What Tenants Should Negotiate When Entering a New Commercial Lease in New Zealand | NZ Legal

Negotiating a commercial lease can feel uncomfortable. There is often a perceived power imbalance — the landlord has the premises, you need them. Many tenants are reluctant to push back too hard for fear of losing the opportunity.

But the reality is that commercial leases are negotiated transactions, and many of the standard provisions that landlords present as non-negotiable are, in fact, regularly modified. A lease that is not right for your business can cost you money, restrict your ability to operate, and lock you into obligations you cannot meet.

Having a lawyer assist with the negotiation adds genuine value: they know what is market standard, where landlords typically have flexibility, and how to frame requests in a way that does not unnecessarily antagonise the other side.

The negotiating landscape

Commercial lease negotiations in New Zealand are typically carried out between the tenant and the landlord’s real estate agent (for the Heads of Agreement) and then between lawyers (for the Agreement to Lease and Deed of Lease). Most negotiations happen at the Heads of Agreement stage — once you have signed an Agreement to Lease, the terms are much harder to change.

The leverage you have as a tenant depends on market conditions, the quality of the premises, and how motivated the landlord is to secure a tenant. In a market with high vacancy rates, landlords are more flexible. In a tight market, you may need to be more strategic about which points to focus on.

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Choose your battles. A landlord who makes multiple concessions on minor points may be less willing to move on the one clause that actually matters to your business. Identify your must-haves early and lead with those.

1. Fit-out and make-good

The three things your lease covers

Almost every commercial tenant will need to fit out a building for their specific needs. Your lease will cover:

1. Your right to do the fit-out — including what works require landlord consent and what design standards apply
2. The landlord’s contribution — whether the landlord will pay for any works as an incentive
3. Make-good obligations at lease end — what condition you must return the premises to

Tenant-favourable vs landlord-favourable positions

Issue	Tenant-Favourable	Landlord-Favourable
Fit-out consent process	Consent not to be unreasonably withheld; deemed given after 10 working days	Landlord has full discretion; no deemed consent
Make-good at lease end	Return to condition at commencement (documented in condition report); fair wear and tear applies	Full reinstatement to bare shell; all fit-out to be removed
Landlord fit-out contribution	Cash contribution or landlord's works; specified in lease schedule	No contribution; tenant bears all fit-out costs
Rent-free period	6–12 weeks rent-free at commencement to cover fit-out period	No rent-free; rent commences from lease commencement

What to negotiate

The make-good clause is often the most significant issue at the end of a tenancy. If you fit out the premises extensively (partitions, flooring, kitchen, meeting rooms), you could face a substantial reinstatement cost at lease end. Key points to negotiate:

• The make-good standard should be return to condition at commencement (documented in a condition report), not return to “original condition” or “bare shell” (which is a much higher and costlier standard)
• Fair wear and tear should be expressly excluded
• The lease should specify which fit-out items the landlord wants removed at lease end (ideally confirmed in writing before you invest in them)
• If the landlord is paying a fit-out contribution, get the terms documented clearly — amount, timing, what works it covers, and whether it creates any reinstatement obligations

2. Rent and outgoings

Base rent

Base rent is the fixed monthly amount for the premises. While rent is often treated as non-negotiable, in markets with elevated vacancy the advertised rent is frequently the starting point for negotiation. A lawyer with market knowledge can tell you whether the asking rent is consistent with recent comparable transactions.

Outgoings — what you are actually paying

Commercial leases commonly require tenants to pay outgoings on top of base rent. In multi-tenanted buildings, outgoings are apportioned by floor area. Typical outgoings items include:

• Rates (local council rates for the property)
• Building insurance premium
• Building Warrant of Fitness costs
• Fire service charges
• Common area cleaning and utilities
• Building management fees
• Rubbish collection

Outgoing item	Tenant-Favourable	Landlord-Favourable
Capital expenditure (e.g. new roof, lift replacement)	Excluded from outgoings — landlord's cost	Included in outgoings — amortised over useful life
Building management fees	Capped at a fixed percentage of base rent	Uncapped; includes time spent managing the building
Outgoings cap	Annual outgoings increases capped at CPI or a fixed percentage	No cap; market-rate outgoings pass-through
Outgoings reconciliation	Annual reconciliation with audited accounts; access to supporting invoices	Estimated outgoings only; no audit right

A key issue is whether the outgoings schedule includes capital expenditure items — major building upgrades, plant replacement, or strengthening work. These are properly the landlord’s cost and should not be passed through to tenants as operating outgoings. If you see items like “lift replacement programme” or “building upgrades” in the outgoings schedule, push back.

3. Lease term and renewals

Finding the right balance

The lease term affects your flexibility and the landlord’s willingness to invest. Landlords generally prefer longer terms because they reduce vacancy risk. Tenants generally prefer shorter terms (or shorter terms with more renewals) because they preserve flexibility.

An average commercial lease term in New Zealand is three to six years. Where a landlord has agreed to make a significant fit-out contribution, they will typically require a longer initial term (six to ten years) to recover that investment.

