Getting commercial leases right: protect your premises and your cash flow

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The COVID-19 pandemic and subsequent restrictions have had a significant effect on the viability of many businesses. Now is a good time to review your business’ major commitments and the impact of these in a crisis situation. In the past, the lease of your business premises may not have been given much attention. However recent developments have shown just how important having a comprehensive, well-drafted lease is when things go wrong.

Why does your leasing documentation matter?

Many commercial leases in New Zealand use an “ADLS version” lease (although there are many different types of non-ADLS lease documentation as well). This is important, as since 2012 the ADLS lease has contained a “no access in emergency” provision. The provision provides for rent abatement (essentially rent relief or rent reduction) if there is a specified emergency that prevents the tenant from accessing their premises to fully operate their business.

The outbreak of COVID-19 has seen many tenants take advantage of this provision to require a reduction in their rent. In many cases, given the effect of the lockdown, this reduction has been substantial – even up to 100 percent in some instances.

Older ADLS lease versions (pre-2012) and many non ADLS leases do not contain this “no access in emergency provision” provision, nor any other ability to claim a rent reduction, a significant disadvantage when a tenant is looking to maintain the viability of their business.

Now is a good time to review your lease

COVID-19 has highlighted the importance of reviewing your lease. You need to look at the terms and assess what impact any future lockdown (or other emergency) will have your obligation to pay the rent.

The pandemic has also highlighted a number of other issues which need to be considered when reviewing (or entering into) your lease:

  • Is the lease comprehensive – do you understand what is in the lease and what isn’t?
  • What effect will new government regulations have on the way on which you operate in your premises?
  • Is your premises suitable for the way in which you will need to operate in the future? For example, if you need to make changes to the way in which you will sell or distribute your products (or services), can you adapt your premises to suit?
  • Are the premises safe and legally compliant? 
  • Are there any outstanding issues with the state or condition of the premises that need to be addressed? This will be particularly important if such issues directly affect the running of your business.
  • Think about what would happen if you were prevented from operating your business in the usual way at some point in the future – is there anything about your premises or the structure of your rental payments that could assist you to adapt better?
  • Make sure that your lease is in writing. A conversation or a handshake can easily be ignored when things take a down turn, putting your business at risk.

Ultimately, the terms of your lease need to be fair to both the tenant and landlord. Ideally, your lease terms should reflect the nature of your business to some degree, and at the same time give some protection to your landlord for the investment they have made in the property. Your ability to make changes to, or re-negotiate your existing lease can be limited but if you are looking to sign a new lease or renew your existing lease this can be an opportunity to address these issues. In any case, a conversation with your landlord could still be worthwhile. Have a look at your current lease now – can it be adapted to work better for both you and your landlord?

Our experienced, specialist business law team will be happy to help you review your existing lease, or look over a potential new lease before you sign. Investing the time to do so now can save a lot of stress (and cash) when trouble strikes.

Our thanks to Jared Cains for writing this article.