A businesswoman started a consulting company and needed to rent commercial office space from which to run her business.  She initially signed the Agreement to Lease prepared by the agent, then the landlord then sent her a Deed of Lease to sign. She sought legal advice about the terms.

A Deed of Lease will contain all the terms negotiated in the Agreement to Lease and provide additional terms regarding the day-to-day operation of the lease and obligations of the parties. The usual template is the Law Association Deed of Lease.

We outline a few of the key terms below.

Premises description

It is important for a description of the premises to be accurate so that both parties are clear about the boundaries of the leased property. In addition to a written description, we always recommend that the parties attach a plan to the Lease as this will help avoid any disputes about what is included. If car parks are included in the Lease these are listed separately, and should also be shown on the plan.

Term

The term of the Lease refers to the initial term and does not include any rights of renewal. The initial term of a Lease will vary largely by industry and the level of certainty the parties require. A motel Lease for example may have a term of 20 years, whereas a newly established business may only have a 1-year or 2-year term.

Rights of renewal  

The Lease will set out whether there are any rights of renewal and specify the renewal dates. Exercising a right of renewal is at the tenant’s option and the landlord is obligated to renew the lease unless the tenant is in breach.

Rent

The Lease will include the annual rent payment. Commercial rent is subject to GST but the rental amount will be stated exclusive of GST. The Lease will set out the annual rental amount as well as the monthly rental and the rent payment date. Many landlords will offer an incentive to a prospective tenant by offering a rent-free period or contribution to fit-out, which would generally be set out in the Agreement to Lease.

Rent review

The Lease will include the rent review dates and the method of rent review. The Lease provides for market rent reviews and CPI rent reviews which means the rent will automatically adjust to the rate of inflation.

Sometimes a Lease will specify either or both methods which can be helpful in ensuring the rent gradually increases over time. There are other ways of conducting rent reviews such as fixed percentage increases but these will require an amendment to the standard Law Association Lease terms.

Default interest rate

The default interest rate included in the Lease is the rate of interest that will be applied to payments of rent and outgoings that are not paid on the due date by the tenant. Generally, the rates are between 8 – 14%.

Business use

The Lease will provide for the type of business use that is permitted by the landlord in the premises. From the tenant’s point of view there is the need to ensure that the business use is drafted widely so that the business can continue to grow without being restricted unreasonably by the specified business type.

Insurance

Under the Lease, the landlord is obliged to insure the building against damage and destruction for the usual range of risks such as natural disasters. The Lease also allows the parties to agree that the landlord will provide cover for some additional risks. The conditions covered by the landlord should be clear so that the tenant and the potential business can protect themselves for other situations.

No access periods

No access periods were inserted into the standard form Lease after the Christchurch earthquake. This records that if the tenant is unable to gain access to the premises for a certain period, other than in circumstances where the premises or business are totally or partially destroyed or damaged, either party can terminate the lease.

Outgoings

Outgoings are costs related to the commercial property which a tenant is required to pay. They are separate from rent and could provide for the tenant to pay a proportion of the rates, building and security services, repairs on the building, car park maintenance, and body corporate charges.

Other terms

The Lease will also include a dispute resolution clause which outlines what happens if the parties fall into a dispute or disagreement.

The Lease can also be assigned to a third party with the consent of the landlord and will contain terms regarding assignment.

While it is not essential to sign a Deed of Lease, it is preferable and will give more clarity to both parties. In some instances, the parties will be required to execute a full Deed of Lease, for example if the tenant wishes to sell their business and assign the lease, the landlord wishes to sell their property, or either party is seeking to obtain finance and the Bank requires full Lease documentation.

Importantly, the Law Association Deed of Lease says that the terms of a Deed of Lease will be deemed to apply even if not signed, so it pays to be familiar with the Deed of Lease terms.

Both parties should always obtain independent legal advice before entering into an Agreement or Deed of Lease as this will carry significant legal obligations.

Leading law firms committed to helping clients cost-effectively will have a range of fixed-price 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.