Structure	Tenant-Favourable	Landlord-Favourable
Initial term	3 years with two 3-year renewals	6 years fixed with no renewals
Renewal mechanics	Tenant exercises renewal by notice 3–6 months before expiry	Tenant exercises renewal by notice 12 months before expiry; deemed to have expired if not exercised
Renewal rent	Market rent at renewal, but not less than rent at expiry (tenant-favourable ratchet)	Market rent at renewal with no floor — could go down, but also no cap on increases

If you need certainty for the medium term (to justify a fit-out investment or for business planning), a longer initial term with a lower make-good obligation may be preferable to a short term with a high risk of having to vacate.

4. Rent reviews

How rent reviews work in New Zealand

Rent reviews are the mechanism by which the rent is adjusted during the lease term. There are three main types used in New Zealand commercial leases:

Market rent review: The rent is reset to what the premises would command on the open market at the time of review. This can go up or down. Most market rent review clauses include a “ratchet” provision — meaning the rent cannot fall below the rent at the start of the review period, only go up or stay the same. A genuine two-way market review (without a ratchet) is more common in leases negotiated in favour of institutional tenants.

CPI review: The rent is adjusted in line with the Consumer Price Index (CPI) movement over the review period. This gives predictability but does not adjust for changes in local property market conditions.

Fixed review: The rent increases by a fixed percentage at each review date (commonly 2.5–4% per annum, or a fixed dollar amount). Fixed reviews provide maximum predictability for both parties.

Review type	Tenant-Favourable	Landlord-Favourable
Market review	Two-way market review (genuine — can go down)	Ratchet only — can only go up or stay flat
CPI review	CPI with a cap (e.g. CPI but no more than 3%)	Uncapped CPI — fully exposes tenant to inflation spikes
Fixed review	Fixed at 2.5% p.a. — predictable, modest increases	Fixed at 4%+ p.a. compounded — materially above inflation
Review frequency	Every 3 years	Every year

5. Personal guarantees

What a personal guarantee means

In most commercial leases, landlords require security for the tenant’s performance of its obligations. The most common form is a personal guarantee from the directors or shareholders of the tenant company.

A personal guarantee means that if the tenant company defaults on its lease obligations (fails to pay rent, breaches lease terms), the guarantor is personally liable to the landlord — potentially including their personal assets.

The sting in the tail: ongoing guarantee liability after assignment

Here is the part that many tenants do not realise until it is too late: if you provide a personal guarantee and later assign the lease to a new tenant, your guarantee may continue to apply until the end of the original lease term. This means you could be personally liable for breaches committed by a tenant you no longer have any connection to.

This outcome is not inevitable — it depends on the specific wording of the guarantee — but it is common in landlord-standard lease forms.

Guarantee term	Tenant-Favourable	Landlord-Favourable
Duration	Guarantee limited to initial term only; not to renewals	Guarantee runs through all renewal terms
Post-assignment liability	Guarantee released on assignment	Guarantor remains liable for breaches by assignee
Amount	Capped at 6–12 months' rent and outgoings	Unlimited — full lease liability for full term
Type of security	Bank guarantee or bond; no personal exposure	Personal guarantee from all directors/shareholders

Negotiating the scope and duration of personal guarantees at the outset can make a significant difference — both at the time you want to exit the premises and on a future sale of the business.

6. Exit rights — ending the lease

Cancellation and early termination

Commercial leases generally do not include a right to terminate early unless specifically negotiated. If you need to exit a lease before the end of the term, your options are typically:

• Assignment — find someone to take over the lease with landlord consent
• Subletting — sublet the premises and continue paying rent to the landlord
• Negotiated surrender — agree with the landlord to cancel the lease, usually for consideration (a cash payment or loss of bond)
• Breach and cancellation — if the landlord is in breach, you may be entitled to cancel; this is an extreme step and requires legal advice

Negotiating a break clause at the time the lease is entered into is the most effective way to protect against future business changes. A break clause allows the tenant to terminate the lease on specified notice (typically 3–6 months) at a specified point in the term (for example, at the end of year three of a six-year lease). Landlords are generally reluctant to agree to break clauses, but they are more achievable where the landlord has not made a significant fit-out contribution.

Early termination provisions

The lease should also address how the landlord can cancel in the event of tenant default. Under the Property Law Act 2007, the landlord must follow a specific process before cancelling a lease — serving a notice to remedy specifying the breach and allowing the tenant reasonable time to fix it. A tenant who receives a notice to remedy should take legal advice immediately.

Commercial lease negotiation checklist

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1. Have a lawyer review the proposed lease before signing anything — including the Heads of Agreement
2. Get a condition report prepared and signed off before commencement
3. Negotiate make-good standard — return to condition at commencement, not bare shell
4. Confirm which fit-out items must be removed at lease end (get it in writing)
5. Review the outgoings schedule — exclude capital expenditure items
6. Check whether outgoings are capped or subject to an annual audit right
7. Assess the rent review mechanism — fixed or CPI reviews give more predictability than uncapped market review
8. Negotiate the personal guarantee — aim for a cap and a release on assignment
9. Consider whether a break clause is possible — particularly if the initial term is over 5 years
10. Get landlord fit-out contributions and rent-free periods documented clearly in the lease schedule

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

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Sources

1. Property Law Act 2007 (NZ)Governs commercial leases and tenant rights.
2. ADLS Commercial Lease (Sixth Edition)The standard form commercial lease widely used in New Zealand.
3. Contractual Remedies Act 1979 (NZ)Governs the remedies available for breach of contract, including commercial leases.