Negotiating a new lease with a landlord can be tricky. There can be a power imbalance between a tenant and a landlord, and tenants often feel like they don’t want to rock the boat.

At the same time, agreeing to a lease agreement that isn’t ideal can cost you money, impact your ability to do business and lock you into a long term commitment that may not actually suit you or your business.

Having a lawyer look through a proposed lease adds to your negotiating power and is the safest way to avoid common traps.

These are the most common issues tenants need to work through when you’re negotiating a new lease:

Fit out and customisation

Just about every tenant will need to fit out a building for their needs, and clauses in your lease outline three things:

• Your ability to do it
• The condition you need to return the premises to at the conclusion of the lease
• How the landlord will contribute to it
  ‍

It’s vital you can fit out the premises to optimise your ability to trade, and you don’t want to be stung for unreasonable costs returning the premises to its original state. 

Often landlords will agree to pay for some of the fit-out as a signup bonus or incentive. The longer you sign your lease for, the more they are likely to commit to an incentive. It’s worth asking the landlord about what incentives they’re willing to provide

‍Costs

Commercial leases commonly require tenants to cover day-to-day expenses beyond just rent (known as outgoings, operating expenses, or OPEX). In multi-tenanted buildings, outgoings are apportioned depending on the proportion of the building the tenant occupies. Typical outgoings include:

• Rates
• Rubbish
• Fire service charges
• Shared facilities and toilets
• Utilities (e.g. water, gas, electricity)
• Insurance
• Cleaning
• Internal and external maintenance of the building 
• Building warrant of fitness
• Management expenses 

You may be able to negotiate to exclude or reduce certain outgoings. 

Firstly, check what you’re being asked to contribute to. If the costs are part of the normal operation of the building, then the outgoings are likely to be reasonable. On the other hand, if the expenses are the costs that improve the building (i.e. capital expenditure), this should be questioned.

A lawyer with broad industry knowledge can assist with reviewing what operating expenses are reasonable and what could be disputed. 

Leasing terms

Terms influence how long you have a lease for and your right to renew the lease at the end of that period. 

An average lease term ranges from three to six years, but can be up to 15 years where a landlord agrees to spend money on the premises as part of the fit out for a tenant. 

If you can negotiate a shorter lease term with greater renewal rights this will give you more flexibility if your business needs change.‍

Rent reviews

Rent reviews are the process of adjusting how much rent you pay. There are three main types of lease reviews in New Zealand - market, CPI and fixed reviews. 

Each method has pros and cons, and ensuring a favourable rent review process can save you a lot of money. 

Personal guarantees

‍In most lease agreements the landlord will request security. Often this is in the form of personal guarantees from the directors or shareholders of the tenant.

If you provide a personal guarantee, even if you assign the lease to another tenant, you will still be on the hook to the landlord for any losses or breaches caused by that tenant or any future tenant through until the end of the lease term.  

Having a lawyer assist in negotiating to remove or limit personal guarantees can be significant where you no longer want to remain at the premises.‍

Ending the agreement

Whether you want to get out of the lease early or the landlord is evicting you, cancellation and assignment clauses can be significant. 

If the relationship between tenants and landlords turns sour, these clauses can ultimately determine the outcome, and how much it will cost you.

Lease agreements come with a range of obligations, and they essentially become liabilities for the length of their duration. That’s why it’s important to get them right. 

‍

Are you looking to sign a new lease agreement? Fill out the form below and we’ll book in time to start the process for you.

‍