1 September 2013

Agreements to lease

Before entering into a formal commercial deed of lease the landlord and the tenant are often presented with an agreement to lease to sign, particularly where a real estate agent is involved with the leasing of the property. The agent sometimes uses its own version of an agreement to lease. Where agents are not involved and parties wish to enter into an agreement to lease they often use the Auckland District Law Society agreement to lease form (currently the 5th Edition 2012 version).

Why enter into an agreement to lease before the deed of lease?

Clients often ask why it is necessary to first enter into an agreement to lease and then a formal deed of lease rather than proceeding directly to sign the deed of lease. An agreement to lease is commonly used where there are:

• Works to be carried out to the premises by either the landlord or tenant prior to the commencement date; or
• Conditions to be satisfied by either party before the lease agreement becomes unconditional. Examples include a due diligence condition which means the tenant secures the premises pending the completion of their due diligence investigation and conditions relating to resource and other consents.

Some points to consider before entering into an agreement to lease

Tenant entity

If you are the Landlord has the tenant got “substance”? Does the tenant have the financial resources and commercial experience to comply with its lease obligations?

If you are a tenant should you be entering into the lease personally or setting up a company to enter into the lease?

Personal guarantees

Consider who should provide personal guarantees – normally directors/ shareholders of tenant company.

Premises description

Check the address and legal description of the property and attach a plan clearly identifying premises and any car parks being leased. Is there sufficient access to the premises?

Fitout obligations

Itemise the fitout obligations of both the landlord and tenant so parties are clear as to exactly what they must do and when.

Term and rights of renewal

Check these are acceptable.

Rent reviews

Consider how often rent review are to take place and whether these are to be based on CPI or the market rent (or a mix).

Insurance obligations

Check insurance options and likely costs. Usually the landlord insures the premises but the tenant pays the premium. If you are the tenant you may wish to ask the landlord about the amount of insurance cover.

Business use

Is the proposed activity permitted within the relevant zoning rules? Most standard lease agreements leave this squarely in the tenant’s corner.

Costs

Is each party to pay its own costs relating to negotiation and completion of the agreement to lease?

Summary

It is important parties obtain legal advice before signing an agreement to lease. By doing so the parties have the ability to negotiate terms of the deed of lease. Just because the agreement is a “standard” form doesn’t mean it is right for the particular circumstances. On signing the agreement to lease the parties are almost always committed to entering into a deed of lease under the terms in the agreement. With rights of renewal factored in, that commitment can be for many years.

If you would like further information please contact Dale Thomas on 07 958 7428.