Commercial Deed of Lease - Strengthen it Immensly

[Wezz]

Hi - This could be a powerful thread for all of us if we all take a couple of minutes out of our day to contribute. Please share your wisdom.

When I get a new Deed of Lease drawn up, I have a few extra things that try very hard to get included into the Lease.

These include items such as:

• A Full (not soft) Ratchet Clause.
• 100% of Outgoings Paid by Tenant.
• The Landlord retains all tenant enhancements, unless the Landlord chooses for them to be taken out at the end of the Tenancy.
• All Rent to be paid By Automatic Payment on agreed date of each month.
• Annual Adjustment for the Consumer Price Index (CPI).
• 2 Yearly Rent Reviews.
• Rights of Renewals that don't fall at the same time as the Rent Review Dates.
• The longest Term possible.
• Personal Guarantees.
• Demolition Clause.

I'm hoping that Olly and the rest of you can add to this list and help the rest of the Commercial Property Community.

Cheers and bring on the advice!

[Davo36]

Hi, been too buys to post up unitl now. Good topic tho.

Surely you don't get all of these things in any one lease. No tenant would sign that would they?

What do you consider to be a full ratchet clause? And how does that differ from the standard ADLS clauses?

David

[Wezz]

Surely you don't get all of these things in any one lease. No tenant would sign that would they?

I'm trying to find all of the items that you "could" put in the Deed of Lease. Negotiations would start after that.

Do you have any to offer Davo?

Or anyone else for that matter? Is there anything that you would like to see in your Deed of Lease?

[Davo36]

I see.

So yes, I agree with most of your list above.

One more I would like to add which has caught me in the past is some clause to stop them assigning. At the moment you can't really refuse.

I had a good software company as a tenant. They were so good they needed bigger premises. So a property investor from Wellington (I'm in Akl) bought a building and fitted it out for them. He then took over my lease. He then preceeded to just not pay the rent, outgoing etc. Subleased the premises without my permission to a security guard training co. So had big gorillas in my property wrecking it.

The property investory just wanted me to quit the lease because he didn't want the premises, and didn't want to have to pay for it. So he didn't care.

I didn't want it vacant as it was kinda hard to lease.

So I was a bit stuck for a while, nothing much I could do apart form jump up and down a lot.

So I'd like to take out the subletting/assignment totally really.

David

[brettc]

In my leases assignment still requires landlords approval. A change of use would not be unreasonable grouonds for refusal.

Also, with the example above, did the first tenant not have contigent liability?

[Davo36]

Yeah, there was no change of use. It was office space continuing to be used as office space. In fact the person who took on the lease left it vacant (until the sublease). How can you argue against that?

Yes the first tenant was still liable. Mostly I managed to get the rent paid by whinging to them. They'd complain to their own landlord who had the lease on my place and tell him to pay.

But if that hadn't worked, I would have been able to sue. Now being able to do that, and that being a practical, workable solution are 2 different things. I imagine it would cost a lot and may not be worth it.

David

[brettc]

Hi - This could be a powerful thread for all of us if we all take a couple of minutes out of our day to contribute. Please share your wisdom.

When I get a new Deed of Lease drawn up, I have a few extra things that try very hard to get included into the Lease.


These include items such as:

• A Full (not soft) Ratchet Clause.
• 100% of Outgoings Paid by Tenant.
• The Landlord retains all tenant enhancements, unless the Landlord chooses for them to be taken out at the end of the Tenancy.
• All Rent to be paid By Automatic Payment on agreed date of each month.
• Annual Adjustment for the Consumer Price Index (CPI).
• 2 Yearly Rent Reviews.
• Rights of Renewals that don't fall at the same time as the Rent Review Dates.
• The longest Term possible.
• Personal Guarantees.
• Demolition Clause.

I'm hoping that Olly and the rest of you can add to this list and help the rest of the Commercial Property Community.

Cheers and bring on the advice!

So as a tenant with several leased properties, I would expect most of these in my lease. The only one of the above I am really likely to take issue with is the "longest term possible". This I would try and limit to avoid long run contigent liability.

PGs and Demo clauses are to be expected, and I'd rather pay 100% of outgoings than have the LL managing them and charging me a mgmt fee.

With regards to a non assignment clause, this would be a big deal for me, as that impacts on my ability to sell my business.

[OllyN]

Some more

Wherever possible I would add the following :

(1) Rents reviews based on CPI or market which ever is the higher.
(2) Full ratchet i.e. the rent will never be less than the last rent paid ( a soft ratchet is where the rent is not less than that at the commencement of the lease).
(3) Permitted use should be extremely tight so that on any assignment, there may be the opportunity for another bite at the cherry.
(4) Tenants to redecorate the interior at their expense every 5 (?) years.
(5) Must be open during all normal business hours.
(6) Only use the 1993 ADLS version of a lease ( or similar version) as later ADLS leases become more tenant friendly.
(7) Use Direct Debit Authority rather than A/P's

The are many more angles and twists, but it then becomes a case by case situation.

