Leases

Posted on April 28, 2015 in Commercial , Property (Tags: Commercial Law, Leases, Property Law) Property.jpg

Frequently, significant commercial agreements are negotiated by exchange of emails, with the intention that the agreement reached be formally documented at the conclusion of the negotiations. The documentation and subsequent signing of the agreement provide conclusive evidence of the terms of the agreement and most of all, that they intended to be bound. Sometimes that will be evident from the correspondence itself but parties usually feel more comfortable with a properly drafted agreement which has been correctly signed by all the parties in a manner which legally binds them. This is particularly the case with commercial leases

Most small businesses will at some stage be involved in negotiating a lease of their business premises. Sometimes those negotiations and the subsequent documentation will be concluded directly between the parties or by leasing agents. Typically, at the time that the agreement is reached, an Agreement to Lease is prepared which sets out the key elements of the lease agreement, but anticipates the signing of the formal Deed of Lease subsequent to that. However, it is not uncommon for the final step of the preparation and execution of a Deed of Lease to be overlooked or ignored.

Issues can arise when one of the parties wishes to exercises its rights under the Agreement such as the right to renew or to not renew, or where the tenant wishes to sell its business with the benefit of the lease. Informalities in the lease documentation can create issues for a purchaser’s due diligence and it is important to ensure that all agreements reached between the landlord and tenant are contained within a Deed of Lease or a variation of that lease in deed form.

These typical practices in relation to commercial leasing were reviewed in some detail in the Court of Appeal late last year in relation to a commercial building occupied by the Ministry of Education in Lower Hutt. The Ministry, through its property agent, was negotiating with the landlord over a renewal of its lease of the premises, which included certain works to be undertaken. Whilst there was agreement reached on the terms of the renewal of lease, the Court ultimately found that because the variation of the lease was not prepared or signed, then the variation (and therefore renewal) was of no effect. This had significant negative consequences for the landlord.

For many businesses, premises rental will be their biggest outgoing and ensuring that the lease arrangements are certain between the parties and properly documented is important. This is not only for certainty between the landlord and tenant, but also to enhance the saleability of the business should they wish to assign the lease in the future. Sadly, poorly prepared lease documentation (or no lease documentation at all) is all too common in the business community even though getting it wrong can have a significant impact on your business.

Key points to check are as follows:

  • Are the premises correctly and unambiguously described?
  • Do the dates for renewals and rent reviews match the final expiry date?
  • Is there a clear description of tenants’ chattels?
  • Is there a clear mechanism for rent review?
  • Does the business use match the nature of the business?
  • Has it been correctly executed by the entities signing?

Lawyers review leases frequently and your lawyer should be able to assist you with strategies for lease negotiation as well undertaking these basic checks on your behalf.

Sally Peart