Understanding commercial lease jargon

by Alan Knowsley - Rainey Collins Lawyers

Entering into a lease (often in conjunction with starting up a business or continuing a business in a different location) is a huge financial decision for tenants. It is not made any easier by the jargon that some professionals use when talking about leases.

To help here are explanations of some of the legal commercial lease jargon you may come across when leasing premises.

Agreement to Lease –the document that agents will be most familiar with, which is generally signed as a preliminary step before signing a Deed of Lease. This details the basic agreement between the parties as to rent, how long the lease is for (the term), any fit out to be carried out, the start date etc, which is generally signed before the tenant moves in to the property. Agreements to Lease may include conditions that need to be fulfilled before the tenant moves in, including completing a fit out of the premises. The standard form Agreement to Lease produced by the Law Society records that the parties agree to enter into a formal Deed of Lease (see below) to further record their obligations.

Assignment
– generally a lease will include a right to assign or sublet the lease. Assigning means that the lease is transferred to another party. Generally the original tenant remains liable for the obligations under the lease unless the standard provisions in the Deed of Assignment document are amended. An assignment requires the consent of the landlord and the landlord is entitled to look into the suitability of the tenant (eg business experience).

Deed of Lease – this is usually the main lease document. A deed is a document which needs to be in a particular form and where each party’s signature needs to be witnessed (as opposed to an agreement which need not be witnessed). A Deed of Lease clarifies and expands on the obligations of the parties to the lease, and carries forward the basic terms agreed in the Agreement to Lease. The standard Law Society Deed of Lease includes clauses regarding rent review, damage due to natural disasters, default on payments etc. Without a Deed of Lease being signed, it can be unclear what the parties’ obligations are.

Default interest –interest payable on the rent if the tenant is in default on payment.

Final Expiry date – the date the lease ends or terminates, after all rights of renewal (if any) have been exercised.

Further Term of Sale / Conditions – conditions that need to be confirmed in the Agreement to Lease within a certain period of time, before the parties are bound to go ahead with the lease.

Gross lease
– a lease whereby the total rental includes any outgoings.

Landlord’s fixtures and fittings – refers to things attached to the property like lights, kitchen cupboards etc, which are leased with the premises. There is a list attached to the standard Deed of Lease which should be filled in by the parties, so it is clear who owns what when the tenancy ends.

Net lease – a lease where the rental excludes outgoings, which are instead paid separately (sometimes to the landlord or sometimes direct).

No Access period – this is to cover a situation where the property is totally or partially destroyed or damaged after a natural disaster such as an earthquake. The Deed of Lease records a period of time after which either party has the right to cancel the lease. The default period is 9 months but this can be amended.

Outgoings – expenses payable in addition to the rent (or included, depending on whether it is a gross or net lease) which can include utilities, rates, rubbish collection charges, management expenses etc. These are to be agreed in the Agreement to Lease.

Personal Guarantee or Guarantee – where the tenant is a company, generally a landlord will require a personal guarantee from the directors and/or shareholders of the company. This is a promise by those individuals to comply with the lease and pay the rent if the company fails to do so. The reason for this is that the company could be wound up and if it has no assets then it is difficult for a landlord to obtain payment for outstanding rent or take any action against the company. Guarantees will also sometimes be required when there are other entities such as incorporated societies or charitable trusts as tenants. Some landlords require bank guarantees where rental incentives are to be paid in advance.

Premises Condition Report – a report attached to the Deed of Lease which records the condition of the premises (including carpets etc) when the parties entered into the lease. Often landlords and tenants will do a walk-through of the premises together to undertake this, but sometimes this is undertaken by a professional or third party. Photos can be attached to this. 

Property Law Act notice – a notice under the Property Law Act 2007 issued from the landlord to the tenant advising of a breach of the lease such as non-payment of rent (and generally advising that they will cancel the lease if those breaches of the lease are not remedied within a certain time frame). These notices are required in order to validly cancel a commercial lease in the event of a breach. They are required to include certain information in a certain format, so landlords should always take legal advice before issuing a notice.

Rent review dates – the dates that the rent will be reviewed. There is a process required to be followed in the Deed of Lease where either party gives notice of the new rent and the other party has an opportunity to dispute it. Rent reviews can be to market rent (which generally involves arbitration or valuers if agreement can’t be reached) or to CPI, (based on a percentage increase based on the Consumer Price Index) or a mixture of market and CPI, depending on what is agreed.

Renewal dates (rights of renewal) – agreed dates where the tenant is required to give notice to renew the lease for a further term. 

Sublet – where a tenant lets part of the property to another tenant. Generally the landlord is required to consent to this and is entitled to ascertain the suitability of that sub-tenant, as with assignment.

Term – the length of time that the lease will run (subject to rights of renewal- see above).

For more information on this topic, please contact the Rainey Collins office (04 4736850)
or the article author - Alan Knowsley.



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