotiated and fixed before you sign or perhaps deleted altogether. If it cannot be fixed then you have the opportunity of not proceeding. This can prevent costly surprises at the end of the transaction.
  5. Landlord's Insurance:
    The ADLS form also provides that the Landlord will insure his premises and the tenant will pay the premium as part of tenants' outgoing expenses. Should the Landlord make a claim on the policy as a result of tenant negligence? The Landlord's insurance company may be able to sue the tenant for recovery of insurance monies paid to the Landlord. If you contact us before you sign the lease we may be able to negotiate a joint insurance policy between you and the Landlord which will prevent any claim being able to be made against you by the insurance company as a matter of law.
  6. Term of the Lease:
    It may be for your benefit to negotiate a different type of term. For example a real estate agent may say that a three year term plus a right of renewal for three years is standard in the industry. If however, you have a new business, you may be concerned about a three year rent exposure if the business does not succeed in its opening year. If you contact your Parry Field lawyer before you sign then we can attempt to negotiate something which may be better for you. For example, one year with a right of renewal for five. At least at the end of your first year you will have more information with which to commit yourself to the next term. In any case you could try to re-negotiate that five year term at the time which gives you more options than being locked in for the first three years.

Generally a lease is a lengthy document but remember that tucked away in any agreement to lease form there is usually a clause saying that you will agree to all the (ADLS) lease form conditions. Again, you can be saved from being trapped into non-negotiable situations by contacting your lawyer before you sign anything to do with agreements to lease, leases, rent reviews or guarantees. It is a simple message which we can't say often enough. An ounce of prevention is worth a pound of cure.

Should you need any assistance with this, or with any other Lease matters, please contact Grant Adams or Tim Rankin (348-8480) at Parry Field.