So you’ve got the perfect idea for a new business, you’ve scoped out the competition, obtained the necessary finance and have found the perfect location to operate your business from… or have you? Sure it may be in the perfect street with affordable rent but what does the Lease say?
The terms of a Lease will govern the relationship between you and your Landlord. It is a legally binding document and for many business proprietors it represents one of the most significant commitments of the business. Below are some of the common causes of contention for Tenants and Landlords alike:
• A Lease or Commercial Tenancy Agreement? – A Commercial Tenancy Agreement is an agreement commonly used by real estate agents and property managers.
They are a standard form document that establishes the basic terms of the tenancy. Whilst these agreements are sometimes preferred by Landlords over a Lease, mainly due to the costs of preparing a Lease, these agreements are often poorly prepared, ambiguous, are not capable of registration and often result in difficulties for both the Landlord and Tenant. We encourage all Landlords and Tenants to use Form 7 Leases.
• Is it a Retail Shop Lease? – Over the last decade significant legislation has been introduced to protect the interests of the Tenant or prospective Tenant of a Retail Shop Lease. If your business is situated in a retail shopping centre or retails to the public, then generally the Lease will fall under the protections of the Retail Shop Leases Act 1994. One of the most significant impacts of the Act is that the Landlord must provide you with a Lessor Disclosure Statement prior to signing a Lease and you can not be required to pay the Landlord’s costs of the preparation of the Lease.
• What are you Leasing? – Does the premises include the exterior wall of the building, an outdoor area or does it include a car park? It is essential that you know exactly what you are leasing as it will impact on your obligations with regards to repair and maintenance and the costs of outgoings. Tenants may assume or have been lead to believe that they have the use of one or more car parks or an outdoor area only to later discover that these are common areas. As a general rule, if the use of a particular area is not clearly stated in the Lease then you do not have a right to use it.
• What is the Permitted Use? – The majority of Leases will provide that the property can only be used for the “Permitted Use”. Whether the Permitted use is “surf shop” or “office space” or “warehouse” you will be in breach of the Lease if your business operates outside of the Permitted Use.
Exclusivity is also another consideration to bear in mind. Unless the Lease expressly states that you have been granted “exclusivity” with regards to the Permitted Use, there is nothing to prevent the Landlord from allowing another Tenant to open a business next door that is in direct competition with your business.
• Rent – Is the rent inclusive or exclusive of GST? When crunching the numbers it is essential that you know the exact amount that you will be required to pay. In most cases, rent is payable monthly in advance so you need to ensure that you have sufficient startup funds available to pay the first month’s rent. Tenants in major shopping centres should also be wary of Turnover Rent and other payments to be made in addition to base rent.
• Rent Reviews – Is the rent to be reviewed in accordance with the Consumer Price Index, a fixed percentage or to market? These are all methods of rent review and the benefits or detriment of each method will depend on prevailing market conditions. The Lease should clearly state the review dates and be clear as to which method of review is to be applied at each review date.
• Outgoings – Many Leases require Tenants to pay The meaning of Outgoings varies from Lease to Lease but usually includes the Landlord’s expenses in relation to the operation, maintenance and repair of the property. Common examples of expenses that are considered outgoings are rates, taxes, levies, insurance costs, management fees and body corporate levies. It is recommended that where outgoings are payable that you request that the Landlord provide an estimate of outgoings for the year.
• Security – Tenants are often required to provide a bank guarantee, personal guarantee or cash bond as security for the performance of their obligations in the Lease. Amounts required can vary, often between 1 – 6 month’s rent, and the security will be required to be provided before you take possession of the property. Your circumstances may make one form of security better than another.
• Term and Options – On one hand, a lengthy initial term will secure your rights to the property for an extended period of time and may be beneficial in terms of rent reviews. On the other hand, consider the following example, if you have an initial term of five years, but in year two you discover your business is no longer viable you are still obligated to pay rent to the Landlord for the remaining three years of the term. This could have been avoided by having an initial term of two years with 2 x 2 year options as in that scenario the Tenant would be under no obligation beyond the initial term. It should be noted that without an option, a Landlord is under no obligation to renew a Lease.
• Repair and Maintenance – Generally a Tenant is responsible for the repair and maintenance of the Premises and this includes everything from the replacement of light bulbs to the replacement of broken plate glass in the shop front. From a Tenant’s perspective it would be prudent to ensure that any repairs of a capital nature would be at the Landlord’s expense, especially with regards to air conditioning which can prove to be a costly item to repair or replace.
Leases often include an obligation to redecorate the premises (repaint and replace floor coverings) at particular intervals, say every three years and then again on the expiration of the Lease. Consideration should be given to the state of the Premises at the time that you take possession.
• Registration – Whether or not a Lease is registered often is left up to the Tenant. Whilst Tenants can often be reluctant to register a Lease, the best way to secure your interest in the property and the rights afforded to you in the Lease is to register the Lease with the Department of Environment and Resource Management.
Registration will protect your right to occupy the premises in the instance that the Landlord sells the property to a third party or a mortgagee enters into possession of the property.
Lease terms vary significantly from Lease to Lease and it should never be assumed that one Lease is the same as another. In many cases, even the variation of only a few words can have a significant impact. We recommend that before entering into any agreement for the Lease of property, including Letters of Offer/Intent and Agreements to Lease, that you have the Lease reviewed by a Solicitor. In many cases, the terms of a Lease will be open to negotiation but will be difficult to vary once the agreement has been finalised.
