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A couple of things first.
Always seek the advice of your solicitor before signing an agreement to lease.
Although there is a standard ADLS (Auckland District Law Society) lease agreement, you are not required to use it. You can make any variations you wish as long as they are legal, the intent is clear, and all parties clearly understand their obligations.
With my 35 years of negotiating leases, it's easy for me to say what you should and shouldn't do. But that would not be right. Each property owner's situation is different. Some have mortgages, some don't. Each property is different - some are very leasable, some are not. Nothing stays the same forever. Sometimes, in the property cycle, there are very few buildings for lease, and the landlord is in a strong position. Other times, it may be the opposite.
Where I have suggested changes you may wish to consider making to the agreement to lease or adding additional clauses, it is best you discuss this with your solicitor and have them make the changes.
The 15 tips follow the sequence of an ADLS lease agreement. Where there is a number in reference to a specific clause, the number may not always be the same for each edition of the ADLS agreement. I am using the FIFTH EDITION 2012 (4)
GUARANTOR—This can be varied, so it may be limited to a certain dollar amount or, say, one year's rental. Just state in the THIRD SCHEDULE Further Terms page what the guarantor limit is
FIRST SCHEDULE
1. PREMISES
Be specific. Wherever possible, use a plan or aerial photograph and attach it to the Lease Agreement.
If it is part of the building, identify the part of the building they are leasing. Identify common areas with something as simple as a shared driveway or dockway. If carparks or yard space is included, mark out these areas.
For carparks, number them and refer to them in the 2. CARPARKS part
When your valuer does a rental appraisal, they evaluate the premises and carparks as described in the lease.
3. TERM
It is easiest to have the rent paid on the first day of the month and the lease to expire on the last day of the month. If the lease starts during the month, have a term for so many years, plus x number of days, x being the number of days from the lease start date and the last day of that month.
4. COMMENCEMENT DATE:
If you are granting a rent-free fit-out period or rent holiday, have the lease commencement date as the date the rent-free period starts to ensure the lease is operative from this date and, other than the requirement for the tenant not to pay rent over this period, the tenant is still responsible for all their other lease obligations very important particularly if there is an accident or damage done to your building you have that ability to make an insurance claim.
5. RIGHTS OF RENEWAL
When you enter into a lease, you essentially pass control of the premises to the tenant. If the lease is, say, a 6 plus 6, the tenant may be there for 12 years. That's 12 years you won't be able to develop or change the property.
Two experiences come to mind.
One client owned a warehouse building and wanted to sell it to fund the purchase of another property that they believed had greater potential. The neighbour, who was an owner-occupier and had a very successful business, wanted to buy the property to expand their business. They were willing to pay a premium (30% above the market value) because the other option of relocating their business to a larger building was just too expensive and disruptive. Done deal - easy sale and handsome profit for the seller. Not to be. The sitting tenant had three rights of renewal of three years each and indicated they would probably take up their rights of renewal. With no certainty of when they would get vacant possession, the neighbour walked away.
The other client owned a multi-story CBD office building. It was just under 35% occupied. There was a shortage of 3-4-star hotel rooms in the city. My buyer was keen to secure an office building that could be easily converted. The subject building was perfect. Windows on all four sides, a square shape, a service core in the center, and plenty of car parking at the rear and basement level. Perfect. The owner and the agent (myself) could sense a sale. Not to be. On going through the tenancy schedule, the buyer quickly saw that the few tenants in the building were on lease terms of 1+1+1, 2+2+2, and, in two cases, 3+3+3. Negotiating lease surrenders with the tenants would have been too hard and expensive as word would have gotten around that a developer was buying the property and wanted them out. Dollar bills would have lit up in their eyes.
You never know what the future is for your property. If the tenant wants, say a 6-year lease, give them six years and don't offer rights of renewal.
If they want a 6-year lease and renewal rights, don't give them two 3-year renewal rights; give them one of 6. At the right of renewal date, it's better to lock them in for six years and have certainty of income over six years than be left wondering what they will do after 3 years.
If you don't want to give them rights of renewal, but they are a blue chip tenant and want it, seek a termination clause of 3 or 6 months.
If they don't want to run with this, offer them a certain amount of money or a rent-free period that they would receive if you exercise the termination clause to persuade them. I suggest offering them the equivalent of 3 or 6 months' rent. Don't be hung up that it may cost you x number of dollars. Remember, you are only going to pay out if the offer from your neighbour or developer is so good that it makes financial sense to do it.
8. ANNUAL RENT
I don't tend to apportion the rental to Premises and CarParks I just put the total rental in the Total part. There have been times in the past when a tenant, on reading through the lease agreement, expressed surprise at the cost of the carparks and suggested maybe they don't need that many, which can lead to a situation for the landlord if the tenant doesn't want them is to what to do with them.
9. DEPOSIT
Most agents insert a figure equal to two months' rent when preparing the lease agreement. This is to cover their commission.
If you are not too sure about the tenant's financials, then ask for a deposit equal to, say, 3 or 4 months' rent. On the day the lease commences, they must pay one month's rent and monthly thereafter. The deposit is credited as rental paid in advance. This can be documented in the THIRD SCHEDULE, Further Terms. This ensures the rent is at least 3 or 4 months in advance.
10. RENT REVIEW DATES
Market rent review dates:
I have seen before where dates have been inserted, and during the lease term, the tenant requested further rights of renewal. In agreeing to this change, the landlord forgot to add additional rent review dates for the rights of renewal. Consequently, there was no opportunity for the landlord to review the rental during these new rights of renewal periods. I suggest you state the date of the first rent review and then add every 2 (whatever the rent review periods are) years thereafter, including the rights of renewal. Your solicitor will be able to fine-tune this.
