ABL’s or Pre-Commitment Leases are critical to getting developments off the ground. They provide pre-leasing certainty, support financing, and demonstrate project viability. However, they also expose landlords and developers to significant upfront risk, often before construction begins.

Understanding and managing these risks at the outset is essential. We act for Landlords and developers, and have significant experience in advising throughout the full duration of commercial property developments.

1. Failure to Satisfy Conditions

ABL’s are typically conditional on matters such as resource consent, financing and construction feasibility.

If these conditions are not met, the development may not proceed, potentially leading to loss of committed tenants, reputational damage and significant costs being incurred.

Landlords need to ensure that conditions are clearly defined, achievable, and include appropriately broad termination rights if milestones cannot be met.

2. Delay and Timing Exposure

Construction delays are one of the most significant risks. Where agreements include fixed completion dates, or narrow extension right landlords may face tenant termination rights, disputes over delay responsibility and claims and pressure from funders.
ABL’s need robust extension provisions, which are ideally broad, and at least allow extension for force majeure, consenting delays, and contractor issues.

3. Commitment to Fixed Terms Too Early

ABL’s often lock in rent levels, incentives and fit-out contributions well before market conditions are known at completion.
If the market improves, the development may be undervalued relative to market rent. If costs increase, agreed incentives may erode project return. 

4. Specification and Delivery Risk

Developers commit to delivering premises in accordance with agreed plans and specifications.

Exposure arises where plans evolve and circumstances change during construction, cost pressures require design changes and delivery falls short of agreed standards.

This can lead to tenant claims, delayed lease commencement and disputes over compliance with what was agreed.

ABL’s must include reasonable Landlord variation rights and clearly define what constitutes “practical completion” and commencement of the lease.

5. Tenant Default Before Development Completion

A key risk is tenant default before handover and lease commencement, including insolvency, withdrawal from commitment and inability to take up the lease or provide agreed security.

This may leave the developer with financing already committed and significant costs incurred and committed, reliant on pre-leasing thresholds and needing to re-lease at short notice.
Landlords need to secure strong pre-commitment security, including personal guarantees and on-demand bank guarantees and/or parent company guarantees on appropriate terms.

Summary

• ABL’s can shift substantial risk onto landlords which needs to be understood and managed.
• Conditions, delay rights, and specifications must be tightly drafted and managed.
• Locking in terms too early can impact project profitability.
• The strength of the ABL’s and security requirements are critical.

ABL’s are essential for developments, but poorly structured agreements can expose landlords to material financial and delivery risk long before the development is complete and returning income.

If you have questions about Agreements to Build and Lease, please contact Kent Yeoman, Principal ([email protected]/03 343 8453) or any member of our property law team.