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Leasing commercial property in New Zealand can be a good source of revenue and a smart investment. As the landlord, you have the power to manage your property as you like and the discretion to choose appropriate tenants. This does not mean that you should not be careful about how you negotiate your lease, however. You must ensure that you protect your interests while drafting a fair and reasonable lease agreement for your tenant. Many lease agreements follow the standard form Auckland District Law Society (ADLS) deed of lease, but you can modify the clauses as they fit your specific needs. This article will outline:

  • some aspects of your lease you should negotiate with your tenant; and
  • important issues to note.

Tenant Dealings

First, you should make sure you can clearly identify the commercial tenant for your property. This includes collecting the appropriate information about your new tenant and ensuring they are upfront about their suitability. Make sure to only ask for information you need to determine the tenant’s suitability. 

Such due diligence can include: 

  • clearly identifying who the tenant is (are they a company or an individual?);
  • conducting interviews;
  • asking for references; and
  • obtaining tenant consent for credit checks.

Clearly identify who your tenant is, particularly if they are a company. If something goes wrong and you pursue the wrong entity, this makes things difficult. You should ensure you have full details of company directors or managers. When dealing with corporate tenants, it is a good idea to ask for a personal guarantee from the company’s directors or shareholders. If the company becomes insolvent, this means that you can still claim your owed funds.

Tip: In the past, it was common practice for tenants to pay for their landlord’s legal fees in lease dealings. However, according to the new ADLS lease form, each party typically pays for its own fees. Make sure to clear up any such potential misunderstandings in the negotiation process.

Defining the Terms of the Lease

Cater your lease to be specific to your needs, and protect your interests. But make sure that it is fair and reasonable, and get legal help with the lease agreement.

Negotiate with the tenant how long the lease period should be and whether there are any rights of renewal. It is common to have lease periods in blocks, say three blocks of three years, with opportunities to renew in between each block.

If they are a good tenant, it may be more beneficial for you to have a longer lease period. This means your property is filled and continuously sources income, which provides security for you.

Clearly define with the tenant what their business is using the property for. If your scope for a tenant’s business use is too broad, this could lead to unexpected activities on your property that you did not agree to.

For example, your tenant may want to store their inventory in your commercial property. This inventory may require specific storage requirements that your property is not equipped to handle. Make sure to sort out issues like this with your tenant, so that you do not agree to something that may damage your interests.

Rent

You set your rent at the rate that is appropriate. However, there may be other fees applicable in the lease that you should negotiate with your tenant. It is a good idea to ask for a financial bond from your tenant, as a lump sum to pay for any potential damage to the property or cover unpaid rent. This provides some extra security for you, especially if the business is in a high-risk industry.

Specify in your lease agreement how you will calculate rent reviews, and what instances will prompt rent increases. You can typically determine rent reviews through either:

  • market rent; or
  • Consumer Price Index (CPI).

Discuss with your tenant which method you will use. Also, determine with your tenant what outgoings they are willing to pay. Outgoings are the extra fees or costs that a tenant pays on top of rent. The ADLS form lists a broad range of examples, which you can modify as appropriate, including:

  • local authority rates or levies;
  • utility charges, such as water or electricity; and
  • insurance excess for claims, insurance premiums, and valuation fees.

Identifying Obligations

Identify with your tenant what maintenance and repair each of you are responsible for. You need to make sure that:

  • the building is weatherproof;
  • you maintain the premises at an appropriate level; and
  • the building complies with the Building Act.

Your tenant is responsible for damage that occurs during their tenancy in the area that they are leasing. Negotiate what kind of damage this covers, and who is responsible for maintenance. 

Decide whether you will allow your tenant to add fixtures and attachment to the property to aid their business, like installing equipment or machinery, and whether you will contribute to those costs. If you do, you can include a ‘make good’ clause, which means that the tenant has to return the property to the condition it was in at the beginning of the lease. 

Tip: Include a premises condition report so that you can identify if any damage to the property has occurred throughout the lease. This makes it easier to determine what the tenant needs to fix or pay for.

Key Takeaways

There are a variety of issues you need to discuss with your commercial tenant as a landlord, which it is best to negotiate and deal with when drafting your initial lease agreement. Make sure to get expert help to be confident that you are protecting your own interests while maintaining a fair relationship with your tent. For more information or assistance with your commercial lease, contact LegalVision’s New Zealand property and leasing lawyers on 0800 005 570 or fill out the form on this page.

Frequently Asked Questions

What is a commercial lease?

A commercial lease is when a tenant rents out property from business purposes. This could be for a storefront, an office space, or a warehouse.

What are a commercial landlord’s responsibilities?

A commercial landlord needs to maintain the property at an appropriate level, and make sure that buildings are weatherproof. They also need to make sure that the property complies with building standards, as well as health and safety standards for places of business.

Can a commercial landlord terminate the lease early?

A commercial landlord can only terminate a lease if certain conditions are fulfilled. If the tenant fails to pay rent or breaches the terms of the lease, the landlord can end the lease early. They can also do so if they want to demolish the property, or if an intervening event frustrates the lease in some way.

Can a tenant end the commercial lease early?

A tenant can end a lease early, but again only in certain circumstances. They can do so if the landlord consents, usually with an exit payment of some kind. Other possibilities include assigning the lease to a third party, or subletting or licensing it.

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