The leasing market is ever changing. Many would argue the current economy to favour tenants – there are a myriad of vacant properties currently available, and a definite lack of (quality) prospective tenants available. Many tenants are looking to down size, if not liquidate, leaving landlords ("LLs")in the unenviable position of being forced to consider short term and stop gap solutions for their own cash flow purposes. Enter the commercial real estate agent, armed with an agreement to lease ("ATL") .... but beware, both LL and tenant, once signed the ATL will legally bind you to the terms specified and your lawyer will be unlikely to be able to re negotiate your lease. It is important – if not critical – therefore, that both sides fully consider the ATL in detail before signing such. A few key considerations are as follows:
- Parties: It is critical that the parties in the ATL be correct, so tenants should confirm their structure (and available personal guarantees) before negotiations commence.
- Security: Consider personal guarantees, rent bonds and/or bank guarantees as applicable?
- Premises: What is being leased? Where are the carparks? Does the tenant have a right to use common areas, and if so are they included in the assessment of annual rental? What is the measurement of the premises and is annual rental determined on a square metre basis? Strangely enough, the premises description is one of the most commonly neglected items set out in an ATL. If at all possible, attach highlighted plans for certainty.
- Term: LLs prefer long ... tenants prefer short, generally they end up somewhere in the middle. Tenants – it is very hard to escape a lease once the ATL has been signed, so negotiate hard for a short lease term and lots of short rights of renewal. LLs – try and bind your tenants to reasonable term leases with regular rent reviews (either to market or CPI), and avoid limiting or relinquishing tenant liability in the event of assignment.
- Rent and Rent Reviews: Gross or net rental (ie inclusive or exclusive of outgoings)? How often are the rent reviews, and can rent be decreased upon review? Set out in full the means of calculating new rental upon review to avoid argument later. Don't be afraid to include examples in the ATL of how rent would increase if CPI rose by, say, 3% - make it easy for everyone to understand (and later interpret) what has been agreed. LLs – specify that rent is payable by automatic payment.
- Outgoings: Almost always glossed over by agents, but one of the most contested issues between LL and tenant. Work through the outgoings schedule and delete those not agreed to be payable by the tenant. Again, insert lengthy additional clauses to clarify exactly what the tenant will be liable for each year. Who is responsible for a major one off maintenance job to the premises, or body corporate sinking fund contributions?
- Legal Costs: Generally in the fine print you will find the tenant is liable for the LL's reasonable legal costs of preparation of the deed of lease and any document necessary to evidence a renewal/rent review. Tenants – are you happy for this to be the case? Negotiate – often LLs will agree that each party bears its own legal costs, particularly if the tenant is sound and desirable.
- Special Conditions: If in doubt, include conditions in the ATL giving you the ability to withdraw, ie due diligence or finance conditions for the tenants, or all encompassing directors approval or solicitors approval conditions for either party. If you can't review the ATL with your lawyer before signing, give them the ability to negotiate after the facts by making the ATL conditional on their approval; don't hamstring your lawyer and expect them to be able to run for you later.
Often ATL are negotiated and signed without legal input, under the eyes of a commercial real estate agent on commission. Be careful; be sensible; and if at all possible, consult your lawyer before signing an ATL.
Brandon Cullen | Partner | Albany Office
(09) 966 3609 | bcullen@mcveaghfleming.co.nz
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Commercial Property
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