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Signing a lease for your business is an exciting venture. However, it is important that you approach this step with care. You should carefully examine your commercial lease before you sign, to check to see whether there are any terms that you disagree with or wish to negotiate. This article will outline three things that you should look out for when signing a commercial lease in New Zealand. 

1 – The Extent of Your Obligations

The first matter that you should look out for is the extent of your obligations under your lease. Under your lease, you will likely be required to:

  • maintain and repair any damage done to your premises;
  • pay a range of outgoings; 
  • provide a personal guarantee (if your business is a company or a trust); and
  • pay for your landlord’s solicitor’s costs.

Maintenance and Repairs

You should look at the extent of your maintenance and repair obligations in the lease. There are certain obligations that should be the responsibility of your landlord, such as repairing any defects in the design or construction of your leased premises. You should not be held responsible for these obligations, and your lease should reflect this accordingly. 

Outgoings

It is best practice to carefully look through the outgoings that your business will be responsible for during your lease. Outgoings are the day-to-day expenses that you must pay in addition to your rent. There may be outgoings included in a lease that your business will not use during its tenancy. You should negotiate with your landlord to remove these unnecessary costs from your lease agreement before you sign it.

Guarantees

If you are taking on a commercial lease in the name of your company or trust, you may have to provide a personal guarantee. This guarantee means that you will be completely liable for all lease obligations for the duration of your tenancy. If your company fails to pay its rent on time or repair damage done to your premises, it will be your responsibility to amend these failures. Once you are aware that a lease requires a guarantee, you may be able to negotiate with your landlord to: 

  • limit the extent of your liability; or 
  • remove the guarantee provision entirely.   

Landlord’s Solicitor’s Costs

A lease may require your business to be responsible for paying your landlord’s solicitor’s costs. If this obligation is included in a lease, your business could be exposed to paying an unlimited amount towards your landlord’s legal fees. You should negotiate with your landlord to include a fixed amount that you are liable for, or remove this clause altogether.

If they are unwilling to do so, that may be a sign that you should not enter into that lease. 

2 – Your Landlord’s Ability to Change the Rent

Most commercial leases will contain a rent review clause. This clause provides your landlord with the ability to change your cost of rent so that it reflects the market value of your premises. When you are looking through a potential lease, you should look to see whether the rent review clause is accompanied by a ratchet clause.

A ratchet clause is intended to prevent your landlord from losing money when there is a decrease in the market value of their property. The ratchet clause may be hard or soft. A hard ratchet clause details that your rent can only increase and cannot decrease, despite fluctuations in the property market. A soft ratchet clause allows for a reduction in the cost of your rent to a certain extent. 

For example, your rent could decrease but could not go below the cost of rent at the commencement of your lease.

Keep an eye out to see if:

  • a lease contains a ratchet clause; and
  • whether the ratchet clause is hard or soft. 

You may be able to negotiate with your landlord to change the ratchet clause from a hard to a soft provision or remove it entirely.

3 – The Term of Your Lease

The final matter that you should examine is the term or length of your lease. If your lease is for a term that does not suit your business, you may be able to negotiate with your landlord to adjust it.

For example, say you have found a commercial property that is a great fit for your business. However, the lease is for an eight-year period. A long-term lease can provide your business with a sense of security. However, it is also a big commitment. Most commercial leases can only be terminated early through mutual agreement with your landlord or by paying a hefty exit fee. Instead, you could negotiate to reduce your lease to two years and include a right of renewal clause.

Under this clause, you could renew your lease three times. This arrangement would allow your business to have a lease for the same term (eight years total) and have a sense of security but allows for more flexibility if your circumstances or income change. 

Key Takeaways

Signing a commercial lease is a big and exciting step for your business. However, you should approach signing your lease with care. Before you sign your commercial lease, you should look out for:

  • the extent of your obligations under the lease. These obligations may be too broad or place too much liability on you and your business;
  • a hard ratchet clause; and
  • a lease term that does not suit your business.

If you need assistance with reviewing your commercial lease before you sign, contact LegalVision’s property and leasing lawyers on 0800 005 570 or fill out the form on this page.

Frequently Asked Questions 

What is the difference between renting and leasing?

 
There is no difference between renting and leasing a commercial premise.

What should I look out for when signing a lease? 

Before you sign a commercial lease, you should look out for the extent of your obligations under the lease, whether your landlord can increase your rent and the length, or term, of your lease.

What are outgoings? 

Outgoings refer to the day-to-day expenses that a commercial tenant has to pay in addition to the cost of rent.

Do I have to give a personal guarantee to lease a commercial property?

If your business operates as a company or a trust, you may have to provide a personal guarantee to lease commercial premises. This personal guarantee will make you personally liable for your business’s obligations under the lease. If your business fails to uphold these obligations, it is your responsibility to amend these failures. 

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