Before you sign the lease

Commercial leases come in varying shapes and sizes. Whether you operate a transport business and need a place to park your trucks, manufacture and sell goods from a warehouse or conduct your trade from a boutique store in the heart of the CBD, your lease agreement will be at the heart of your business.

Before you sign a lease, there are a number of core issues to consider. It is important to do your homework and talk with us before you commit to anything.

The rent

The first thing you are likely to consider is how much rent you will be paying. It's good to remember that an agreed rent as stated in the lease can change (usually up!) through a rent review process. If you have a sub-lease your rent may be linked to the head lease. If this happens, and your landlord's rent is increased, then your rent is also likely to increase. 

The parties to the lease

If you run your business as a sole trader, then it is likely that you will be the tenant in a personal capacity. 

If your business operates through a company, your company is likely to be the tenant. In addition to your company being the lessee, the landlord may also require personal guarantees from those involved in the company. You may need some guidance on the impact of being a guarantor under a commercial lease. Generally speaking, it holds you personally responsible for any of your company's defaults under the lease. 

The landlord should be the legal owner of the property. If the property is not owned by the landlord, you should find out who does own the property. Otherwise you could be unwittingly entering into a sub-lease agreement, which comes with slightly different rules. Your sub-lease will likely be subject to the head lease which may impose additional responsibilities on you in favour of the head landlord.

Check the premises description

You must ensure that the lease correctly identifies the premises you are leasing. If you lease the entire property, then the lease should refer to the property's title reference. If you are only leasing part of the property, then it is useful for the landlord to attach a floor plan that outlines the premises for which you have exclusive use and any areas that you can use in common with other tenants. It's also wise to check if there are car parks attached to your lease and for you to identify if you have exclusive use of these or if they are available on a first-come-first-served basis.

Use of the premises 

You should check the permitted use (also called' business use') in the lease and ensure this correctly identifies what you want to use the premises for. If the use says retail shop but you want to open a takeaway shop, you will need to have the use changed. 

Most leases contain a provision that allows you to ask your landlord for a change to the permitted use. A landlord needs to consider your request and cannot unreasonably withhold consent. We can assist you with this process if required.

Factor in the outgoings

Outgoings (sometimes known as 'opex') are the additional day-to-day expenses you must factor into your costings, over and above the rental. These outgoings include charges for rates, utilities, insurance and maintenance. It is important to carefully read the list of outgoings in your lease. If there are outgoings that don't apply to your leasing situation, cross them off the list. In some situations, your landlord may add items such as paying for the external maintenance of the premises. 

If you only lease a portion of the property, then you will pay a percentage of the outgoings. If charges are not separately metered, you should think about adding a clause to determine how these are calculated.

Who pays the costs for leases?

In most cases the parties pay their own legal fees for the signing of a lease and documenting any changes such as rent reviews or renewals. If you don't meet your obligations under the lease, your landlord can recover any expenses incurred in enforcing their rights from you.

Signing a commercial lease is a significant commitment and there is a great deal to consider before you sign on the dotted line. Make sure you've addressed every issue before you sign; it is much harder to renegotiate a lease once the terms have been agreed and the lease signed. If you'd like some guidance on your commercial lease, we can help tailor your lease to suit your business goals.

DISCLAIMER: All the information published in Property Speaking is true and accurate to the best of the authors' knowledge. It should not be a substitute for legal advice. No liability is assumed by the authors or publisher for losses suffered by any person or organisation relying directly or indirectly on this article. Views expressed are those of individual authors, and do not necessarily reflect the view of this firm. Articles appearing in Property Speaking may be reproduced with prior approval from the editor and credit given to the source.  Copyright, NZ LAW Limited, 2019. Editor: Adrienne Olsen. E-mail: adrienne@adroite.co.nz. Ph: 029 286 3650 or 04 496 5513.