Business / Commercial

Topical Issues for Tenants When Negotiating Agreements to Lease

Too often we are asked to review Agreements to Lease which have already been entered into by the parties.  Of course this is too late.  And it can be so disappointing because we can immediately see areas where we could have added value and even have saved our client money or reduced their risk.  Of course there is a cost to having a lawyer review an agreement to lease but this does need to be weighed up against the long term and serious financial implications involved.  A $100,000 per annum lease for a term of 10 years will be over a million dollar commitment not including the reinstatement obligations and the ongoing liability on assignment.

If you are a franchisor who is involved in the lease negotiation phase then you will appreciate the importance of making sure your lease negotiations are sound, as the terms of the lease can often be the difference between converting a franchise prospect into a franchisee or not.

We wanted to touch on a few areas in the lease negotiation phase which come up again and again and which have been highlighted by recent cases.

 

When it is best to obtain legal advice?

It is often the case that initially the landlord and the tenant will enter into a preliminary document, for instance a Memorandum of Understanding or sign a letter recording their agreement.  Typically the parties are not looking for this to be legally binding as they are just recording the commercial terms that have been agreed. We recommend to our tenant clients that they include binding provisions relating to exclusivity (by this we mean ensuring that the landlord does not enter into negotiations with another party for a limited period while the form of the Agreement to Lease is being agreed on).  We have heard of situations where the landlord has entered into a preliminary agreement only to terminate it because they have entered into an agreement with a third party.  We also recommend including binding provisions relating to confidentiality, protection of intellectual property and an indemnity for costs and losses in the event that one or more of these binding provisions is breached.

Areas where we can add value include:

1. Rent review provisions  - ensuring our clients are aware of the different options available – for instance the different type of ratchet clauses, cap and collar, caps on CPI increases etc.

2. Detail around landlord works and tenant works –  to prevent arguments later it is essential to be very clear about:

• What works are the responsibility of each party;
• When the tenant's fitout period starts, what payments the tenant must make during this period and what landlord works have to be completed by that date. 

If sunset dates are required then it is vital to ensure that both parties are very clear on exactly what has to happen or not happen for a sunset clause to be activated.

3. Guarantees – for instance ensuring that personal guarantees and bank guarantees are released on assignment, or if not, making sure they are limited – by amount and/or duration or even released when the tenant reaches a certain level of trading.

4. Landlord contributions – making sure it is clear when and how these are paid and if possible trying to eliminate provisions which require these contributions to be repaid in certain circumstances (e.g. on assignment or termination within a certain period).  Landlord contributions are taxable in the hands of the tenant so we try to include a gross up provision which requires the amount of the contribution to be grossed up by the amount of any tax which is deducted.

5. Landlord and Tenant obligations – we look to try and limit the tenant's obligations where possible particularly in the areas of refurbishment – for instance if we have a tenant who is a franchise or multi unit operator then we try to negotiate for no refurbishment while the premises are meeting the branding requirements of the franchise system or business.  Making sure that the tenant has no liability for any fair wear and tear is also important.

6. Damage and destruction clauses – these are pretty topical nowadays given the recent experience of the Christchurch earthquakes so we try to negotiate for the tenant to have a right to terminate the lease if there are access issues or depopulation in the immediate area  and if the landlord does not repair in certain amount of time.

7. Reinstatement – limiting the tenant's obligations on reinstatement.

We recommend that both franchisors and multi unit operators develop their own lease checklists and even precedent clauses which will assist them in their lease negotiations.  These should be tailored to meet the specific requirements of the business. 

Exclusivity

What we are referring to here is the situation where there is a retail development owned by the landlord which consists of a number of units and the tenant wants to ensure they have exclusivity for a particular business use.  For example: the owner of a coffee shop wants to ensure they are the only coffee shop in the development.

This is no easy answer to this.  The options are:

1.  A clause in the lease which states that the landlord will not allow anyone else in the development to have a competing business use.  This is fine while the landlord owns all of the units in the development but what happens if the landlord changes or there is more than one landlord who owns all of the units? 

2. You often see a provision in the body corporate rules which provides that certain units can only be used for certain purposes.  There is a strong possibility that such a clause could be ultra vires the Unit Titles Act 2010 and further it will probably be almost impossible to get an amendment to any existing body corporate rules.

3. The best option is to get an encumbrance registered against the titles for all the units but this will probably be rejected by most landlords.

Branding

Ensuring branding or signage rights can be important to many tenants especially if they are franchisors or multi unit operators.  A typical lease will require the tenant to obtain landlord consent for any signage they want on the premises.  For our tenant clients we look carefully at the initial signage rights and ongoing signage rights.  For initial signage rights we recommend getting the signage approved up front or at the very least have the agreement to lease conditional on agreeing on the signage rights.  The lease should be conditional on obtaining all required consents for the signage on terms acceptable to the tenant.

If the signage is not located on the premises, for instance it is on a pylon or billboard located elsewhere, then there should be express provision in the lease which provide the tenant with ongoing rights to that signage.

For unit title properties where the signage is on common property there should be a signage licence from the body corporate. This should deal with issues such as maintenance of the signage, ability to change the signage without needing landlord consent, insurance etc. 

Other issues to consider with signage are:

1. Ensuring that there is no competing signage at the development and the lease or signage licence prevents this in the future.

2. Ensuring that the signage cannot be obscured or blocked by another structure or another tenant's signage.  The view of the signage should not be restricted.

3. If the landlord owns adjacent property – ensuring that there is no competing signage on that property.

Reinstatement

Reinstatement is sometimes incorrectly referred to as "make good".  But there is more to it than that - reinstatement is the removal of tenant's improvements/fit out, such as partitions, then followed by make good of damage caused.  Particular issues around reinstatement which should be considered by a tenant are:

1. Premises Condition Reports - More frequently and wisely leases now include condition reports recording the state of premises at commencement date giving a base line for reinstatement at lease end.  Anything is better than nothing but the more extensive the better.  Who pays for such a report and what it covers should be included in the agreement to lease.  A Premises Condition Report enables the parties to have a clear understanding of end of lease requirements and this should be attached to the lease to avoid nasty and expensive surprises at lease end.  More tenants are seeking to limit their reinstatement requirements to just removal of signage and other branding.  Whatever is agreed it is reasonable for landlords to require damage caused by removal to be made good by the tenant.

2. Maintenance obligations – fair wear and tear - We are seeing examples of landlords seeking to remove fair wear and tear exception from their maintenance obligations.  Tenants should be aware of any attempt by a landlord to remove fair wear and tear as this could expose them to costs which are really a landlords expense.

3. Notice - Leases usually require landlords to give notice to tenants of reinstatement required by "the end of" the lease.  The High Court has held that this means that such notice can be given on the last day of the lease.  While the tenant is able to access the premises after the lease ends, for this purpose it is problematic for both parties – the tenant has "moved on" physically and psychologically and the landlord wants to relet the premises with as little down time as possible.  We believe that it is better that the landlord is required to give the tenant a minimum amount of notice of reinstatement requirements which set out exactly what is required of the tenant. 

If you are a tenant the importance of getting the right advice before and during the negotiation of a lease cannot be underestimated.  Obligations can be limited, disputes avoided and money saved.

Brookfields Lawyers can assist you at every stage of the leasing process. For more information contact:

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.

© Brookfields Lawyers 2016 – All Rights Reserved

 

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