October 2010 - Understanding Leases (the often confusing terminology explained)
The following article was written by Seaton Read and first published in Resort Brokers Tourism Informer (Spring '10 issue):
Although with the advent of plain English drafting, commercial leases are arguably easier to understand now than once they were, they still manage to give rise to much confusion. I can still remember from my childhood the title of a pop song sung by an American called Johnny Tillotson. The song presumably about an object of his affection was called “Poetry in Motion”. My young ears heard instead “Oh a tree in motion” and so the meaning of the song, if there was any, was lost to me and for some time afterwards I felt vaguely uneasy in the presence of any plant larger than a bush.
The legal language and jargon often employed, even now, by lawyers when drafting commercial leases can also lead to confusion and misunderstanding. I am frequently reminded of this confusion by the questions that even experienced business people ask of me when I am reviewing lease documents and agreements to lease. With this in mind I thought it might be useful to explain or demystify a selection of these terms for those readers who, although experienced with the business end of leasing may be at times nonplussed with some of the terms used. I have therefore chosen a selection of some of the usual culprits and to each of them I have added a brief explanation.
Lessor
The landlord
Lessee
The tenant
Term
The duration of the time the lease is in force
Renewal of lease
Where the lease is extended pursuant to a contractual right normally given to the tenant in the lease document. Usually the existing terms of the lease are carried on and only the duration of the lease is altered. This is to be contrasted with a new lease where the parties are free to negotiate any new terms that they can agree upon but where the existing lease and all its terms comes to an end.
Rental review
Pre-agreed dates during the term of the lease at which either the landlord alone or, in some cases either the landlord or the tenant may require that the rental be reassessed. This is usually based on a market rental but is sometimes fixed to a formula such as CPI or a fixed percentage increase. Rental reviews are not to be confused with lease renewals. Frequently both occur at the same time but that is not always the case.
Ratcheted rental
Where the rental on a rental review may not be reduced below a certain point. This may be a predetermined amount, it may be the initial rental payable at the start of the lease or it may be rental payable immediately preceding the review. The distinction is significant.
Chattels
Chattels are personal property that can be completely transferred by delivery i.e. portable things, as contrasted with fixtures, which are things that are affixed to real property i.e. land and buildings, by permanent means. Chattels may be owned either by the landlord or the tenant. By law and according to their nature fixtures belong to the landlord, whether they are installed by the tenant or the landlord although this presumption may be displaced by express agreement.
Tenants improvements
These are improvements carried out or paid for by the tenant, normally to the land and buildings or perhaps to the landlord’s chattels. Surprisingly these are included in the value of the property upon rent review unless there is an express direction in the lease that they are to be disregarded.
Tenants fixtures
Tenants improvements that are structural and are carried out by the tenant to the landlord’s property. They almost always require the consent of the landlord. Because fixtures are fixed to the landlord’s buildings they become part of the landlord’s property unless the lease provides otherwise. Some leases provide that the tenant may remove their fixtures at the end of the lease. Some leases make the removal of tenants fixtures compulsory. In either case it is usual for the lease to provide that the tenant must make good the damage caused by such removal. Alternatively the landlord may elect for the fixtures to remain there as part of the landlord’s property without any payment to the tenant.
Make good
That is the term which defines the process by which the tenant shall repair the premises upon removal of the tenant’s fixtures.
Net rental
That is where the rent excludes other payments (outgoings) made by the tenant such as for rates and insurance.
Gross rental
That is where the rent includes outgoings.
Improvements rent
Additional rental calculated by applying a pre–agreed interest rate to capital expenses paid by the landlord for additions, alterations or improvements to the property, usually limited to where that expenditure has been required by local or central government. An example of this would be where additional fire detection or fire fighting equipment was required to be installed in a leased building.
Registered and unregistered leases
A leasehold interest may be registered against the title to a property. This has advantages n that it is notice to all the world of the lease and it gives protection of the tenant’s interest against, for example, a purchaser of the land and buildings who might otherwise not be aware of the lease and therefore not be bound by it, or against a person or entity who lent money against the land and buildings without knowledge of the lease and who again would not be bound by the lease should their security be realised. Not all leases can be registered however such as where the lease is for part only of a legal title and where there is no separate legal description (lot and DP number) for the land being leased.
Transfers and assignments
These occur when the leased premises change hands and a new tenant takes over. Registered leases are transferred in the same way as a freehold property interest but unregistered leases are assigned by the parties signing a deed of assignment of lease.
First right of refusal
Many long term leases give the landlord the first right of refusal to acquire the lease on sale of the tenant’s business, or the tenant the right to acquire the fee simple when the landlord wishes to sell the landlord’s buildings. First rights of refusal merely ensure that the person wanting to sell offers the property to the landlord or the tenant as the case may be upon terms that are no worse than they are offering to sell them to a third party.
Option
Options differ from first rights of refusal in that the party who has the option either the landlord or the tenant may call for the other to sell during the option period. In the case of an option the price must be pre–agreed or a formula for fixing the price must be agreed upon.
These are just some of the terms that I am asked about on a regular basis when preparing or reviewing leases for clients. Although important to all leases the lengthy terms and comprehensive obligations contemplated by leases in the hospitality industry make a basic understanding of these terms all the more important for persons involved in this industry.
April 2010 - You & Your Lease
The following article was written by Amy Hyland:
On Monday 26 April 2010, two of our partners Seaton Read and Mark Sherry ran a free seminar called “You and Your Lease” in our Boardroom on level 19 of the PriceWaterhouseCoopers Centre. Seaton and Mark are very experienced in Commercial Property and Hospitality issues, making them ideal to present the seminar which was directed towards tenants of commercial leases, and focussed particularly on Auckland District Law Society (ADLS) leases. 
The seminar was well attended by local business owners to whom our team had hand-delivered fliers, as well as many of our current clients who we thought might find the seminar useful.
It covered a range of issues which regularly face tenants including rent reviews; assignments, subleases and transfers; defaults and consequences; renewals; and maintenance obligations. Based on their accumulated experience Mark and Seaton also suggested some simple solutions in a “tips and tricks” section, and there was plenty of time for questions and answers.
After the seminar Seaton and Mark, together with Senior Associate Nalini Meyer and Solicitor Amy Hyland were available to answer questions one-on-one, discuss the issues raised in the seminar, or just have a chat – and of course enjoy some drinks and nibbles with attendees!
Feedback from the seminar was extremely positive, with attendees saying they felt that the topics were relevant to their needs, and well presented. Some of the comments included: “very well presented, in layman’s terms”, “very informative, learnt a lot, plenty of options and support available now”, and “a good refresher and great to catch up with some associates”.
Due to the success of the seminar, we would like to hold further seminars on the same theme, possibly in different locations around the city.
Would you be interested in attending a similar seminar in the future? Do you know anyone else who might benefit from attending? If so please contact either Stacey Lynn or Stephanie Waterhouse on the email addresses below, so that we can discuss future opportunities such as this with you.
stacey.lynn@harmans.co.nz
stephanie.waterhouse@harmans.co.nz
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