Leasing a commercial property can be an effective way to secure a location for your business, without financing committing to purchasing the space. However, a lease may not be in your business’s best interest when it is first presented to you. You are able to negotiate the terms of the lease agreement with the landlord before you sign it. This article will outline the key lease terms that you should negotiate for as a commercial tenant in New Zealand.
Personal Guarantees
It is now commonplace for commercial landlords to ask their tenants to provide a personal guarantee in the lease agreement. Giving a personal guarantee means that you agree to personally pay for any debts that your business or company takes on, such as failing to pay rent or utilities.
You may be able to negotiate with your landlord to:
- remove the personal guarantee from the lease. To do this, you may be able to prove your reliability by pointing to your creditworthiness and references from prior landlords; or
- reassess the personal guarantee further into the lease, or once the current lease terminates. You may be liable to repay any debts for a period of time, such as the first year of the lease, to prove that your business is a reliable company.
Term of the Lease
You may wish to negotiate the term, or length, of your commercial lease agreement.
A long-term lease provides your business with a sense of security. This is because you will have a secured premise that you can operate out of for an extended period. However, a long-term lease also means that you are committed to that location and your obligations as a tenant for that entire period.
Alternatively, a short-term lease accompanies less commitment, but it also does not provide you or your customers with a secure base.
The best middle ground is to negotiate for a short-term lease that has a right of renewal clause. A right of renewal clause is a term in your lease agreement that provides you with the option to enter into a new lease with your landlord. If you have complied with the lease, and provide notice of renewal to your landlord in the specified manner, your landlord cannot refuse to grant the new lease.
Continue reading this article below the formOutgoings
As a commercial tenant, there are certain expenses, or outgoings, that you will have to pay, in addition to the base rent of the property. These outgoings may include:
- rates;
- utilities, such as water, gas or electricity;
- insurance;
- the cost of cleaning the premises; and
- the internal and external maintenance of the property.
You may be able to negotiate the price of these operating expenses or get outgoings removed from the lease altogether.
Rent Review
Most commercial leases will include a rent review provision. These clauses allow the landlord to change the premises’ rent to reflect the property’s current market value. You will usually be unable to negotiate to remove the lease agreement’s rent review clause. However, you may be able to negotiate a rent review calculation method that is better suited to you and your business.
Assignment, Subletting and Early Termination
You may also wish to negotiate with your landlord to include a clause that allows to assign or sublease the property. When you assign your lease, a new business replaces you as the commercial property’s tenant. This business inherits your tenancy obligations, such as:
- paying rent; and
- keeping the premises in good condition.
Subletting is when a business rents out your premises for a fixed period. You are still required to uphold your tenancy obligations, should the subletter fail to do so.
Alternatively, if your landlord does not want you to assign or sublet the premises, they may agree to include an early termination clause in the lease agreement. An early termination clause allows you to end your lease before it expires. You will usually have to pay a fee or follow a specified protocol to terminate your tenancy.
Key Takeaways
Signing a commercial lease is an exciting step for your business and a big commitment. If the lease is not best suited to your business, you may be able to negotiate to include or exclude certain clauses. You may wish to negotiate to:
- limit your personal guarantee;
- change the term of your lease;
- adjust your outgoings;
- change the method of rent review; and
- include a clause on assignment, subleasing and early termination.
If you need legal advice on lease negotiations, contact LegalVision’s New Zealand property and leasing lawyers on 0800 005 570 or complete the form on this page.
Frequently Asked Questions
Commercial leases are negotiable. However, there may be certain clauses that your landlord will refuse to negotiate to change or remove.
You may wish to negotiate a commercial lease to limit your personal guarantee, change the term of your lease, adjust your outgoings, change the method of rent review or include a clause on assignment, subleasing and early termination.
A rent review clause details that the landlord of the commercial property can change the premise’s rent to reflect the property’s current market value.
Outgoings are the expenses you pay on top of the price of rent.
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