A small retail business entered into negotiations with a landlord for a commercial lease of a premises in central Wellington.  The landlord agreed verbally and by way of a handshake that the business could take over the premises and that the detail of the lease could be agreed later.  The retail business spent a lot of money fitting out the premises and moved in as soon as they could.

About three months after they moved in, the business was contacted by the landlord’s lawyers to say that the landlord was terminating the lease with 20 working days’ notice.  This was on the basis that the lease of the premises was only a month-by-month tenancy, as there was no written lease in place. 

The business was required to vacate and ‘reinstate’ the premises.  This meant the premises had to be returned to the condition they were in at the time the lease began. 

As the business had not put anything in writing with the landlord, it was very difficult for the business to argue that the tenancy was anything but a ‘periodic’ (also known as month-by-month or short term) lease.  This meant that either party could terminate the lease at any time by giving at least 20 working days’ notice.

The business therefore had to spend many thousands of dollars removing their fit out and moving into new premises.  This caused huge disruption for the business. 

Further, the business and the landlord could not agree on what condition the premises were in at the time the lease began (prior to them completing their fit out), so had to spend significant time and money on legal fees to come to agreement on the standard to which the premises were to be returned.

Below are two key tips to avoid getting caught out in a situation like the above when entering into a commercial lease:

1. Make sure you record your lease arrangement and ongoing terms in writing

A handshake is generally not enough for agreements in relation to land, like long term leases.  It is vital that any terms the parties agree are recorded in writing.  Generally this is done by way of an Agreement to Lease, which is an agreement to enter into a lease.  This includes key terms such as rent review dates, renewals, fit out, and any rent-free periods or early access.  After an Agreement to Lease is signed, the parties will sign a Deed of Lease which records in detail the rights and obligations of both parties.  Your lawyer will be able to advise you further about the terms of your particular Agreement to Lease and/or Deed of Lease.

If you do not put your lease in writing, you will likely end up stuck with a periodic/short term lease, where either party can cancel with at least 20 working days’ notice, which doesn’t give certainty to either party.

2. Prepare a Premises Condition Report

When taking on a new lease or assigning a lease, we recommend that the landlord and the tenant together prepare a ‘Premises Condition Report’.  This records the condition the premises were in at the date the lease began, and avoids arguments at the end of the lease as to the original condition of the premises.  It is good idea to take photos as part of this exercise.  This report is attached to the lease documents.

Entering into a lease is a major commitment and there are a number of areas where the unwary can be tripped up.  It is vital to take legal advice before signing any form of lease.


Claire Tyler
Commercial Lawyer