August 11 2017
People sometimes hurry into an agreement to lease commercial property. Time is money and delays to setting up a business can mean delays to generating income. However, it’s important to get your agreement to lease right to ensure your premises continues to suit your needs over the long-term. Here’s a run down on what you need in an agreement to lease.
How is an agreement different to a deed of lease?
An agreement to lease precedes a deed of lease. It gives a landlord and tenant an opportunity to negotiate and record their leasing arrangements before the relationship is formalised. There are usually many details to be agreed upon by both parties. The agreement should set out important details to avoid confusion or discrepancy when it comes time to sign the deed.
What’s essential in an agreement to lease?
Obviously, the agreement needs to identify the landlord, tenant and premises that will be leased. Other essential details are the annual rent, if and when the rent will be reviewed and how often, the term of the lease, any options for renewal, a commencement date and the details of any guarantors required.
Many agreements contain more details than these basics and this is where the agreement can play a vital part in opening your business. An agreement provides an opportunity to address any matters arising prior to the start date. Examples include due diligence or consent conditions, any work that has to be completed by either or both parties, and the period allowed for fit-out.
Should you use a ADLS standard agreement to lease form?
Many agreements to lease use the ADLS (Auckland District Law Society) standard form. This contains a clause which requires the preparation of a formal deed. Until that deed of lease is prepared and signed, both parties are bound to the terms of the ADLS lease.
This clause binds all parties to the latest edition of the ADLS lease, which you may not have reviewed. If you’re unfamiliar with or don’t understand the terms of an ADLS lease and haven’t sought advice, you’re going to enter an agreement without knowing your rights and obligations under the ADLS deed of lease.
The advantages and disadvantages of using a commercial real estate agent
Commercial real estate agents often negotiate all the terms of the agreement between the parties, write up the document, and have copies signed and delivered to lawyers to draw up the formal lease.
Most commercial landlords and tenants understand the needs of their businesses and are usually comfortable with negotiating the terms and conditions of annual rent, rights of renewal, fit-outs and so forth. However, in the heat and haste of making the deal, important omissions often get made such as:
- Whether or not a guarantor is available. From the landlord’s perspective, this can have serious consequences for enforcement or security.
- For first time landlords and tenants, an understanding or explanation about the rights and obligations of the standard ADLS lease.
- A clear definition of when rent starts being paid. This is usually the ‘commencement date’ in the agreement, but in the case of fit-outs or newly constructed premises, the tenant may not be able to occupy or use the premises on the actual commencement date, yet the obligation exists to pay rent.
These are just a few examples of important points that are often overlooked during agreement to lease negotiations. The agreement is a vital document for landlords and tenants and it should be reviewed by a property lawyer before being executed. Property lawyers can provide advice to pre-empt and prevent problems or disputes. As property lawyers, we can identify issues you may not have considered.
If you’re involved in agreement to lease negotiations contact our legal champions before you put pen to paper.