Taking on commercial premises is one of the most significant financial commitments a business can make. The rent, the term, the outgoings, and the obligations around fit-out and make-good can easily run to hundreds of thousands of dollars over the life of a lease. Yet many tenants sign leases with little understanding of what they have agreed to — often because they have not had proper legal advice.
This article explains the key terms in a typical New Zealand commercial lease (the ADLS Sixth Edition Deed of Lease), what a tenant should be negotiating, and how a lawyer can level the playing field.
The Power Imbalance
Before your first negotiation, understand who you are dealing with.
A commercial landlord typically has:
- Experience structuring lease deals to their advantage (often across many properties).
- Detailed knowledge of the property’s history, quirks, and outgoings.
- A commercial real estate agent acting on their behalf, incentivised to secure the best rent and terms for the landlord.
- A pre-drafted ADLS Deed of Lease that already includes landlord-friendly amendments in the special conditions.
As a tenant, you are typically negotiating this once. The landlord does it repeatedly. That is why having a lawyer with specialist market and legal knowledge can make a material difference to the outcome.
The Two-Stage Leasing Process
NZ commercial leasing is typically documented in two stages:
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Stage 1
Agreement to Lease
The Agreement to Lease (ATL) is a shorter document that records the agreed heads of terms: rent, term, renewal options, permitted use, outgoings cap, fit-out contribution, rent-free period, and any conditions (e.g. landlord completing fit-out works, building consent being obtained). The ATL may be conditional on the tenant’s board approval, finance, or other matters. Once signed and conditions satisfied, the parties are bound by those commercial terms.
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Stage 2
Deed of Lease
The Deed of Lease is the full legal document incorporating the agreed ATL terms. It covers the mechanics of the lease relationship in detail: rent reviews, outgoings obligations, make-good, assignment rights, insurance, default procedures, and termination. The Deed of Lease is the document that governs the relationship for the life of the tenancy. It should be reviewed by a lawyer before execution.
The time to negotiate your lease is before the Agreement to Lease is signed, not after. Once the commercial heads of terms are locked in, a landlord has little incentive to reopen them.
Key Terms to Negotiate
Rent
Market rent is your starting point. Research comparable premises in the area — a commercial real estate agent can provide market evidence. Factors that affect rent include:
- Location and foot traffic (for retail).
- Seismic rating and building quality.
- Available carparking.
- Current market supply and demand.
Incentives are often available in soft markets or where you are a strong tenant covenant. Common incentives include:
- Rent-free period — a period at the start of the lease during which no rent is payable. Common in office and industrial. A 3–6 month rent-free period on a 6-year lease is not unusual.
- Landlord fit-out contribution — the landlord pays (or partially pays) for fit-out works. This reduces your upfront capital requirement.
- Reduced rent in early years — a stepped rent arrangement where rent starts lower and increases after 12 or 24 months.
Landlords will typically not advertise these incentives. They need to be negotiated.
Rent Reviews
The ADLS Deed of Lease provides for several types of rent review:
| Review Type | How It Works | Tenant Impact | |
|---|---|---|---|
| Market rent review | Market rent review | Rent is reset to current market rent, typically by agreement or independent valuation | Can go up or down — market reviews are two-way. Favourable in a falling market. |
| CPI review | CPI review | Rent increases by the percentage change in the Consumer Price Index | Predictable. Protects the tenant from large step increases but tracks inflation. |
| Fixed percentage review | Fixed percentage review | Rent increases by an agreed fixed percentage (e.g. 2% or 3% per year) | Highly predictable. Tenant can model future rent obligations precisely. |
| Ratchet clause | Ratchet clause | Rent can only ever increase — a market review cannot reduce below the passing rent | Tenant-unfavourable. Push back hard on this. Not part of the standard ADLS form. |
The frequency and mechanism of rent reviews should be carefully considered. A market review every 3 years on a 9-year lease in a rising market can dramatically increase occupancy costs.
Term and Renewals
Initial term: Most NZ commercial leases run for 3, 6, 9, or 12 years. A shorter initial term limits your exposure if the business does not perform, but you may have limited security of tenure. A longer term gives certainty but locks in cost and location.
Renewal options: A renewal option gives the tenant the right (but not the obligation) to extend the lease for a further term on terms to be agreed or at market rent. Renewal options are negotiated. Standard ADLS form includes renewal provisions but the number of renewals, duration, and rent review mechanism at renewal are all negotiable.
Early termination right (break clause): Some tenants negotiate the right to terminate early on notice — typically 6 or 12 months’ written notice after a specified period. Landlords are reluctant to grant these, but they are achievable for strong tenant covenants.
