How to Negotiate Your Commercial Lease as a Tenant

12 March, 2014 | Wade Hansen

Negotiating the terms of a lease is just like negotiating any other legal agreement. Both parties will have deal breakers and both will have points they’re willing to concede on. As a tenant, while you may not feel you have a lot of bargaining power, you may be surprised at what a landlord will be willing to give if you have a proven track history of being a reliable tenant. Generally, all landlords are looking for are low maintenance tenants who pay their rent on time.

This article outlines some of points to think about when entering into an agreement to lease or when negotiating the terms of a new lease. Land agents are usually paid by the landlords and you may not know what to ask for, so it is recommended that you come to us to get legal advice before signing any agreement to lease.

Limiting your guarantee

If the tenant is going to be a company rather than you personally, the landlord may ask that the directors and/or the shareholders of the company guarantee the lease in their personal capacity.

If you sign as guarantor, you are guaranteeing all of the rent and outgoings payable by the tenant for the current lease period or maybe even the entire term of the lease (including all renewals). What term you are guaranteeing will be set out in the lease assignment or renewal.

This guarantee will endure through later assignments unless you are specifically released from your obligations by the landlord. An assignment is when the tenant transfers the lease to a third party with the consent of the landlord.

To avoid your guarantee enduring through assignments, you can try to limit the length of your guarantee. Or, you could ask for the guarantee to be restricted to the period that your company is the current tenant. This means that if you assign the lease part way through the term of the lease and that third party defaults, you won’t be liable for their on-going rent and outgoings.

Changing the term of the lease

There are pros and cons when deciding if you want a shorter or longer term of the lease. A longer term gives you security but are a greater liability as you are locked in for a set amount of time. This may not be a good thing if you’re not sure about the premises or the landlord.

You could negotiate to have shorter terms with more renewals. For example, a lease with an initial term of three years and then three further rights of renewal of three years each would provide you with more flexibility than a lease with a term of six years and then one right of renewal of another six years.

Both options give you the right to occupy the premises for 12 years but the 6×6 (said “six by six”) option means you have to remain in the premises for six years before you can get out of the lease without any problems.

With the 3x3x3x3, you can reassess your position every three years which is strategically much more flexible for your business. Straight away you are only ever liable for half the amount as in the 6×6 situation.

Even if your annual rent is only $10,000, halving the term length from six years to three years is effectively reducing your potential liability from $60,000 to $30,000. Also, remember that these rights of renewal are for your benefit as the tenant. The landlord cannot choose to terminate the lease while you still have rights of renewal.

Different mechanisms for rent reviews

Most leases now have standard rent clauses which state that the rent shall be determined by the current market rent, and/or adjusted by the Consumer Price Index (“CPI”). There is generally not much room for negotiation when it comes to market rent, however, because valuations can be very expensive, it may be a better option to just request the CPI option. Have a look below for an explanation of how the CPI works.

Fixed rent increase
If you want even more certainty, you could propose a set figure, such as a 5% increase every rent review. However, the down side to this is if, for example, recession hits, and market rents stall or even decrease, you would still be bound by that 5% increase every rent review. The positive is exactly the opposite. If the market takes off and rents go through the roof, your rent increase would still only be capped at 5%.

CPI rent increase
The CPI is a figure published quarterly by Statistics New Zealand and it records changes to the prices of consumer items bought by New Zealand households, giving a measure of inflation. This would mean that as the CPI increases and decreases (i.e. inflation increases or decreases), your rent would change by the same percentage.

Your landlord may insist on a hard or soft ratchet clause (hard meaning that the rent can never be less than the immediately preceding rent and soft meaning that the rent can never be less than the rent at the commencement date of the then current term of the lease) but at least that means your rent would more or less stay the same if there was little increase in inflation.

Reducing the outgoings you are responsible for

Outgoings can be expenses such as rates, insurance (including related valuation fees), water, gas, electricity, cleaning, ground maintenance, repairs (that are not structural), body corporate charges and costs associated with obtaining a building warrant of fitness. You can try to restrict these or at least ask for fixed amounts that you will be liable for.

It is important that you understand your lease and the implications it has for your particular business situation.  A skilled commercial lawyer can ensure you understand your rights and obligations and help you negotiate the best deal.

To have a skilled commercial property lawyer review the terms of your existing lease, or to draft a new one, contact Wade Hansen on 09 837 6885 or at wade.hansen@smithpartners.co.nz

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