If you have a new commercial building and intend to enter into a commercial lease below are the top tips for success:

1. Choose the Tenant carefully

Arguably, the most important decision for a landlord is choosing the tenant. Is the tenant suitable to occupy your building and meet the obligations under the lease? Due diligence is required to confirm the reliability of the proposed new tenant.

2. What type of Lease?

The Law Association of New Zealand (formerly known as the ADLS) Deed of Lease is the most common lease which is generally considered to be neutral in terms of ‘favouring’ neither the landlord or the tenant. However, it may not be suitable for all leases, particularly if you are leasing as part of a larger development. Other options include the Property Council Lease and bespoke leases.

3. Agreement to Lease

The Agreement to Lease (ATL) is the first document prior to the final Deed of Lease. The ATL can only safely be skipped if there is a fixed commencement date and no fitout to be completed.

By entering into an ATL you are usually also agreeing the terms of the Deed of Lease. Changes to either document requires negotiation prior to signing the ATL.

4. Security

Security is essential to give you options if the tenant cannot pay or is in breach.

1. Personal guarantees – These are standard practice except if the tenant is of very high standing.
2. Bank guarantee – The ideal simple solution for the landlord. Simply request payment from the bank. The bank guarantee terms are crucial.
3. Cash guarantee/security bond – This is similar to a bank guarantee, again agreed terms are very important.
4. General or specific security – Can be useful, ideally in addition to one or more of the above.

5. The Commercial Deal

The commercial deal is not just agreeing on the rent to be paid. The deal needs to consider:

1. Rent reviews – How often? Can the rent reduce or is there a soft or hard ratchet?
2. Lease term length and right to renew.
3. Fitting out the premises – who is paying, when and how? There are many options.

6. Reinstatement obligations

Reinstatement obligations need to be agreed when the lease is first signed. These are also part of the overall commercial deal. The standard position is that the tenant reinstates the premises on expiry/termination of the lease.

7. Premises Condition Report

Before any lease commences, the parties should record the premises condition in writing and with photos. This can avoid time consuming and costly disputes, especially the condition of the premises around reinstatement.

8. What happens if the tenant does not pay?

Non-payment should be clearly covered in the terms and the landlord should understand their options and the processes.

9. Clearly document the lease

All details of the deal agreed between the landlord and the tenant should be set out clearly, with detail, in writing in the lease, and with plans.

Kent acts for a variety of landlords, including significant multi-lease commercial developments in Christchurch and beyond. If you have a new commercial lease contact Kent Yeoman (03 343 8453 / kent@mmlaw.co.nz) for assistance.