PART 2: DESIGN, BUILD AND LEASE AGREEMENTS - TENANTS
Posted by Dasha Kovalenko on November 2 2020 in News
This article is part two of a two-part series about Design Build and Lease Agreement (Agreement(s)). For the first part, follow this link.
In the first article we looked at entry into Agreements from the landlord’s perspective. This article focuses on entry into Agreements from the tenant’s perspective.
Under the Agreements, tenants have the opportunity to have delivered to them by the landlord, premises that align with their commercial/bespoke operational needs. However, if you are a commercial tenant, and wish to enter into an Agreement, there are a number of fishhooks that may appear in such Agreements, of which you should be aware of.
What is your expectation?
The Agreement should provide certainty on the state of the premises you receive on commencement date. To provide the most certainty as to what is being delivered, the Agreement should include:
- Very detailed specifications and plans and a requirement of these to be approved by you as tenant;
- For consents obtained for the landlord works to be approved by you as tenant;
- That the landlord works are to be in accordance with the relevant detailed plans and specifications, consents, all requirements of Council and the law;
- Your right as tenant to inspect the landlord works.
You should either be able to approve variations/substitution and/or the landlord must ensure that such changes do not materially impact your use of the premises.
To allow for flexibility (in achieving premises aligned with your requirements), you may request an ability to ask the landlord to vary the landlord’s works - if that is the case, this needs to be accounted for in the Agreement.
Fit out is usually carried out by the tenant at tenant’s cost, although this largely depends on what is commercially agreed by the parties. If you are paying for your own fit out, in order to save costs, you may wish to do so before lease commencement. In such cases, early access terms for fit out will need to be agreed with the landlord.
You will need to consider what conditions need to be included in the Agreement given the particular circumstances. Some common examples of conditions you may include are:
- If the company tenanting the premises is an overseas person, and the land falls under the Overseas Investment Act 2005 (OIA) criteria, then OIA approval;
- Board approval;
- Entry into any other third-party agreements that are necessary for the Agreement to go ahead (i.e. funding or service providers); and
- Resource consent for business use.
Completion / Commencement of Lease
You will need to make sure that certain deliverables are achieved by the landlord at/prior to the commencement date. Usually commencement of lease will be triggered by practical completion. The definition of what practical completion is needs to be carefully reviewed. For example, you should as a minimum require:
- Code compliance certificate for the premises;
- Practical completion certificate from an engineer, that the landlord’s works have been completed in accordance with the detailed plans and specifications;
- If the landlord does not own the land at the time the parties enter into the Agreement, then a copy of the record of title showing the landlord as registered owner should be provided before commencement of the lease;
- Provision of any other certification (i.e. seismic rating, healthy homes tick etc).
You will also need to consider whether the commercial terms of the Agreement are agreeable to you. There are numerous properties standing empty on the rental market now, and this could be a great opportunity for you as tenant to agree a good deal, whether it is by a reduced rental, a rental holiday or other concessions.
It is not unusual for the landlord to request a deposit be paid upon signing of the Agreement or the Agreement becoming unconditional. Make sure that the deposit is held in the landlord’s solicitor’s trust account until lease commencement date or termination and it clearly states what happens to the deposit- for example if the Agreement does not go ahead, the deposit should be returned to you.
In addition, the landlord may request either a bank guarantee or a cash bond (Security). Ultimately that is operating capital that will be tied up during the period of the lease. You will need to negotiate with the landlord to make sure the amount for the Security is appropriate/proportionate, that you are given notice to remedy before the landlord calls upon the Security and that any Security is released immediately upon the termination or end of the lease, subject to any breaches or holding over by the tenant.
You may wish to consider inserting and negotiating into the Agreement an ability to terminate, whether it is due to a certain event (i.e. if third party funding is required for rent payments, then such funding coming to an end) or a no fault termination. In order to sweeten the deal, you can offer to cover the landlord’s expenses relating to re-letting and/or paying a termination fee.
Usually Agreements will prohibit assignment and/or require consent from the landlord to do so. If you are signing up for a “long term” lease, which the Agreements usually are, then you will need to consider whether you will require assignment in the future (whether it is by way of restructure or other) and to negotiate the provision into the Agreement. For example, the landlord may be agreeable to you assigning if certain criteria can be met (as per the standard ADLS form of lease provisions) or provided the assignment occurs to an associated/related party.
You need to make sure that any instruments the Landlord may register on the title, do not materially impact on your use of the premises. For example, if your use of premises directly contradicts a land covenant, this will mean that you will be precluded from using the premises in the way you need to because they would breach the land covenants (land covenants usually also apply to tenants). A way to avoid this is to make sure that anything that is registered on the title is first approved by yourself as tenant.
Our two-part article series illustrate some of the key complexities in drafting Agreements. Whether you are a Landlord or a Tenant, our team is able to guide you in making sure that your risk exposure is limited. Feel free to reach out to us to see how we can assist you.
Richard Hatch | Partner | Richard.Hatch@shieffangland.co.nz
Dasha Kovalenko | Associate | Dasha.Kovalenko@shieffangland.co.nz
This paper gives a general overview of the topics covered and is not intended to be relied upon as legal advice.