PART 1: DESIGN, BUILD AND LEASE AGREEMENTS

Posted by Dasha Kovalenko on September 25 2020 in News

This article is part-one of a two-part series. In this article we will focus on issues that Landlords need to consider. The next article will consider issues that the Tenant needs to consider. We act for a number of landlords and tenants who regularly enter into agreements to design, build and lease (Agreement(s)).

Under the Agreements, the Landlord usually develops land / premises they already own (or will own). Such an arrangement can monetise a Landlord’s existing assets and provide a steady cash flow, but there are several things that the Landlord must consider before entering such an arrangement.

What is being delivered by the Landlord?

The Landlord needs to be clear on what the Tenant is expecting to be delivered under the Agreement. The Agreements usually include very detailed explanations on works expected to be carried out by Landlord, the standard of such works as well as plans and specifications relating to the same.

In addition, the Landlord needs to make sure that there is an element of flexibility, whereby the Landlord can vary the works, plans and specifications and substitute materials, if necessary.

It is not unusual for the Tenant to carry out their own fit-out works either simultaneously to the Landlord works or once the Landlord works are completed. The Landlord will need to make sure that it is aware of what the fit-out works will entail and that these are of a good quality. The Tenant may also likely request early access to complete the works, but the Landlord will need to make sure that this is done at their direction and discretion so as not to interfere with the Landlord’s works and in accordance with the requirements under the Health and Safety laws, regulations and for the relevant insurances to be in place.

Further, for purposes of flexibility the Landlord may also wish to retain the right to have access to the premises after completion/commencement of lease to complete any minor outstanding works or defects.

Other professionals

The Landlord will have to engage engineers, architects, and builders for carrying out the development of land/premises. These will need to be reputable professionals who will keep the Landlord updated.

The Landlord will usually enter other contracts for consultancy services or building contracts with these other parties – the Landlord will need to make sure that these documents are also carefully reviewed form a legal perspective.

Conditions

The Agreement may include several conditions. The extent of conditions will depend on the stage of the development as well as obligations that the Landlord may have to other parties/things out of the Landlord’s control. Examples of conditions that the Landlord may include:

1. Funding to complete the development;
2. Completion of purchase of the land on which the development is to occur;
3. Obtaining resource consents and building consents;
4. Board approval; and
5. Surrender of an existing lease.

Completion/Commencement of Lease

Usually lease commencement does not start on the set date, because there are often several moving parts that need to align for completion and subsequent commencement to occur. It is not unusual for the Tenant to require confirmation of practical completion of the Landlord’s works before lease can commence (the Landlord may wish to be able to control this i.e. the works are complete when the Landlord confirms they are complete).

Notwithstanding the above, it is usual for the commencement date to align with practical completion, which is triggered by issue of code of compliance, meaning there is sign off from Council that the building is complete.

Commercial Terms

The Landlord will have to consider the commercial terms such as, annual rental and review of the same, term, renewals, and any other further terms. The Landlord is making a big investment in the development and will have to make sure that it is getting a good return.

Security

The Landlord may wish to request security from the Tenant for performance of Tenant’s obligations under the Agreement and subsequently the lease. It is commercially accepted to expect that a deposit is payable upon the Agreement becoming unconditional. The deposit is applied to the rent payable and provides a small buffer in case anything goes wrong at the start. However, in addition to the deposit a Landlord should also consider requesting either a bank guarantee or cash bond. This will give the Landlord the ability to draw upon these in the event there is a Tenant breach. There is also an option of a personal guarantee.

Form of Deed of Lease     

In order not to have uncertainty or any issues down the track, it is in the interests of both parties to agree to the form of lease. This is usually done by way of attaching the form of lease to the Agreement.

Final Remarks

The Agreement is a complex/bespoke document that will require careful consideration and assessment of risk given your particular circumstances and requirements. The above are only some of the considerations that a Landlord needs to take into account when entering into or preparing an Agreement. We would be happy to discuss with you risks and issues that are specific to you as the Landlord and provide you solutions to address these.

Richard Hatch | Partner
t +64 9 300 8761 | Richard.Hatch@shieffangland.co.nz

Dasha Kovalenko | Associate
t +64 9 379 0655 | Dasha.Kovalenko@shieffangland.co.nz