Knowing how to approach retail leases can be difficult, especially for small business owners. When lease agreements are being drawn up, many tenants don’t fully understand what issues they should be concentrating on during the negotiation process. In this story, brought to you by Brookfields Lawyers, we explore how retailers can get the best out of their lease.
Auckland commercial law firm Brookfields Lawyers specialises in commercial leasing and advising landlords and tenants how to negotiate the best contract for their needs.
“You don’t know what you don’t know,” Brookfields partner Lizandra Bailey says. “When legal advice is sought the tenant has the comfort of mind to know they did the best they could to get the right deal.”
Retail leases are a significant financial commitment. In a shopping centre the annual rent can be upwards of $100,000 plus GST. Typically leases are signed for five to six year terms but can be up to 10 years or longer.
“Because of the size of the commitment , it’s concerning when people don’t seek legal advice,” Bailey says. “We have seen tenants signing up to $1 million (plus outgoings) commitment over a 10 year period with no legal advice.”
Bailey has more than 15 years experience acting for business owners. She has seen what can happen when tenants are out of their depth.
All manner of variables are at play when it comes to lease negotiations. From landlords entering non-binding preliminary agreements only to terminate them; to the responsibilities of both parties being unclear; to signage and exclusivity rights not being locked down effectively; right down to tenants thinking they can get out of unconditional agreements to lease.
This can lead to retailers finding themselves in the frustrating position of realising down the track that they could have negotiated better rights for themselves. Negotiating a lease can be an unpleasant process but it doesn’t have to be if the retailer gets the right advice at the right time.
The main message from lawyers is: do not sign before advice is sought.
“There’s no one who knows contracts and detail like lawyers,” Bailey says. “Typically clients don’t have time to go over everything with a fine-toothed comb, that’s a lawyers’ job.”
“We want to take the worry away from tenants so they can focus on what’s important. They can operate their business and know they’ve done the best they can to get their leases in the right shape.”
Lawyers make sure any potential issues in the lease are ironed out at the very beginning. They can future proof a contract, saving tenants money in the long run.
“Making sure the rights of the tenant are entrenched going forward is so important. We think of all the possibilities and do our best to protect against them.”
Retail tenancy legislation protects businesses across the ditch, but there is no direct equivalent in New Zealand. Any legal action between tenants and landlords can be expensive and time consuming.
Lawyers can add value for tenants in a number of areas, including: rent review provisions; landlord and tenant obligations; personal or bank guarantees; landlord contributions; ensuring signage and exclusivity rights, damage and destruction clauses, termination of liability on assignment and limiting the tenants’ obligations on reinstatement.
When to seek legal advice can be different for everyone, but if a retailer wants the most out of the resource, earlier is better and definitely before signing anything.
“Before they do anything retailers should be getting legal advice, even in non-binding agreements there are provisions we can add to protect tenants down the line.”
Legal advice for retail leasing can reduce the obligations of a tenant, avoid disputes and has the potential to save a tenant money over the length of the lease.