An Agreement to Lease and a Deed of Lease
How are they different?
An agreement to lease and a deed of lease are two similar, but different, documents. The Law Association of New Zealand (TLANZ), formerly the Auckland District Law Society, provides a ‘standard’ form of both an agreement to lease and a deed of lease. Most commercial leases use this ‘standard’ form of agreement to lease or deed of lease.
Agreement to lease
An agreement to lease sets out the main commercial terms of a lease, such as the term, annual rent and rights of renewal. It can also contain further details regarding the fitout and other alterations which the tenant intends to do to ensure the premises are suitable for its business use. It can also set out how the cost and ownership of the fitout and alterations will be met between landlords and tenants.
Agreements to lease can often be conditional agreements while the tenant works through a due diligence process to ensure the property is suitable for its intended use, or to ensure that it can obtain the necessary territorial authority consents to operate its business.
Once any conditions have been satisfied, the agreement to lease is a binding agreement between the landlord and tenant; it can only be cancelled in accordance with the terms of the agreement. An agreement to lease states that a tenant must enter into a deed of lease on the standard TLANZ form once prepared by the landlord.
Deed of lease
Like an agreement to lease, the deed of lease also sets out the main commercial terms of the lease, such as the term, annual rent and rights of renewal. It goes further than the agreement to lease; it allows a tenant to assign the lease and additional terms set out the position in relation to the day-to-day management of the lease, such as maintenance obligations for both the landlord and the tenant, and what happens at the end of the lease.
Why you should also enter into a deed of lease
An agreement to lease does not allow the tenant to assign its interest in the lease. However, a deed of lease does allow this. If a tenant wishes to sell its business, they will need to enter into a deed of lease to have the benefit of the assignment provisions in the deed of lease. If the tenant wants to obtain bank lending for its business, the lender may want to see the deed of lease, and may require that a deed of lease is entered into as part of its financing approval.
The agreement to lease provides that the parties will enter into a deed of lease on the ‘then current’ form of deed of lease.
Most importantly, the agreement to lease also incorporates all of the terms of the standard deed of lease, so the landlord and tenant are agreeing to be bound by a document they have not seen or signed. In particular, if the parties have not received legal advice before entering into the agreement to lease, they may not have full knowledge of the terms of the deed of lease and what they have agreed to, and may find that the obligations in the deed of lease are not as they expected.
We can help
While agreements to lease can be helpful, we recommend that you enter into a deed of lease shortly after the agreement to lease is unconditional and/or the lease has commenced. This will help ensure that all parties have a full understanding of the terms of the lease and all the benefits (and obligations) offered under the lease.
We can help in advising on the terms of the agreement to lease and the resulting deed of lease prior to execution. We can also assist with documenting the terms of an agreement to lease into a deed of lease.
DISCLAIMER: All the information published 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 this newsletter 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.