Also, if, say, the lease term is 3 years followed by 3-year rights of renewal, the rent review dates can be different from the right of renewal dates. You can have, say, rent reviews every two years.
Further on rent reviews:-
It is now common to have CPI rent reviews. Quite often, the review involves a CPI increase plus, say, 1%.
Another common one is fixed annual increases. The most common rate is 4%, but I have seen a range of 2 - 5%.
Some investors believe that the market rental for their property will rise at a rate greater than, say, the CPI plus 1% or 4% and will request a market rent review on the renewal dates or if the initial lease is, say, 6 or 9 years, request a market rent review in the middle of the lease term.
There are no hard and fast rules. Some owners like the CPI formulae or fixed annual increases as it gives them the certainty of rent growth, and they don't have to go through the market rent review process that they find can be expensive and a hassle as well as possibly putting a strain on their relationship with their tenant (client).
11. DEFAULT INTEREST RATE
We have seen interest rates fluctuate; therefore, nominating an actual interest rate could work against you. It is for this reason that some of my clients use The official cash rate plus, say 4%.
12. BUSINESS USE
Be specific about the use of the premises you allow.
For industrial property leases, it is not uncommon to see in the Agreement To Lease the business use as Warehousing (or workshop) or any other use permitted by Hutt City Council (as an example) as a permitted activity.
One of my clients owns a large industrial property. Back in 2018, the building became vacant. At that time, there were a number of vacant buildings, and very few tenants were looking to move. They were approached by a very successful and well-established joinery manufacturing business that had outgrown their current premises around the corner. Being in the same locality and having done a quick check of the district scheme to ensure the zoning permitted their activity, the property owner signed them on a long-term lease. Some 18 months later, their insurer's assessor surveyed the building and deemed the use high-risk. Consequently, there was a significant increase in the insurance premium and excess, with a warning that the insurers may not continue to insure the building.
Check the intended use with the council and your insurers. Be specific with your wording of the Business Use.
Being specific about the Business Use will also give you greater control over when the tenant seeks your approval for an assignment of the lease or to sublease.
13. LANDLORD'S INSURANCE
There is a requirement for the landlord to choose the cover and a default if the landlord does not choose a cover.
The issue I see with this is that the cover that the landlord may choose as appropriate at the start of the lease may need to be revised as time passes. For this reason, I recommend adding the following words: 'at the landlord's discretion'.
FOURTH SCHEDULE LANDLORD'S FIXTURES, FITTINGS AND CHATTELS
Please don't assume the tenant knows what these are.
The person you negotiated the lease with may not be there on the lease expiry date. Completing this part will remove any doubt as to who owns what. It will also help your valuer at the time of rent review, if the lease is assigned, and at the expiry of the lease.
Buyers will know what is included if you sell the property.
I have seen leases that do not mention items such as heat pumps, pallet racking, or superior LED lighting, and when potential buyers or valuers speak to the tenant, the tenant claims to own them.
Reinstatement
Not a month goes by without a client moaning that their tenant who is moving out won't repair the damage they have done, which may range from damage to the carpet to a hole in the roof from a flue they installed to remotes to heat pumps they can't find.
The best way for you to handle tenant reinstatement is to complete a premises condition report with them on the first day of the lease. The report details the condition of the flooring, walls, ceiling, roof, electrics, plumbing, heat pump, air-conditioning, roller doors, etc., and the remotes, etc., given to the tenant.
The report is attached to the lease and used as a reference when calculating the tenant's reinstatement liability at the lease's expiration.
If you are not familiar with the premises condition report, let me know, and I will send you one.
To help you better understand the above, I am happy to email you a copy of the FIFTH EDITION 2012 (4) ADLS Lease Agreement.
The following two are not in the Agreement to Lease. They are in the Deed of Lease. I have included them because if you want to adopt the suggested changes, they will have to be noted in the Agreement to Lease THIRD SCHEDULE Further Terms.
Market Rent Review
The ADLS Deed of Lease Sixth Edition 2012 (5) requires either the landlord or tenant by three months prior to the rent review date, specifying the annual rent proposed as the current market rent as at the relevant market rent review. The three months can be changed to, say, six months so the landlord can give the tenant plenty of notice and feel them out if they are likely to renew or not. If you would like to do this, you will have to insert the appropriate clause in the THIRD SCHEDULE Further Terms of the agreement to lease.
RENEWAL OF LEASE
The ADLS Deed of Lease Sixth Edition 2012 (5) states that 'If the tenant has given to the landlord written notice to renew the lease at least three calendar months before the end of the term.' If the tenant has yet to give notice, the landlord cannot simply assume the tenant will not renew. The onus is on the landlord to chase up the tenant and obtain written confirmation they will not renew. I have learned from clients that the three months go by quickly. Quite often, it is only a few weeks before the lease expiry that the tenant advises the landlord that they are not renewing. This creates a real possibility of loss of income for the landlord as it may take a few months to find a tenant. I suggest the three months be changed to six months, so the landlord knows well before the lease expiry date if the tenant is renewing. If they are not, the landlord can start marketing the property sooner, which will lessen the possibility of a loss in rental income.
If you would like to do this, you will have to insert the appropriate clause in the THIRD SCHEDULE. Further terms of the agreement are required to lease.
Important
Always have your solicitor check the lease documentation before signing and seek his/her advice on any changes you would like to make. Inputting the wrong word, for example, may, instead of will, can put you at a big disadvantage at some future date.
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