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Leasing Process Explained
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To be effective, an agreement to lease must deal with certain matters, being the identity of the landlord and tenant, the premises to be leased, the rent to be paid, the start date of the lease and the lease term. It should also be in writing and signed by the landlord and tenant.
If the tenant is a limited liability company then a landlord will often require a personal guarantee from the directors of the company. Anyone signing a guarantee will then be personally liable for the obligations of the tenant to the landlord.
An agreement to lease should also deal with issues that apply before the start of a lease. These include the payment of a deposit by the tenant, whether either party is going to carry out any building work (for example, a landlord may be agreeing to construct a new building) and any conditions that either party requires before the agreement will go ahead (for example, a landlord’s condition may be that any building consent is obtained for any landlord’s building work or a tenant’s condition may be that any resource consent for the tenant’s business use is obtained).
An agreement to lease will refer to the parties entering into a form of lease (generally called a deed of lease) containing detailed terms governing the rights and obligations of the parties during the lease term. Depending on what form of the lease the parties want to use, the agreement to lease can have the form of the lease attached or can refer to a standard lease form being used (with or without variations to that standard form).
There are numerous standard lease forms available and which one is used will depend on the circumstances. For example, the form used for a lease of an industrial building will usually be different from that used for a lease of premises in a large office building and different again from that used for a lease of a shop in a mall. The basic form of the lease required will usually be set by the landlord, especially where there are multiple tenancies as this means consistency across all the leases for the landlord.
Negotiations between the landlord and the tenant will take place up until the point where an agreement to lease is signed. Once an agreement to lease is signed then at that point the parties will be legally bound to its terms. Given there is often a lot of money involved with a commercial lease then it makes good business sense to obtain specialist advice before the agreement to lease is signed so issues can be identified and dealt with before the parties are legally bound.
Often an agent will be involved and usually acting for the landlord. In our experience the best way of concluding agreements to lease is to use a two step process.
First, the parties will negotiate the key commercial terms important to each party and record this in a non-binding commercial deal letter. This will usually involve input from the agent.
After that, an agreement to lease will be negotiated and signed. The commercial deal letter will be used as the basis for this and the parties’ lawyers will be involved in the process.
The advantage of this two step process is that the parties deal with the key issues up front in the commercial deal letter and usually less time is wasted. It is important to obtain specialist advice from a leasing lawyer before you sign an agreement to lease. If the lawyer is not involved until after the agreement to lease is signed it will usually be too late to make changes to the agreement to lease. This means a party may be stuck with an unsatisfactory lease.
The earthquakes have highlighted some deficiencies in the standard lease forms used in New Zealand so it is even more important for parties to pay attention to what they are agreeing to. We will be looking at some of the new terms landlords and tenants may be looking for in a future article.
As the rebuild of Christchurch moves ahead there will be new leases entered into every day. It is important for both landlords and tenants to make sure they come to grips with the leasing process and obtain the right results.
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