These documents are far more complex than your simple residential lease and therefore harder to understand, especially the first time you encounter one.
Spending a relatively small amount of time, effort and money to get a legal review of the proposed lease before you commit is a smart investment, but to get you started here are a number of points to take into consideration when negotiating your lease.
(While this list might seem fairly long, it is by no means exhaustive and many businesses or premises will require unique clauses to account for their specific needs.)
First things first, make sure that you have specified the right party as the tenant! We’ve seen directors inadvertently commit to a lease in their personal names, instead of their limited liability trading company.
Where the tenant is to be a private limited liability company, the personal guarantees of its principal directors/shareholders are usually required by the landlord. However, it may be possible to avoid a guarantee or have a rent bond arrangement instead.
Term & Renewals
Does the term suit your needs? For example, if your business is growing rapidly and may outgrow the premises, it may be better to have a short term lease (e.g. 2 years) with multiple rights to renew for similar terms, rather than one long term lease.
Commencement Date & Fit-Out
Does the commencement date reflect your needs? Is early access provided to enable you to complete your fit-out of the premises? When does the obligation to pay rent commence? Could you negotiate early access and/or a rental holiday?
Does the annual rent provided for in the lease match your understanding of the annual rent that is to be payable for the premises? This may seem obvious but we have seen a tenant inadvertently committing to a higher level of rent than they realised because they did not get the agreement to lease legally reviewed before they signed it. In their situation, they did not appreciate that the rent was to be finalised following a measurement of the premises upon completion of construction, and that the annual rent specified in the Agreement to Lease was merely an indicative figure subject to that final measurement.
As a tenant, you would be looking to limit the frequency of rent reviews. Furthermore, you would be looking to exclude any rent ratchet applying on any rent review. Conversely, landlords want the ability to review the lease frequently and for the rent never to be reviewed downwards.
Read our recent article on commercial rent reviews here. What rent review method are you committing to, and what are your rights and obligations on any rent review?
Default Interest Rate
What is the default interest rate specified in the lease? This is the rate that will be charged in the case of any default in the payment of rent. Is it a fair and reasonable rate?
What is the permitted business use under the lease? Is it wide enough to allow you to undertake your existing business and any expansion of your business? If it is very specific to your business, it could limit your ability to assign or sublease the premises in the future.
What is the minimum level of insurance cover provided for under the lease? Usually the obligation to insure falls on the landlord. However, many landlords (particularly in earthquake prone regions and in the case of very old buildings) will only commit to a very basic level of insurance cover. This generally exposes tenants to a high degree of business continuity risk.
No Access Period
In the event of an emergency that prevents access to the premises (eg. the ‘red zoning’ of the building following an earthquake), how long should this be tolerated before either party can cancel the lease? One month, 6 months, etc.? The default ‘no access period’ provided for in lease documentation is 9 months. Can your business sustain rent payments for this long without access to the premises?
What outgoings are payable under the lease? Tenants generally favour ‘gross leases’ – namely, leases where the rent is inclusive of outgoings. Whereas landlords look to recover all outgoings from tenants and generally favour ‘net leases’ – where a contribution to outgoings is in addition to rent.
Landlord’s Fixtures & Fittings
What fixtures & fittings are being provided by the landlord? These need to be clearly specified in the lease, so that there is no argument coming into the lease and also at the expiration of the lease.
Premises Condition Report
A lease often provides for a Premises Condition Report to be completed and inserted into it. This means the tenant must leave the premises at the end of the lease in the same condition as at the start, subject to fair wear & tear from reasonable use. This report should be completed just before you take possession of the premises and needs to be attached to the Deed of Lease.
Tenant’s Maintenance Obligations
What are your maintenance obligations under the lease and are they fair and reasonable? Commonly, the tenant’s maintenance obligations include responsibility to:
Assignment & Subletting
Will you be permitted to assign the lease or sublet all or a portion of the premises?
Generally, there is no absolute right to assign or sublease – it is only permitted with the prior written consent of the landlord. Usually, that consent cannot be unreasonably withheld. However, the landlord may impose reasonable conditions to their consent – e.g. subject to vetting & approving the proposed assignee/sublease, requiring suitable guarantees, etc.
There are a number of different reasons why a tenant may wish to assign or sublease – for example, on sale of a business. What many people do not realise, however, is that the original tenant’s liability does not necessarily end when they assign the lease (and become an ‘assignor’) to a new tenant.
If you enter into a lease you will typically still be liable for the full current term of that lease, regardless of whether you assign to a new tenant. If the new tenant breaches any of the conditions of the lease, you could still be liable, i.e. if the new tenant fails to pay rent, the landlord can often pursue you for the loss.
What Can you do?
Premises are an essential component of most businesses. Ensuring the tenure of your leased business premises and understanding your lease rights & obligations is good risk management. Invest the time, effort & money to get a legal review of the lease before you commit to it!
Wakefields makes leasing simple with a dedicated team of commercial property experts only a phone call away. Get in touch today on 04 970 3600 or email us at email@example.com