A businesswoman recently decided to start a business and started looking for premises that were appropriate. Once she found a suitable premises, the agent gave her the Auckland District Law Society Agreement to Lease (“the Agreement”) to sign. The businesswoman was worried about what was included in the lease and decided to see her lawyer for advice. 

Once we reviewed the Agreement, we found that it only entitled the business to operate between the hours of 9am to 5pm. This would have caused major problems, as florists often start early in the morning to prepare and arrange the flowers.    

After negotiations with the landlord’s lawyer, we were able to widen the operation hours, which allowed the business to successfully operate. 

In light of the above example, we detail below a range of common clauses that are included in an Agreement to Lease that need to be understood and carefully reviewed before signing it.  

Business Use

The Agreement will usually provide for the type of business activity that is permitted by the landlord in the premises. You should ensure that the business use is drafted widely so that the business can continue to grow and evolve. For example, if your Agreement stated that you are only permitted to use the premises for clothing retail, then it would prevent you from manufacturing clothing at the premises. 

Guarantor

You also may be required to be the guarantor for the Agreement. This means in the event that the Tenant (usually a company) is unable to pay, you will then be personally liable to cover the outstanding rent and any other related costs. 

Rent Reviews

It is important to check how often the rent reviews will be. This may be annually or every second or third year, for example. Therefore, you will need to determine whether you can afford the initial annual rent, and then whether you would be able to afford any future rent increases after reviews. 

Rent reviews are commonly reviewed by market rent or by Consumer Price Index, or a mixture of both. Market rent requires the rent to be comparable to similar premises as at the date of review, which sometimes leads to disputes among the parties. CPI reflects inflation and usually provides both the landlord and tenants with more certainty as to the likely rent increase.  

Outgoings

You will need to be aware of the outgoings that you will be required to pay and you should request an estimate on how much the outgoings would likely be per annum. Outgoings can be costly so it’s important that you are able to cover the outgoings, annual rent and other related costs.  Sometimes outgoings are included in the rent (“a gross lease”) and sometimes they are not (“a net lease”), so it pays to understand that difference.

Right of Renewal

The term of the Agreement may be short, so, if needed, you should ensure that you have one or more rights of renewal for the premises. This then provides you with the security that you will occupy the premises for a certain period of time if you choose to. Before entering into the lease you may well be able to negotiate successfully if you require either a longer initial term or more rights of renewal, or both. 

If you are thinking about entering into a commercial lease, we strongly encourage you to seek legal advice to have the Agreement reviewed. If the businesswoman in the example above did not get the Agreement reviewed, then it is likely that the limited operating hours would have prevented her from successfully operating her business.

Leading law firms committed to helping clients cost-effectively will have a range of fixed-priced Initial Consultations to suit most people’s needs in quickly learning what their options are.  At Rainey Collins we have an experienced team who can answer your questions and put you on the right track.

Claire Tyler
Commercial and Business Lawyer
Wellington, New Zealand


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