If you are about to enter into a new lease, you probably have a few questions about your rights and obligations under the lease.
It is always best to approach your lawyer early in the leasing process and definitely before you sign an Agreement to Lease or a Deed of Lease to ensure your expectations are reflected in the legal document.
We have set out a few of the frequently asked questions we receive and have provided some general answers for you to consider.
Will the Landlord be able to increase the rent during the term of the Lease?
You will need to look at the rent review terms in the lease and consider any potential increases in future rent. For example, if the Landlord has offered the lease for a significantly reduced rent, then the rent may jump considerably on the first market rent review date. You will need to look at whether the rent reviews are market, Consumer Price Index (CPI) or fixed rent reviews, together with the frequency of the review dates. Market rent reviews are based on a market valuation, whereas CPI rent reviews will increase rent by the same percentage as CPI. Fixed rent reviews increase the rent by the percentage set out in the lease.
The Landlord can only increase rent in accordance with the lease terms, so it is important to discuss your expectations for rent reviews with your lawyer and make sure this is reflected in the terms of your lease.
Can my rent ever decrease to reflect market rates?
The standard Auckland District Law Society lease includes a ratchet clause that prevents rent from decreasing below the rental amount payable on the commencement date of the lease on a review of the rental. This means that the rent might go up but never go below the starting rent. Accordingly, if market rents drop then you will be stuck paying a higher than market rent.
What extras or “outgoings” am I responsible for paying over and above rent?
It is common practice that a lease will require the tenant to pay outgoings separately from rent, as these costs can vary throughout the term of the lease. In a standard form lease, outgoings include a wide range of expenses such as utilities, council rates, insurance premiums, rubbish collection and regular maintenance of the property (among others).The outgoings are listed in your lease document and you should consider these costs carefully.
To assist your budgeting requirements, it is sensible to request from the Landlord details of estimated outgoings for each item, when payments are to be made, and confirm if GST is included or excluded. An even better approach is to try to cap your liability for outgoings to a set figure.
Will the Landlord help me pay for the premises fit-out?
You will want to consider if any work needs to be done to fit out the premises so it is fit for purpose for your business. Depending on the market, you might want to negotiate with the Landlord for a contribution to the fit-out costs. Incentives like contribution to fit-out costs and rent-free periods are becoming more common. You will also want to carefully consider any tax implications with respect to receiving incentives from a Landlord.
Will I be able to operate my business in the premises
There are district zoning regulations that you will need to consider. You don’t want to lock yourself into a new lease and then find out you need a resource consent to operate in that zone, costing you thousands in extra costs. You will need to check the zoning for the property you are looking to lease and consider whether your business is a permitted activity. Our commercial property team, alongside our specialist resource management team, can assist you with any resource consent requirements.
What alternatives to an unlimited personal guarantee can I offer a Landlord
Where the Tenant is a limited company or trust entity, a Landlord will often require a personal guarantee. You should be wary of agreeing to an unlimited personal guarantee, which means you personally guarantee all the obligations under the lease (including paying the rent) for the full term of the lease.
You might consider proposing either limiting your personal guarantee to a set amount (e.g 6-12 months rental) and/or recording that your guarantee will cease if the lease is assigned; or providing an alternative type of security, such as a bank guarantee. This will give the Landlord some security without exposing you to unnecessarily onerous risk as guarantor.
How long is the lease and can I get out it if I need to?
Your obligations under the lease will continue until the lease expires. If you assign the lease to a new tenant then you continue to remain liable during the then current term unless the Landlord releases you (which very rarely happens as there is no incentive for the landlord to do so).
If you have a new business and you are not sure of your long-term future, it may be best to have a short initial term of 1 or 2 years, with renewal options so that you can exit the lease at that stage if needed. On the flip side, if you are confident of your business’ longevity in the space and want to ensure you can stay there for some time you will want to negotiate a longer term, with longer-term renewals.
Whatever your leasing requirements, it is best to seek advice early and definitely before you sign on any dotted lines. We can provide bespoke advice on how best to structure your lease to ensure you and your business are put in the best position for the duration of your lease.
Copyright © Cavell Leitch. All rights reserved. Redistribution is only permitted with express written permission. For enquiries please contact us. This article by its nature cannot be comprehensive and cannot be relied on by clients as advice. It is provided to assist clients to identify legal issues on which they should seek legal advice. Please consult the professional staff of Cavell Leitch for advice specific to your situation.