Negotiating Your Commercial Leases as a Landlord

4 July, 2013 | Wade Hansen

As a commercial landlord, it is vital that you carefully negotiate any lease with a prospective tenant and ensure that the agreement to lease and/or deed of lease covers you as a landlord.

Tenant

The most important issue is to ensure that you have a good tenant. You should clearly identify the tenant (is it a company or trust or an individual) and obtain full identification and their consent to undertake credit checks reference checks. If the tenant is not an individual, make sure a company search is undertaken or the trustees’ full names are provided. Ideally, you should obtain a copy of the trust deed). Obviously, if you don’t investigate the tenant, you could end up with a tenant who has a bad credit history.  If the incorrect tenant is noted you could be left with no recourse against the ‘correct’ tenant if they default on payment or damage the property.

Guarantee

If the tenant is a company, ensure that you obtain the personal guarantee of the directors and/or shareholders. It is important to check what assets they own in their individual names as those assets could be owned by another entity such as their trust. If that is the case, you should seek a guarantee from the trustees, otherwise you will have no recourse against the trust assets in the event the tenant defaults.

Bonds

In addition to guarantees, it might be prudent to obtain a financial bond from the tenant, the guarantor or their bank. A bond is a sum of money that is held to cover unpaid monies or damage that is caused to the property (similar to a residential tenancy bond).  This will enable you to call up the bond if the tenant defaults to ensure that you are paid or the default is fixed.

Term of Lease

The term of the lease is the period the tenant leases the premises from the landlord. These periods are usually in blocks giving the tenant the right to renew the lease after the expiry of a block. From a landlord’s perspective, it is desirable to have lengthier terms (for example two lots of six years as opposed to six lots of two years). This will provide the landlord with security that the premises are leased and occupied.

Business Use

It is important to be specific as to what the premises are to be used for. If it is too broad, then there is the potential for the tenant undertaking a less desirable activity, which may concern the landlord or the other tenants in the vicinity of the premises.

Fitouts and Making Good the Premises

Fitting out the premises is an integral part of the leasing process for the tenant. A lot of the time, the landlord pays for or contributes to the costs. The recovery for the costs of the fitout is usually through an increase in the rent.

The issue with fitouts is that you need to decide whether you require the premises to be returned to its original state or not. There are advantages and disadvantages either way, but this is something the landlord needs to give careful consideration to and should be detailed in the Deed of Lease.

Rent Reviews

The standard Auckland District Law Society lease, which is normally used for commercial leases, was updated in October 2012 to provide two ways the rent can be reviewed — market rent and CPI (Consumer Price Index).

From the landlord’s point of view, it is preferable to have regular rent reviews and suggest that this is adjusted annually based on the CPI with a market review every three years.

Legal Fees

Under the new form of lease, each party pays for their own legal fees. Previously, the tenant was responsible for all fees. Notwithstanding that this can be considered equitable, it is something to negotiate from the outset.

Your Obligations as Landlord

The tenant is liable for maintenance of the interior and minor breakages. The landlord is liable for the balance of the building maintenance including weatherproofing it. Therefore it is important that the building is in a good state of repair at the commencement of the lease to avoid disrupting the tenant’s business and potentially being in breach of the lease. The alternative is to negotiate or limit your responsibility in relation to any deficiencies associated with the premises.

Insurance

It goes without saying that the premises needs to be insured. It is important that this is undertaken through a reputable insurer. The premiums and excess are payable by the tenant but the excess is usually a limited amount. It is important to check what the amount is and that the amount recorded in the lease covers this.

The above is not an exhaustive list. Careful consideration needs to be given when preparing a lease – it is not simply a form filling exercise. Therefore it is important to consult your lawyer for advice before committing to leasing your valuable asset.

For assistance negotiating your lease with a potential tenant and to ensure your lease documentation protect you as a landlord, contact experienced commercial lease expert, Wade Hansen by phone on 09 837 6885 or email wade.hansen@smithpartners.co.nz