Business, Property & Finance

Negotiating and Drafting Agreements to Lease

on Wednesday, 08 June 2016. Posted in Business, Property & Finance, Leasing

Negotiating and Drafting Agreements to Lease

The first stage in the negotiation of a lease is usually the negotiating, drafting and signing of the Agreement to Lease. This agreement sets out the provisions which apply prior to lease commencement, such as conditions concerning due diligence, obtaining consents, board approval, and provisions dealing with works to be completed by the landlord and/or the tenant, fit out periods and landlord contributions.

Brookfields Lawyers have put together this guide which contains a summary of the types of provisions and issues which should be considered when negotiating an Agreement to Lease.

Have it in writing - There is a technical argument that an agreement to lease for less than three years need not be in writing, and that an oral Agreement to Lease may be enforced. However, it is preferable, that it be reduced to writing to endeavour to minimise arguments. The Agreement to Lease should be contained in a separate comprehensive document although other documents, for example, the agreed form of lease, may be incorporated into that by reference to it e.g. by providing that the form of the lease will be the current edition of the Auckland District Law Society Inc. lease.

Clearly identify the parties - If any party is a company make sure that the company does in fact exist and the name is correct. This can be done by a free search via www.companies.govt.nz. If it is a partnership, then the individuals need to be identified and words of clarification, for example "trading as AB Car Painters" may be added. If it is a trust, then the names of the trustees must be included, for example "Joe Smith and Bill Jones as trustees of the Bill Jones Family Trust" not "the Bill Jones Family Trust". Trustees may require a limitation on their liability particularly where they are professional or independent trustees.

Guarantors - Any guarantors must be identified in the Agreement to Lease as a guarantor and must sign the document in that capacity or at least sign it with the intention to be bound in that capacity. Directors or shareholders of limited liability companies are, these days, wary of giving guarantees and will seek to have no guarantee or to somehow limit their liability as guarantor. In some cases they will take steps to ensure they have no assets to support their obligations by having their assets carefully secured in family trusts. It is important, therefore, for the landlord to consider not only the solvency of the tenant but also what means a guarantor has to back its promise to pay if the tenant does not. In some cases the landlord may be better to settle for a limited "guarantee" in respect of the obligation of the tenant rather than an unlimited guarantee which, in the long run, may turn out not to be worth pursuing.

These limited "guarantees" take many forms, for example:

  • They may be limited to rent for a set period i.e. 12 months from the Commencement Date;
  • They may be limited to a quantifiable amount which is stated in absolute dollar terms or is calculated at six or twelve months' rent and opex;
  • It may take the form of a cash bond held by the landlord or by a stakeholder;
  • It may take the form of a bank backed bond (also called a “bank guarantee”).

Whatever form the obligation takes it needs to be carefully documented to ensure that it is effective. Where cash is to be obtained from a third party the document needs to ensure that funds will be available both on "demand" and without interference by a third party such as a receiver or liquidator.

Factors which a landlord may take into account in assessing the amount of a bond or bank guarantee will be the ease with which the premises may be relet, what work will need to be done to the premises to put them into a state where they may be easily relet and what other obligations, if any, the landlord will have to incur in respect of a failed tenant, for example, arrears of outgoings such as rates, water rates and insurances?

Property - The leased premises need to be identified accurately in the Agreement to Lease. They need to be described in words or drawn in so there can be no argument.

The parties also need to give consideration as to what else is going to be included within the definition of the premises subject to the lease. Does access need to be provided for the tenant or for the landlord to or through the premises? Are there common facilities to be shared with other tenants? Are there carparks to be included in the lease or are they to be separately licensed?

Rent - The rent or how it is to be calculated should be stated clearly. Is the rent stated the final rent for the premises or is it to be calculated at so much per square metre following a measure? If it is to be calculated by measure, what method is to be used?

Operating Expenses - Tenants need to give consideration to the operating expenses payable under the form of lease to make sure they are not paying any expenses, which should more properly fall on the landlord. Tenants should be wary of costs relating to replacement of all or part of air-conditioning, lifts and similar plant particularly where the equipment is ageing. Tenants should also ask for estimates of outgoings and if possible get the landlord to "cap" those expenses at that level, at least after the end of the next period when a reconciliation is to be carried out.

Rent review - How often is the rent to be reviewed? At regular intervals? – and/or on renewal? Is there a ratchet clause (which provides that rent on review cannot go below a certain amount), if so when is the ratchet set? Commencement? Immediately prior to the review?

Term - How long should the lease be? Is there a desire or a need to have a "break" clause (which allow the tenant or the landlord to end the lease early in certain situations)? Are there any rights of renewal? How much notice needs to be given? Is the tenant restricted to renewing the lease in respect of the whole of the premises or is there to be some flexibility? Will the landlord agree to the tenant knowing how much the rent is to be before the tenant has to exercise the right of renewal?

What is the commencement date? Does the landlord need to have completed certain works before the commencement date is triggered? Are there any other circumstances which must occur to trigger the commencement date e.g. a major tenant in the development must have commenced trading? What are the implications for the landlord and the tenant if vacant possession is not available to the tenant on that date?

Work on the premises - What work is to be undertaken by the landlord? When and to what standard and what happens if the landlord doesn't complete the work properly or on time? The same questions apply in respect of the tenant.

Form of lease - It is important that whatever the parties decide to be the form of lease both parties are aware of what the lease says and that any modifications to it are agreed at the Agreement to Lease stage. Some parties may be prepared to agree to changes to the form of lease notwithstanding that the Agreement to Lease specifies the form of lease to be applied, but parties should not rely on this.

Where the landlord requires the tenant to sign its form of lease which is used for all tenants in the development, tenants should also seek assurances that their lease is no more onerous than that of others.

Agreements to Lease should avoid use of terms such as "usual covenants" or specify that the lease is in "the form of lease commonly used by solicitors practising in Auckland" because these terms create room for significant arguments.

Termination obligations - Both parties need to have a clear understanding of their obligations at the end of the term. Whatever form of lease is specified or attached to the agreement, the lease will include these obligations and they can contain a substantial sting in the tail for an unwary tenant.

Consideration needs to be given to these clauses at the beginning and not at the end of the lease. It may be that a landlord does not really need the premises stripped out and restored. But if the lease says the tenants will do so, it is a highly generous landlord which will let the opportunity pass without some recompense.

Brookfields Lawyers understand that each client, whether a tenant or landlord, will have their own requirements when it comes to negotiating an Agreement to Lease. We help our clients determine what their requirements are and help ensure that their Agreement to Lease reflects this.

For more information about negotiating and drafting an Agreement to Lease, please contact Ian McCombe, Brookfields Lawyers 0508 Brookfields or .

Disclaimer - This information is intended to be general in nature. You are strongly recommended to seek your own legal advice in relation to the matters dealt with here.

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