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How to enter into a commercial lease
With commercial leases often very large amounts of money will be involved. Given the changeable nature of business life, it is very important that certainty is achieved as far as possible by providing in the lease agreement for any disputes or other difficulties that may arise. The rights and obligations that arise under commercial property law may lead to harsh consequences for one or other of the parties. It is therefore strongly recommended that in negotiating a lease you seek advice from a property lawyer who specialises in this area.
The main difference between a commercial lease (or "tenancy") and a residential lease is that the RESIDENTIAL TENANCIES ACT 1986 does not apply to commercial leases. Commercial leases are instead governed by the PROPERTY LAW ACT 1952. (For information on residential tenancies, see How to enter into a residential tenancy.)
With a lease the landlord is referred to as the "lessor" and the tenant is referred to as the "lessee".
What should be included in the lease agreement?
In order to be valid, a commercial lease must include the following elements:
- Deed of Lease: The Landlord leases the Tenant, and the Tenant takes on lease the premises and the carparks (if any)
- A clearly printed and signed parties: Landlord, Tenant, Gurantor in the presence of Witness.
- The leased premises must be certain and plus a clear indication of carparks, fixtures and fittings contained in the premises, the common areas of the property.
- The lease must be for a time period that is certain: The commencement date, rights of renewal, renewal dates, final expire dates.
- Rent:
- Annual Rent: Premises plus GST amount
Carparks plus GST amount,
Total amount plus GST amount.
Monthly Rent amount plus GST amount.
Rent payment dates.
Rent review dates.
Proportion of outgoings
Default interest rate
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The lease must be properly created as a legal contract.
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A lease will ordinarily be in writing, although this is not necessary for the lease to be valid. A written lease ensures that the parties know exactly what their rights and obligations are.
The parties are at liberty to negotiate specific terms in the lease agreement that suit their particular requirements. Because of the nature of commercial property and its uses, the parties may wish to provide in the agreement for issues such as ownership of fixtures and fittings and the intended uses of the property.
Periodic and fixed-term leases
An important distinction is between periodic and fixed-term leases. With a periodic lease there is no requirement for the beginning and end of the lease to be certain; instead, the lease ends on notice being given by either party. A fixed-term lease, on the other hand, requires a certain duration for the lease – that is, a certain starting and ending time.
If the lease agreement does not specify otherwise, a lease will be a monthly periodic lease, which means that either party can terminate it by one month’s notice in writing.
The landlord or tenant may be a company
Frequently one, if not both, of the parties to the lease will be a company. A landlord (lessor) may require a personal guarantee from a representative of the company, usually a director or major shareholder. The effect of this is that the guarantor will be personally liable for any amount owed by the company in the future.
The rights and obligations of the parties
The rights and obligations of the landlord and tenant are provided for in the PROPERTY LAW ACT 1952, and are implied by the law into all commercial leases. These include the following:
- The tenant (the lessee) must pay the rent when it is due under the lease.
- The tenant must keep the premises in good repair.
- The landlord (the lessor) is entitled to enter the premises at all reasonable times to view the state of repair. The landlord can serve the tenant with a notice requiring the tenant to repair any defect within a reasonable period of time specified in the notice.
- The landlord may re-enter the premises if the rent (or part of it) is in arrears for a period of 21 days. The landlord can also re-enter if the tenant has failed to perform or observe any of the terms of the lease. The landlord can exercise these rights to re-enter the premises either personally or through an agent. If the landlord does re-enter, this does not relieve the tenant of liability for the overdue rent or other breach.
Registration of leases
The parties have the option of protecting their interests by registering the lease on the Certificate of Title for the property.
- Rates or levies payable to any local territorial authority
- Charges for water gas electricity telephones and other utilities or services, including line charges
- Rubish collection charges
- New Zealand fire service charges and the maintenance charges in respect of all fire detection and fire fighting equipment
- Insurance premiums and related valuation fees and any insurance exess in respect of a claim but not exeeding $500
- Service contract charges for air conditioning, lifts, other buiding services and security services
- Cleaning maitenance and repair charges including charges for repainting, decorative repairs and the maintenance and repair of building services to the extent that such charges do not comprise part of the cost of a service maintenance contract, but excluding charges for structural repairs to the building (minor repairs to the roof of the building shall not be a structural repair)
- The provisioning of toilets and other shared facilities
- The cost of ground maintenance i.e. lawns, gardens and planted areas including plant hire and replacement, and the cost of repair of fences
- Yard and car parking area maintenance and repair charges but excluding charges for structural repairs to any car parking area of the building
- Body corporate charges for insurance premiums and related valuation fees and management administration expenses
- Management expenses
- The costs incurred and payable by the Landlord in supplying to the territorial authority a building warant of fitness and obtaining reports as required by the Building Act 1991
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