September 2023
Signing a commercial lease is a step most businesses will have to take. The lease sets out the terms and conditions under which the tenant will occupy a commercial property. This article outlines a number of essential factors a prospective tenant should consider when evaluating and negotiating a commercial lease in New Zealand.
Understanding how long you will be locked into performing the obligations under the lease is vital. Tenants should carefully consider the length of the initial term, options for renewal, and any termination clauses. Given business needs may change over time, we usually recommend that a tenant try and negotiate a shorter lease term with several short renewal periods. This allows the tenant the option to bring the lease to an end by not exercising a right of renewal at the end of any given term if the tenant finds that the premises no longer suit the business needs, or if the business is underperforming. However, a tenant should also ensure that the initial term and renewal periods are sufficient to ensure long-term stability.
The financial obligations associated with a commercial lease must be clear. Tenants should assess the rent amount (with reference to market conditions), frequency of rent increases, and the method of calculating an increase (type of rent review). Regardless of the method of increase (whether it be inflation or market based) we recommend that a tenant seeks to include a cap on any annual increase to try and minimise the risk of unexpected increases (many inflation-based reviews saw annual rentals increase by up to 7% recently). It is also important to understand the additional costs payable by the tenant, such as utilities, maintenance, insurance, and rates. We recommend the lease require the landlord to provide you with an annual budget of outgoings.
Responsibilities for maintenance and repairs should be explicitly outlined in the lease. Tenants should assess what they are responsible for under the lease. The usual position is that the landlord will be responsible for structural repairs, with the tenant being responsible for interior maintenance and repair.
Understanding the permitted use of the premises is important. The lease should clearly define the business activities allowed on the property and any restrictions or limitations. Tenants must ensure their intended use aligns with the permitted use under the lease, and that the permitted use is also permitted under the terms of the relevant District Plan (if not, resource consent may be required). Additionally, tenants should inquire about any restrictions on signage, parking, or access to the property.
The ability to assign or sublease the leased premises can provide flexibility for tenants. Usually subletting or assignment is permitted with the landlord’s consent, but some leases may restrict these activities. The ability to transfer or sublet the lease can be advantageous if the business needs change or if the tenant seeks to share or reduce rental costs. When acting for a tenant, we recommend trying to include provision for the tenant to be released from its lease obligations following any assignment of the lease.
Signing a commercial lease is a significant commitment for any tenant. By carefully evaluating the lease terms, tenants can make informed decisions that align with their business goals. We highly recommend seeking legal advice on the terms of a lease, and undertaking thorough due diligence on the property, to ensure a successful and mutually beneficial commercial lease arrangement is entered into.