Make your Lease a valuable business asset, not a liability

When considering leasing a commercial property any business owner must ensure the lease will meet the needs and circumstances of their business. We discuss below some key issues to consider in order to get the best lease for you and your business.

Entering into a commercial property lease as a tenant requires serious thought. The lease must meet both your present and future business needs. In addition, it will normally create a personal liability, and this may continue after your business vacates the premises.

Before signing anything – whether it is the lease itself or merely an agreement to lease – remember to talk with your lawyer first. Even an agreement to lease may seem a simple document but it may bind you to lease terms that you may later regret.

If you feel pressure to sign an agreement to lease, do so only if it has a clause making it subject to approval by a lawyer.

Every business owner needs to have legal advice on the suitability of the lease terms for their needs. Help will be given to negotiate terms to achieve a balanced lease that meets the needs and expectations of both you and the landlord.

The first step

If you are considering entering into a commercial property lease you must first consider your business needs and explain them to us. Ask yourself these questions:

Is the property in the right location?
Is the property appropriately zoned with the necessary resource consents in place for your business to operate legally?
Are there any proposed zoning changes that may impact on your business?
What do the neighbours do? Could their activities impact negatively on your business?
Will your business expand in the future and, if so, will the property cope with that expansion? If the property is unlikely to be suitable if the business expands, how soon can you get out of the lease?

If the property meets your needs, we should review the lease together to ensure you understand your rights and obligations:

Lease term: Do you want a fixed term lease, for example, nine years or is it better to have a shorter term such as three years with two rights of renewal of three years each that would allow you to consider your options every three years?

Rent reviews: How often is rent reviewed? Is the review on the lease renewal date? Do you have to renew the lease before you know what the rent will be on renewal? What is the mechanism for rent reviews? Is there a ratchet clause which means rent is not reduced even if market rents drop?

Assignment: Can the lease be assigned if you want to leave or sell your business? If so, does your liability continue and does it continue beyond the current lease term if the new tenant renews the lease? Are there any restraints of trade preventing a particular assignment?

Maintenance: What is the tenant s responsibility? What does the landlord have to do? What are you obliged to do at the end of the lease, eg: replace carpets, re paint?

Plant, fixtures and fitting: Is it clear what the landlord owns and what your rights are in regard to removing what you own at the end of the lease?

Outgoings: What other outgoings will there be, apart from the rent? If there are other tenants in the property, how do you share those costs, eg: rates and maintenance costs?

Costs: Do you have to pay the landlord s costs for preparing the lease? If so, is there a limit on those costs?

Signage: Can you put up the signs that are needed for your business? Are there limits on style, size, etc?

Rent free period: Can you get a rent free period while you set up premises for trading? Many landlords will consider this to attract tenants.

Insurance: Who insures the building? What sort of cover and who pays? Do you have to insure plate glass or pay for the landlord s loss of rents insurance?

Shared use: If you lease part of a building, is it clear what rights or responsibilities you have for, say, use of carparks and cleaning shared facilities?

These are some of the key issues to consider. Depending on your particular circumstances or the nature of the lease or your business there may be other issues that will need to be discussed with your Conveyancing.co.nz lawyer.

The fundamental issue is that the lease, as far as possible, should meet your business needs and that you clearly understand your rights and obligations under that lease. You then should have a lease that fits your business plan and is an asset, not a liability.

Source: This article first appeared in Fineprint, client newsletter of NZ Law Limited members www.nzlaw.co.nz

Posted: 1 Apr 2008