Guide for new tenants
A wide range of leases are used for commercial office tenancies in New Zealand. The Auckland District Law Society's (ADLS) template deed of lease is still the most widely adopted form. Another popular template is the Property Council Office lease.
It is also very common for institutional landlords to have their own bespoke form of lease, or even for landlords to use a heavily amended standard form.
It is worthwhile engaging an experienced lawyer who specialises in commercial office leasing to ensure that you are properly informed and there are no hidden surprises when you enter a new lease.
Alistair Law and Kelly Rankin of law firm Anthony Harper offer these 10 tips for tenants looking to enter into a new commercial office lease:
1. Commercial reality Template office leases are often skewed towards being "landlord friendly". The commercial reality is that most tenants will not have the bargaining power to demand wholesale changes to the landlord's template document. This is particularly true for larger landlords who require their leases to be on fairly consistent terms to assist with the management of their portfolio. In our experience, tenants often have more success in focusing their requests on material areas, such as make good and reinstatement obligations, rather than rewriting the landlord's template lease.
2. Binding agreements to lease We are often asked to review a deed of lease for a tenant after an agreement to lease has already been entered. This is problematic as the majority of agreements to lease include provisions which deem the parties to be bound by the terms of the landlord's lease from the commencement date. It is usually too late at this point to be able to negotiate amendments to the lease documentation. We recommend that the deed of lease is reviewed before the agreement to lease is signed if you intend on negotiating amendments.
3. Flexibility Tenants are increasingly focused on entering into flexible arrangements. Whilst the rise of co-working is a testament to the growing importance of flexibility, so too are lease provisions designed to achieve the same objective. We are seeing a greater number of tenants looking for the ability to shrink or expand the size of their premises to meet their business demands. Whilst assigning or subletting are traditional methods used by tenants, increasingly it is also being achieved through first rights of refusal for additional space, surrender or break rights at certain points during the term. Tenants should bear in mind that landlords are focused on securing long-term arrangements, so the ability to negotiate such rights will depend on the negotiating power of the tenant.
4. Make good and reinstatement obligations It has become fairly common to seek to reduce the tenant's make good and reinstatement obligations on the final expiry of the lease. This is largely a hangover from the GFC, as landlords commissioned questionable dilapidations reports that they used to seek large cash payments from tenants. Tenants should bear in mind that their make good and reinstatement obligations can be significant. It is also an easy area for landlords to concede as the impact of any concessions is not immediate. Clauses requiring the tenant to pay the landlord a cash settlement rather than completing the works should be strongly resisted, particularly since new tenants will most likely have different requirements.
5. Seismic rating
Tenants should routinely ask landlords for a building's seismic rating before entering into a lease. There are potentially serious health and safety implications that can arise from a building with a low seismic rating. We also recommend that tenants include seismic provisions to ensure that the landlord is responsible for achieving a minimum seismic performance (usually above 67 percent of current new building standards) in a timely manner and at their cost if any new structural issues are identified.
6. Premises condition
The tenant's repair and maintenance, as well as make good and reinstatement, obligations are often linked to the condition of the premises as at the commencement date. So it’s important to keep documentary evidence of the condition to avoid disputes. It is helpful that the template ADLS lease now includes a schedule for a premises condition report, but our experience is that this is not widely embraced. Even if it is not economically viable to commission a professional premises condition report, it is a good idea to take photographic evidence of the condition of the premises and annex these to the lease.
The majority of leasing in New Zealand is done on a 'net' basis, which means that outgoings are payable in addition to the rent. Accordingly, it is important to review the type of outgoings that are recoverable under the lease. Most tenants are responsible for their share of rates, utilities and insurance premiums, as well as contributing to repair and maintenance costs for the premises, building services and common areas. The replacement of capital items or structural repairs should be excluded as these costs can be significant. As a starting point, we recommend that tenants review the landlord's outgoings budget to ensure they are comfortable with the level of outgoings being charged. However, we also recommend cross referencing the outgoings budget against the list of recoverable outgoings to assess the potential for surprises.
8. Rent reviews
The process for determining the rent throughout the lease is very important and it is usually only with hindsight that the best rent review structure can be assessed. Typically the rent will be reviewed to market, increased in line with CPI or subject to an agreed fixed percentage increase at regular intervals during the term. There are pros and cons to the different rent review types. While CPI reviews are designed to keep up with inflation and fixed reviews provide certainty, both these mechanisms can result in the rent outstripping the market. Conversely, market reviews have less certainty and the cost of resolving a rent review dispute can be significant. We would usually recommend a mix of either fixed or CPI rent reviews together with a break to market at agreed intervals to blend the best of both options. We are increasingly seeing caps and collars on reviews to limit the scope for surprises.
Most landlords will require some form of guarantee as security in case the tenant fails to meet their obligations under the lease. The most common type are personal guarantees from the directors and/or controlling shareholders of the tenant. However, most tenants will be reluctant to give a personal guarantee as it exposes them to personal liability. Following an assignment of a lease, guarantors should be mindful that their liability will continue until the next renewal date. Another option is for the tenant to provide a bank guarantee in lieu of personal guarantees, although the cost of a bank guarantee and the security that the bank requires can make this less appealing.
10. Lease incentives
It is fairly standard practice for tenants to negotiate some form of incentive when entering into a new lease. Tenants should carefully consider the tax consequences of such incentives, as they are commonly becoming taxable to the tenant. They should also resist documenting incentives in side agreements without including suitable protection, particularly for large sums, as such arrangements will not be binding on future owners who purchased the property without knowledge of the incentive.
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