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5 Key Terms to Consider in an NZ Retail Lease 

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Many small businesses choose to enter into a retail lease once they can do so.  As a business owner, now might be the time to finally get a retail space in your ideal location. Before signing a retail lease, you should understand the terms and what they mean for your business. Often a lease agreement will favour the landlord, so you must be prepared to negotiate for terms that benefit you. This article will outline the key terms of a retail lease and how they may affect your business. 

1. Permitted Use of Premises

This lease term will outline the purposes for which you can use the property. Before signing your retail lease, you want to ensure that the permitted use is broad so your business has flexibility.

For example, if the permitted use states that you can only run a bookstore, you can only run a bookstore during your lease. If you decide to start selling coffee and drinks to allow people to sit and read, you could be breaching your lease as your lease does not include food sales. This may also limit your ability to assign or transfer your lease. 

2. Length of the Lease

You must consider whether the lease term suits your business needs. When you sign a lease, you are bound for the full term. Short-term leases typically offer flexibility, while long-term leases offer more certainty. If you are just starting your business and testing out the market, consider a shorter lease term. Likewise, if you have found an excellent location at a low price, consider a longer lease to lock in the price.

A solution may be negotiating a short-term lease with renewal options, which can offer your business stability and flexibility. Instead of having a six-year lease, you can have a two year short-term lease that you renew up to three times. This will allow you to use the premises for the same amount of time and move if the location does not suit your business. However, note that when you usually have options to renew, the Landlord will require a market assessment of the rent, and the rent may increase significantly if the market changes.  

3. Rent Amount

Paying rent is an essential component of a lease. When negotiating your lease with your landlord, you want to ensure that you will be able to pay the rent each year, including any rent increases, and if not, you should try to get it reduced. Furthermore, consider whether the rent offered is fair for the area and type of Premises. 

You also need to consider how your base rent will increase over time. Rent reviews are commonly done through the following:

  • market rent review – your rent will be compared to other rents of similar properties and will be adjusted accordingly;
  • fixed percentage increase – your rent will increase at certain times at a certain amount; or
  • Consumer Price Index (CPI) rent review – your rent may increase or decrease depending on the CPI.

Depending on the method, your base rent may increase or decrease (usually increase). CPI rent review may be beneficial when the CPI is low and can sometimes reduce your rent. However, a fixed percentage increase gives you cost certainty and the ability to plan financially. Consider obtaining legal advice when negotiating your rent.

4. Exclusive Right

Your landlord may give you an exclusive use right. If so, your business will be the only one that can sell a particular product or provide a specific service in your building or centre. This will limit your competition and can help ensure access to customers.

For example, suppose you run a beauty salon. Your landlord may offer you an exclusive use right. In that case, your landlord must refrain from offering a lease to any other beauty salon. As such, you have no direct competition within the building centre.  

If your retail lease has no exclusive use clause, you can try to negotiate for one. Usually, landlords want their properties to have different business types, but some may not. 

5. Make Good 

This lease term will outline how to leave the retail space once the lease ends. During the lease term, you may decide to transform the layout completely. At the end of your lease, your landlord may require you to reverse these changes when you leave. You should note you may have to make these changes at your own expense.

Changes you may decide to make to the retail space include:

  • installing fit-outs such as walls and partitions for fitting rooms or shelving;
  • adding wallpaper or changing the colour of the walls;
  • changing the appearance of the storefront;
  • changing the layout of services such as air conditioning or lighting to suit your needs; 
  • hanging curtains in the changing room; or
  • changing the flooring.

Reversing changes are costly, so you need to carefully review your lease before you sign it. The extent of the make-good clause will vary with each lease. Some landlords may require you to move everything, including floor coverings and return a bare shell. Other landlords may require you to return the premises to them in the condition it was in at the lease’s commencement date. The consequences of a make-good clause can be costly. As such, you will want to ensure that you negotiate this with your landlord. For example, you may request that you only remove your loose items rather than your fit-out. Alternatively, you may negotiate out of removing wall coverings and flooring. 

Crucially, if your fit-out is expensive and your lease has a make-good clause, you need to ensure your lease term is appropriate. You need to ensure that your lease lasts for such a time that makes your investment worthwhile.  

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Letter to Landlord (request lease assignment)

If you are moving out of your leased space and assigning the lease to another party, you are required to notify your landlord and obtain their consent. Use this free proforma template for this purpose.

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Key Takeaways

Before signing your retail lease, there are some key terms that you should look out for. Terms include:

  • make good;
  • permitted use of premises;
  • length of the lease;
  • rent amount and rent review method; and
  • exclusive right clause.

By looking out for these terms, you can ensure that the lease agreement is advantageous to your business. Likewise, you can ensure that you have opportunities to expand and scale.

If you need help with reviewing your retail lease agreement, contact our experienced leasing lawyers as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0800 005 570 or visit our membership page

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Zaakirah Nabi

Zaakirah Nabi

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