Commercial leases – one size fits all?

Advice for first home buyers
December 5, 2018
Rachael Jhinku
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March 5, 2019
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Commercial leases

A stable home is as important to a business as to a family.  The terms of a commercial lease will determine the business’ ability to occupy the premises as its “home”, as well as the performance of the landlord’s rental business (also affecting the value of the premises!).  Carefully thought through lease terms are critical to both the tenant and the landlord.

A bespoke lease may sound ideal, but a pre-printed lease form is a more time and cost effective option in many cases.  These forms have their pros and cons. The Property Council New Zealand lease forms, for example, are premises-type specific (leases for industrial, retail and office space, and carparks), but tend to be landlord friendly.  The Auckland District Law Society Incorporated (ADLS) lease form is most commonly used and comparatively more balanced.  However, amendments can still be made to improve a party’s position.

Some of the potential amendments to the ADLS lease form that the parties can consider include:

  • Structure of the initial term and rights of renewal of the lease – The duration of the total lease term (with all rights of renewal) represents how long the tenant can elect to occupy the premises (if those rights are exercised).  In contrast, duration of a current term represents how long the tenant has committed to lease the premises and the landlord has a secured rental income. Therefore, the tenant usually prefers more renewal terms with shorter duration while the landlord prefers fewer renewal terms with longer duration (e.g. five terms of two years each vs two terms of five years each).
  • Demolition and first right of refusal provisions – The standard terms do not allow landlords to terminate the lease early for redevelopment of the property. The landlord may request a provision to be inserted for obtaining such a right (especially for leases with a long total lease term).  The tenant may, in return, request first right of refusal to obtain a new lease for the redeveloped premises or other premises of the landlord.
  • Guarantee – The guarantors may wish to request that their personal guarantee be released on assignment of the lease.  The landlord may wish to obtain a bank guarantee in addition to, or in replacement of, the personal guarantees of the guarantors (as a stronger security).
  • Non-competition – The landlord or tenant may wish to insert a provision in the lease prohibiting operation of a similar business by the landlord’s other tenants (usually within the same complex).
  • Other premises or business specific provisions – The premises or the tenant’s business may trigger particular needs or obligations, which should be addressed by carefully drafted additional provisions.

The final lease form determines the parties’ rights and obligations.  Pre-printed lease forms provide good basic frameworks for preparing leases but careful consideration must be given to the best approach – a pre-printed lease form, a pre-printed lease form with amendments, or a bespoke lease form?  There is no one size fits all!  We strongly recommend that you seek legal advice before signing any document.  Please do not hesitate to contact us if you would like assistance with preparing any lease documents.

Julia Leung
Julia Leung

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