7 Things Commercial Tenants Should Look Out For in a Lease Agreement | NZ Legal

As a business owner, the terms of your commercial lease will have a direct impact on your bottom line, your ability to operate, and your flexibility to grow or exit the business. Yet many tenants sign commercial leases without fully understanding what they have agreed to — and discover the consequences only when something goes wrong.

Your lease should align with your business needs today and over the full lease term. Reviewing it with a property lawyer before you sign is the single best investment you can make in the process.

Here are the seven most important clauses to understand.

1. State of the premises

Why it matters

You will be required, at the end of your lease, to return the premises in a certain condition. How that condition is defined — and what it was at the start — determines how much it costs you to comply.

Most commercial leases include a make-good clause requiring the tenant to return the premises to the same condition as at the commencement of the lease (fair wear and tear excepted). Without a documented record of the starting condition, disputes at the end of the lease are almost inevitable.

What to do

Before signing the lease (or at least before taking possession), obtain a condition report that includes:

• Photographs of every area of the premises
• A written record of all existing defects — scratches, scuffs, damaged fixtures, stained carpet, cracked tiles, missing components
• A measured floor plan confirming the lettable area

This report protects you at make-good time. If a defect was already present at commencement and is documented in the condition report, you cannot be required to repair it. Conversely, if the condition report shows the premises were in excellent condition and you have damaged it during your tenancy, you will need to make good.

Fair wear and tear

“Fair wear and tear” is a qualification on most make-good obligations. Gradual deterioration through normal use — carpet compressed from foot traffic, paint faded from sunlight — is not your responsibility. However, damage caused by your business operations, your staff, or your fit-out works is.

Worked example

A tenant takes a five-year lease on an office. No condition report is prepared. At lease end, the landlord claims the carpet needs replacing (cost: $40,000) and the walls need repainting throughout ($25,000). The tenant argues the carpet was already worn at commencement and the paint was already discoloured. Without a condition report, this is a he-said-she-said dispute. With a condition report confirming the condition at the start, the tenant can demonstrate what was already there — and limit their make-good obligation accordingly.

2. Health and safety

The landlord’s obligations as a PCBU

Under the Health and Safety at Work Act 2015, any person conducting a business or undertaking (a PCBU) has a primary duty of care to eliminate or minimise health and safety risks. A landlord who supplies a workplace is a PCBU and has specific obligations to ensure the premises are safe.

These obligations include ensuring that:

• The building structure is sound and does not present risks to occupants
• The premises have been tested for asbestos (if built or refurbished before 1 January 2000) and an asbestos management plan is in place and shared with you
• Fire safety systems are operational and compliant
• Building Warrant of Fitness requirements are met

As the tenant — also a PCBU — you share overlapping duties with the landlord. You are responsible for the safety of how your staff conduct their work within the premises. The landlord is responsible for the safety of the physical building.

What to check before signing

Before taking possession:

• Ask for a copy of the current building asbestos register and management plan
• Confirm the building has a current Building Warrant of Fitness
• Check that fire evacuation schemes are in place and have been documented with Fire and Emergency NZ
• Ask whether any seismic assessment has been done and what the NBS percentage result was

Buildings below 34% of the New Building Standard (NBS) are considered earthquake-prone under the Building Act 2004. The local council can serve a notice requiring strengthening, which can disrupt your occupation significantly.

3. Right to quiet enjoyment

What it means

Quiet enjoyment is a fundamental right in every commercial lease: your landlord cannot interfere with your lawful use and enjoyment of the premises during the term of your tenancy. This right is implied at common law and typically also included expressly in the ADLS Sixth Edition lease (clause 5.1).

“Quiet” does not mean freedom from noise — it means freedom from interference. Your landlord cannot:

• Enter the premises without prior notice (except in an emergency)
• Interfere with your signage, access, or services
• Allow another tenant to encroach on your space
• Take actions that substantially disrupt your ability to operate

What happens if the landlord breaches quiet enjoyment?

If your landlord is interfering with your right to quiet enjoyment, you should:

1. Document the interference — dates, what happened, the impact on your business
2. Write to the landlord (through your lawyer) requesting they cease the interference and comply with their obligations
3. If the breach continues, you may be entitled to claim damages — potentially including loss of revenue and costs arising from the disruption

In serious cases, a persistent breach of quiet enjoyment can entitle the tenant to treat the lease as cancelled. These are fact-specific determinations — take legal advice before making any such election.

4. Right of exclusive possession

What it means

Your right of exclusive possession means you can control access to the premises and exclude other people from them — including the landlord — except where the lease expressly allows entry.

The ADLS lease permits the landlord to enter the premises for limited purposes, including:

• Inspecting the condition of the premises (usually on reasonable notice — 48 hours is typical)
• Carrying out repairs that the landlord is obliged to perform under the lease
• Showing the premises to prospective tenants or purchasers (with notice, and usually only in the final 6–12 months of the term)
• In an emergency

Why this matters for fit-out

If you are fitting out the premises, exclusive possession also protects your interest in the work you are doing. However, be careful: the ADLS lease includes provisions about landlord approval for fit-out works and the landlord’s ability to require reinstatement at lease end. Read these carefully alongside the exclusive possession provisions.

