Welcome to Apogee Legal's monthly column, where we demystify legal concepts and provide you with knowledge on navigating the legal side of life.

Vicky Murray - legal executive

Leasing a premise is a great option for many businesses, especially in the first few years. But whether you’re a tenant or the landlord, it’s vital that you clearly understand the terms of your lease, and what legal documents you’ll need during the tenancy.

Understanding Lease Agreements

The terms & conditions in lease agreements help to ensure a fair process and minimise disputes. Typically, they include:

· The duration of the lease

· Right of renewal

· How the property can be used (this may include details like hours of operation, the size and type of signage allowed, and type of business)

· How rent reviews are calculated (and how often)

· Responsibility for maintenance, repairs and property outgoings

· Insurance requirements

· what happens if one party wants to exit the lease

Renewing a lease

If a tenant has a right to renew in their lease agreement, they will typically need to notify the landlord around 3 months before the lease ends that they wish to exercise this right. The renewal then needs to be legally documented with a Deed of Renewal of Lease.

Leaving a lease before the term is up

As a landlord, you generally cannot end a lease early unless the tenant has breached the lease terms. In such cases, there is a specific legal process you must follow before the tenant is required to vacate, unless the tenant agrees to leave voluntarily.

As a tenant, there are genuine reasons that you may need to exit a lease early. So, what are your options?

• Assign your lease: If your lease is a Law Association (previously ADLS) Deed of Lease, you have the ability to “assign” a lease to a new business for the remainder of your lease term. This requires a “Deed of Assignment” to be drawn up and signed by the current tenant, landlord and “assignee”. The landlord cannot unreasonably withhold their consent to assign the lease. But they may need to be provided with evidence that the assignee is a good operator and has the financial resources to meet the lease obligations. If the lease is assigned, the original tenant is usually still liable for any rent payments that the assignee defaults on – meaning you have an equal interest in ensuring the new tenant is reliable and able to pay.
• Surrender your lease: A tenant and landlord can negotiate an agreement to exit the lease early. Sometimes this includes the tenant paying an exit fee or supporting the landlord by finding a new tenant.
• Sublet your lease: Another option is to sublet part or all the property to another tenant, allowing you to share the space. This requires the landlord’s consent, and a legal document called a Deed of Sublease. When exiting, you’ll also need to check whether the lease agreement includes a “make good” clause, whereby you must leave the property in the state that you found it.

Selling your business or the major shareholding

A Deed of Assignment of Lease may also be required when a business is sold, as the lease is typically transferred to the purchaser at settlement. Similarly, if there's a change in shareholding that results in a shift in control of a tenant company, a Deed of Assignment may be necessary.

Rent Reviews

Most commercial leases include a rent review clause that specifies the method for calculating the rent increase (or decrease) and how often these reviews will occur.

The most common methods for rent reviews are:

- Independent property valuation determines the market rent review

- Rent is proportional to changes in the Consumer Price Index

- Aa fixed percentage increase in rent (for example, 5% per year)

Additionally, many leases contain ratchet clauses that limit or prevent any decrease in rent.

Upcoming changes

At the end of this month The Law Association of New Zealand will be releasing an update of its standard Deed of Lease document. The update will reflect changes in law and in business practice. Clauses that will be updated include options for rent review and security/bonds, building maintenance and make good clauses, compliance with other laws (such as health and safety), emergency access, and seismic ratings.

We'll provide more explanation of the changes in next month's column.

A final thought

Leases work best when viewed as a partnership. Ensuring the lease terms are thorough, fair and a good fit for both parties are key to a successful relationship.