Outgoings
Outgoings are the operating expenses of the building — rates, insurance, body corporate levies, building management fees, and maintenance. Under most NZ commercial leases, the tenant pays outgoings on top of rent.
Negotiate an outgoings cap: For gross office leases or retail leases, try to negotiate a cap on management and administration fees as a percentage of rent. Also check whether the outgoings estimate provided at lease commencement reflects actual costs — if the estimate is understated, you will face a reconciliation catch-up.
Check what is included: Outgoings definitions vary. Capital expenditure (replacing the roof, earthquake strengthening) should not be classified as an outgoing payable by the tenant — it is a landlord cost.
Permitted Use
The permitted use clause defines what business activity the tenant may conduct from the premises. It should be defined broadly enough to accommodate your current business and likely future evolution.
A restrictive permitted use can cause problems if you want to:
- Expand into an adjacent business.
- Sublet to a subtenant with a different use.
- Assign the lease to a buyer of your business.
A use clause such as “general office use and any lawful business activity” gives you maximum flexibility.
Fit-Out and Make-Good
Fit-out: Agree in writing who is responsible for each element of the fit-out, which party pays, and what happens to the fit-out at the end of the lease. Landlord-installed fit-out typically becomes a fixture and stays. Tenant-installed fit-out may need to be removed (make-good) unless the lease says otherwise.
Make-good: The make-good obligation requires the tenant to return the premises to the condition specified in the lease at expiry. This can be expensive — strip-out, patching, painting, and reinstating services. Negotiate a clear make-good specification at the outset, ideally with a schedule of condition attached to the lease. Some landlords agree to a cash settlement in lieu of physical make-good.
Personal Guarantees
Landlords routinely require directors or shareholders to personally guarantee the company’s lease obligations. This means that if the company defaults, the guarantor is personally liable for arrears, make-good costs, and any other unpaid obligations.
Key points to negotiate:
- Limit the guarantee to the current lease term — not renewals.
- Cap the total guarantee amount — e.g. limited to 6 months’ rent.
- Multiple guarantors — ensure liability is proportional, not joint-and-several.
- Release on assignment — the guarantee should be released when the lease is lawfully assigned to a creditworthy assignee.
Assignment Rights
You may want to assign your lease to a purchaser of your business, or simply to exit early. The ADLS Deed of Lease allows assignment with the landlord’s consent, which cannot be unreasonably withheld if the proposed assignee is financially capable.
Negotiate clarity around:
- The test for what is “reasonable” grounds for withholding consent.
- The process and timing for the landlord’s consent.
- Whether the outgoing tenant is released from liability after assignment.
A Worked Example: Office Lease Negotiation
A professional services firm is negotiating for 400 sqm of office space at $340/sqm (base rent $136,000/year). The landlord’s initial offer is a 6-year term, market reviews every 2 years, a 3-month rent-free period, and a directors’ guarantee with no cap.
After legal negotiation, the tenant secures:
- Rent-free period extended to 5 months.
- Market reviews changed to every 3 years, no ratchet.
- Directors’ guarantee limited to 6 months’ rent and released on the first market review date.
- Make-good definition clarified to exclude tenant’s own fit-out beyond a nominal patch-and-paint.
- Permitted use broadened from “professional office” to “office and business services.”
The 5-month rent-free period alone represents $56,667 in saved rent. The guarantee cap removes the directors’ uncapped personal exposure. These outcomes were achievable because the lawyer identified them as negotiating points before the Agreement to Lease was signed.
What a Lawyer Does for You
Engaging a lawyer for a commercial lease negotiation involves:
- Understanding your business requirements and how the space needs to function.
- Advising on market terms and what you should reasonably be asking for.
- Reviewing and negotiating the Agreement to Lease before heads of terms are locked in.
- Reviewing the Deed of Lease clause by clause and drafting amendments to protect your position.
- Negotiating special conditions — incentives, make-good qualifications, guarantee limits.
- Advising on dispute strategy if issues arise during or after the lease.
Before you sign an Agreement to Lease
0/0 completeThis article is general information only and does not constitute legal advice. Commercial leases are complex documents; your specific circumstances will affect what is reasonable and achievable. Always obtain legal advice before signing.
Get in touch with NZ Legal for assistance with your lease negotiation.
Sources
- ADLS Deed of Lease (Sixth Edition 2012, revised 2021)The standard form commercial lease used across New Zealand.
- Property Law Act 2007Governs landlord remedies, tenant protections, and the re-entry process.
- Commercial Leases and COVID-19 — Clause 27.5 of the ADLS LeaseNo-access clause providing for rent abatement where premises are inaccessible due to emergency.
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