An Agreement to Lease and Deed of Lease are two documents used in commercial property management but what is the right one for you? James Bangerter discusses the important differences between the two leases and the benefits of using a Deed of Lease.
One of the most common tasks a commercial property manager undertakes daily is reviewing Deeds of Lease when issues arise between tenants and landlords. Most of the time the lease is very clear but, in some cases, it is a matter of interpretation which makes it difficult for the two parties to agree. Experienced property managers have usually dealt with most issues so we can advise how similar issues have been settled in previous cases. We do however find that this can be a lot more difficult when parties have only ever signed an Agreement to Lease and not gone to the next step and signed a Deed of Lease.
The Agreement to Lease (ATL) and the Deed of Lease (DOL) are two different documents. The ATL sets out the broad commercial terms, e.g. the term, the rights of renewal, the rent amount and the rent reviews.
The DOL repeats all the commercial terms, but also goes into more detail about the day-to-day operation of the lease. For example, the deed of lease covers off how you’re expected to look after the building, what happens if you want to leave the premises, and what process will be followed if the tenant is ever late in paying rental, amongst other things.
We always recommend to both landlords and tenants that they take the next step and sign a deed of lease and share the cost of doing so.
There are several benefits to signing a Deed of Lease document:
- You will have a document which you and your property manager can easily refer to for answers if there is ever an issue.
- As outlined above, when you sign an Agreement to Lease you’re bound by the terms of a Deed of Lease as well, so it make sense to know exactly what a Deed of Lease contains. A Deed of Lease provides certainty and comfort.
- Your Agreement to Lease may be conditional upon certain matters. For example, your lease may not start until the landlord has finished building the premises. In this case the Agreement to Lease will only state an estimated commencement date. The Deed of Lease will then record when the building was finished and the lease started. It is always good to know exactly when your lease started so you know exactly when it will end!
- If either party is borrowing money their bank may require that the Agreement to Lease is converted into a final Deed of Lease so that all the paperwork is in order.
- Having a Deed of Lease in place is critically important if a tenant ever wishes to assign the lease to someone else. Clause 6.1 of a standard Agreement to Lease states the Agreement to Lease cannot be assigned. The aim of this clause is to prevent someone using their bargaining power to secure special lease terms and then assigning the lease to someone who the landlord isn’t prepared to deal with. If you do want to assign a lease, then you will need to sign a Deed of Lease. An Agreement to Lease cannot be assigned, but a Deed of Lease can be assigned if the right criteria are met.
The standard Deed of Lease form has changed over the years, and likely will again. Following the Christchurch earthquakes, several new provisions were added to the Deed of Lease form dealing with what should happen to the lease if the building is damaged or inaccessible. This was helpful during the pandemic and again following the recent floods.
We recommend signing a Deed of Lease document, even if you’ve already signed an Agreement to Lease. Commercial tenants and landlords should understand exactly what a Deed of Lease contains before signing any Agreement to Lease. We are having to refer to these lease documents more frequently as businesses are impacted by various market factors. Some tenants are finding it hard to pay the rent, they are questioning the responsibility for maintenance issues, and they are wondering how they can go about assigning their leases. It is easier for all involved if a comprehensive Deed of Lease is in place.
General Manager – Commercial Property
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