5. Maintenance and repairs

Who is responsible for what?

The ADLS lease splits maintenance and repair obligations between landlord and tenant. Broadly:

Landlord’s obligations (under the standard ADLS lease):

• Structural repairs — foundations, roof structure, exterior walls
• Keeping the exterior weathertight
• Maintaining common areas and shared building plant
• Repairing latent defects (defects not discoverable on inspection at commencement)

Tenant’s obligations (under the standard ADLS lease):

• Internal maintenance and minor repairs
• Keeping the premises clean and tidy
• Repairing damage caused by the tenant’s use
• Maintaining any plant or equipment specifically demised as part of the premises

Capital expenditure vs operating costs

A key negotiating point is capital expenditure. Some landlords — particularly larger institutional landlords with customised lease forms — attempt to pass capital expenditure items (major plant replacement, building upgrades) through to tenants as outgoings. A tenant should resist being responsible for capital items that go beyond the day-to-day maintenance of the premises.

A lawyer can advise on whether the maintenance and repair clauses in a specific lease are consistent with market standard or have been skewed in the landlord’s favour.

“

An ambiguous maintenance clause almost always costs the tenant money. Do not leave it to interpretation — get it clarified before you sign.

6. Assigning the lease

What assignment means

An assignment transfers your entire interest in the lease to a new tenant (the assignee). The assignee steps into your shoes and takes on all your obligations from the date of assignment forward. Assignment is typically required when:

• You sell your business — the buyer needs to take over the premises
• You want to exit the premises early without subletting
• Your corporate structure changes (for example, a restructure that moves the operating entity)

The landlord’s right to approve or decline

Under most ADLS-based commercial leases, the landlord must consent to an assignment — but cannot unreasonably withhold or delay that consent. The landlord can reasonably require:

• Evidence of the assignee’s financial standing (business references, financial statements)
• A CV or business profile of the assignee
• Confirmation that the assignee will continue the permitted use

The landlord cannot decline assignment simply because they dislike the assignee personally or want to use the vacancy to seek a higher-paying tenant.

The Deed of Assignment

An assignment is documented in a Deed of Assignment executed by the current tenant, the assignee, and the landlord. It records the parties, the date of assignment, the remaining lease terms, and any conditions attaching to the consent.

Personal guarantees and ongoing liability

This is the part of assignment that often surprises tenants. If you provided a personal guarantee at the start of the lease, you may remain liable to the landlord for breaches committed by the assignee — depending on how the guarantee is drafted. Getting legal advice before assigning (and ideally when the lease is first negotiated) can significantly limit this ongoing exposure.

7. Insurance

The landlord’s insurance obligations

Under the standard ADLS lease, the landlord is required to insure the building for full replacement value against standard risks including:

• Fire, explosion, and lightning
• Earthquake and volcanic eruption
• Flood and weather damage
• Impact damage
• Subsidence

The cost of this insurance is typically recovered from tenants as an outgoing — your proportionate share is included in the annual outgoings reconciliation.

Why this matters to you as a tenant

If the building is damaged or destroyed by an insured event, the landlord’s insurance should cover the cost of rebuilding. This protects your ability to continue trading at the premises (or, if the damage is severe, provides the framework for the lease to be cancelled under the ADLS provisions for untenantable premises).

However, the landlord’s building insurance does not cover:

• Your fit-out, plant, and equipment (insure these under a tenant’s contents policy)
• Your business interruption losses (a separate business interruption insurance policy)
• Liability claims by third parties visiting your premises (your own public liability insurance)

Make sure you understand exactly what the landlord is insuring and what you need to arrange separately.

Key lease clause checklist for commercial tenants

0/0 complete

1. Condition report prepared and signed off before taking possession
2. Make-good obligations clearly understood — what standard must the premises be returned to?
3. Asbestos register and management plan obtained from landlord (if pre-2000 building)
4. Building Warrant of Fitness current and provided
5. Quiet enjoyment clause included in the lease
6. Landlord entry rights limited to specific, reasonable circumstances with adequate notice
7. Maintenance and repair obligations clearly allocated — no capital expenditure items shifted to tenant
8. Assignment provisions reviewed — will you be able to assign on a business sale?
9. Personal guarantee scope understood and, if possible, limited in time or dollar amount
10. Landlord’s insurance obligations confirmed; tenant’s own insurance arranged for contents and business interruption

This article provides general information about commercial lease clauses under New Zealand law as at October 2022. It is not legal advice and is not a substitute for advice on your specific situation.

Get in touch with NZ Legal

Sources

1. Health and Safety at Work Act 2015 (NZ)PCBU obligations for landlords supplying workplaces.
2. Property Law Act 2007 (NZ)Quiet enjoyment, assignment, and subletting provisions.
3. ADLS Commercial Lease (Sixth Edition)The standard form commercial lease widely used in New Zealand.