[Xav]

Wherever possible I would add the following :
(6) Only use the 1993 ADLS version of a lease ( or similar version) as later ADLS leases become more tenant friendly.

The later versions reflect changes in the law. Using an earlier form won't help you.

[fudosan]

I am new to this game (retail, to be specific). My understanding is that prospective tenants sign the Agreement to Lease, and then later enter into a formal contract using the Deed of Lease. Therefore, are these strict clauses you mentioned above also included in the Agreement to Lease so they know the conditions up front? Otherwise they have no way of backing out as the Agreement to Lease is binding.

Do you append these clauses to the Second Schedule?

[Xav]

My understanding is that prospective tenants sign the Agreement to Lease, and then later enter into a formal contract using the Deed of Lease.

An agreement to lease has the same force as a Deed of Lease in New Zealand law. Both are a formal contract.

Therefore, are these strict clauses you mentioned above also included in the Agreement to Lease so they know the conditions up front?

Yes. The agreement to lease provides that the parties shall enter into a Deed of Lease on the terms of the current standard form subject to the terms of the agreement to lease. So if you want to alter those standard terms you need to do so in both the agreement and deed.

Do you append these clauses to the Second Schedule?

In the lease, yes. Don't have an agreement to lease handy so not sure if it schedule 2 or not but you just add them to (or vary) the existing standard conditions.

[fudosan]

Thanks Xav for the clarification. I was referring to Agreement To Lease, ADLS 4th Edition 2008 where I have seen people appended further conditions to the Second Schedule section.

If both Agreement To Lease and Deed of Lease have the same binding power, are there situations where Agreement To Lease alone is enough? I'm dealing with sub $1 m retail units and whenever I request for copy of lease, I am given only Agreement To Lease. I have not seen one Deed of Lease yet (only studied Olly's example in the book Commercial Real Estate). The Agreement To Lease developed and used by Bayleys is even simpler (only 4 pages). This leads me to suspect that in smaller commercial deals only the Agreement to Lease is used but not Deed of Lease. Am I wrong?

[Wezz]

Agreement to Lease & Deed of Lease

Therefore, are these strict clauses you mentioned above also included in the Agreement to Lease so they know the conditions up front? Do you append these clauses to the Second Schedule?

Hi Fudosan - Yes you have to make sure any special clauses are included in the Agreement to Lease. The tenant has to know (and agree) to the terms of the Agreement to Lease. Extra requirements or changes/alterations to the Deed of Lease are usually carried out via a 'Schedule of Amendments to Auckland District Law Society Deed of Lease', which of course needs to be attached to your Agreement to Lease. This Schedule of Amendments, (and any other alterations that were made to your Agreement to Lease document), will then be transfered to the Deed of Lease when it's drawn up.

If you try to just 'introduce' these extra requirements/alterations at the Deed of Lease stage, you may find your tenant will say "I didn't agree to any of this". Then you're on the back foot, paddling fast in the wrong direction.

My advice to you would be to get your solicitor to draw up your first Agreement to Lease (which will include your 'Deed of Lease Wish List' (which is what this Posting is all about ), then you will have a template to move forward with. If you're not comfortable with using a template moving forward, just get your solicitor to draw up all of your Agreement to Lease and Deed of Lease documentation (which is a prudent move, considering that you are going to rent, for a period of time, one of your greatest assets.

Cheers and I hope this helps.

[Xav]

If both Agreement To Lease and Deed of Lease have the same binding power, are there situations where Agreement To Lease alone is enough? I'm dealing with sub $1 m retail units and whenever I request for copy of lease, I am given only Agreement To Lease. I have not seen one Deed of Lease yet (only studied Olly's example in the book Commercial Real Estate). The Agreement To Lease developed and used by Bayleys is even simpler (only 4 pages). This leads me to suspect that in smaller commercial deals only the Agreement to Lease is used but not Deed of Lease. Am I wrong?

In my experience it is uncommon for there not to be a Deed of Lease. I have come across it before as well though. Conversely, where there isn't a Real Estate agent involved usually you don't bother doing an Agreement to Lease and just do the Deed.

The Agreement to Lease incorporates the terms of the Deed by reference, which is why they are essentially the same. The other difference is that the Agreement is not usually executed as a Deed (witnessed etc). The only risk I can think of off the top of my head with not doing a Deed of Lease is the risk that the tenant will try and argue later that they were not aware of all the terms of the Deed of Lease, however that argument would usually be easily disposed of (although it is always better to avoid the argument entirely where possible).

The other difference is in the limitation period for bringing any claim (agreement vs deed), however I would think that is unlikely to be an issue.

Usually the tenant pays your solicitors costs so there would be no cost to you in having the Deed entered into. It may displease the existing tenants though.

[Orkibi]

Changing the Lease/term renewal notes from the standard 3 month prior to 6-8 month.