A tenant’s snapshot guide to commercial leasing

Commercial leases are a core component of most businesses operating in New Zealand, and as a tenant it is essential to understand the key terms, and potential risks associated with your lease agreements, to ensure that your commercial endeavours can thrive. 

Below, we will briefly discuss some of the key elements of which to be aware and advise on how to avoid some of the more common pitfalls.

Understanding the Legal Framework

Commercial leases in New Zealand are governed by the Property Law Act 2007 (the Act).  The Act outlines baseline requirements and rights of landlords and tenants, however many of the lease terms can be set or changed based on what works for the parties’ specific circumstances. It is up to you to ensure that your lease is fit-for-purpose and makes sense for your business.

Negotiation of Lease Terms

Commercial lease negotiations can involve a wide range of terms including rental amounts, term, renewal options and rent reviews as well as any special conditions specific to the parties or premises. 

We recommend speaking with a lawyer at this stage before you sign, to make sure you are adequately protected and that the lease contains the rights and protections that you need it to.

Key Considerations of a Lease for a Tenant

• Rent Review Mechanisms: Leases will usually include rent review clauses that outline the process for adjusting rent over time.  Often, these are built around regular market valuations, CPI increases, or a combination of the two.  You should make sure you understand how often reviews will occur, what mechanisms will be used, and what if any) limits there are on how much your rent could go up. Understanding of this mechanism can also ensure that you notice anything untoward occurring.
• Business Use: The purposes for which you will use the premises must be recorded carefully.  For example, if the lease lists the business use of the premises as offices, yet you wish to open a retail store, you will need to seek additional permission from the landlord or risk being in breach of the lease.  You may need to think ahead: if it is foreseeable that you may pivot to a different kind of business, the use should be described more broadly.  

• Outgoings: There are additional costs that you will likely need to pay, known as outgoings. The lease should specify what these are and their estimated annual cost.  Some of the items that tend to be included in outgoings are rates, building services and maintenance, the landlord’s insurance premiums, utilities, and the collection of rubbish.  Outgoings can vary broadly depending on the use and specifics of the premises. 

• Maintenance, Repairs & Make Good: A lease will typically specify the responsibilities of each party relating to property maintenance and repairs.  As a tenant, you will usually be responsible for maintaining and repairing the interior of the premises, as well as glass, floor coverings and any garden or lawn areas. You must make good any damage caused either by you or by someone for whom you are responsible (for example, your employees, guests or customers). The landlord is responsible for any structural issues and building services contracts. Regular property inspections and thorough documentation of the property's condition at the start of the lease can help avoid disagreements over maintenance and repairs issues.  It is also common for leases to contain “make good” provisions: at the end of your tenancy, you will return the premises to the state it was in at the beginning of the term.  It is advisable to keep a record of damages as they arise, as well as any alterations.
  
  
• Dispute Resolution: Disputes may arise during the lease term.  Leases should include clauses for mediation or arbitration to provide a structured process for resolving disagreements.  Timely and amicable dispute resolution can help maintain a positive landlord-tenant relationship.  To avoid a costly dispute, communication is key, and if there are potential issues, get in touch with your lawyer soon rather than later. 
  
  
• Personal Guarantee: In some instances, the landlord may feel that it is necessary for the Tenant’s obligations under the lease to be personally guaranteed by someone. This is especially common when the Tenant is a company – the landlord would usually seek personal guarantees from the directors and/or shareholders.   If you agree to sign a personal guarantee, then you are personally taking responsibility for the Tenant’s obligations under the lease.  This means that if the Tenant is unable or unwilling to meet its obligations, the landlord can require you to step in, including to pay any money owing to the landlord.  If you are being asked to give a personal guarantee, you should speak with your lawyer before you sign.

Commercial leases are important legal documents which impose significant obligations and grant significant rights to commercial tenants.  Navigating these waters can seem daunting, however a good lawyer will be able to guide you through the process. Contact us to discuss how we can help you with your lease.

Ezrom is a Solicitor in our Commercial Team and can be contacted on 07 959 2313