Business Leases What have they got to do with Sandra Bullock? | ABC Business

Business Leases What have they got to do with Sandra Bullock?

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Clear skies with a chance of satellite debris

A standard clause in every lease is the business use clause. The tenant is permitted to carry on any business from the premises fitting within that business use. The business use can be quite broad, such as offices and warehouse. More commonly business use is defined with the existing tenant in mind and can be quite specific e.g. a bakery without seating that does not serve coffee (i.e. not a café). The scope of the business use provision can cause issues for the landlord and tenant down the track.

When a tenant wishes to assign the lease, it is possible that the new tenant will want to use the premises for different purposes than those specified in the lease. Any change to the specified business use requires the landlord’s consent. The tenant would

not want the assignment to be blocked for that reason. The good news for the tenant is that the landlord’s consent to a change of use cannot be unreasonably withheld (section 226 of the Property Law Act 2007), but the term “reasonable” is still tinged with uncertainty.

The landscape may be different if the landlord owns adjoining premises - for the purpose of this article we can consider those other premises as satellites. The landlord may wish to ensure that the premises are not leased to a competitor of its other tenants. The landlord will want to avoid a situation where one tenant threatens the financial viability of another. There may also be a case for having a variety of different businesses in the immediate area to attract a broad range of customers. 

 

Similarly, a tenant may want assurances that they will not be affected by competing businesses or businesses that detract from the general environment. For example, an upstairs office may not want a ground floor to be leased to a food outlet (with the associated smells and rubbish).

 

Houston, I have a bad feeling about this mission

The usual scenario for disputes over business use occurs when an incoming tenant wants to use premises previously used as say a flower shop and open a café. But consider the following situation. The tenant wanted to surrender their lease (i.e. end the lease early with the consent of the landlord). The tenant was consolidating its premises across Auckland. The landlord was happy to agree to the surrender of lease, provided that the tenant paid the landlord a break fee. The tenant expected to pay the break fee but also wanted to add a proviso – the premises could not be leased to a competitor for at least 12 months. The tenant was concerned that a competitor would lease the premises and take advantage of the goodwill generated at the location for that business. Coincidentally, the landlord (with the assistance of an agent) had already found a replacement tenant - a direct competitor. The landlord did not want to agree to the tenant’s proviso. To protect its goodwill the tenant decided to retain the lease and to sublet the premises so that it could control the use of the premises. The tenant had to subsidise the rent payments to find a subtenant, which is clearly not ideal.

Having a keen awareness of the business use that premises (and surrounding premises) can be put to in future is important. Catastrophes relating to such matters are generally avoidable if the risks are properly considered at the right time.

 

It’s not rocket science

Read leases carefully. Check the permitted business use. Depending on your perspective, consider whether it is too broad or not broad enough. If the landlord has surrounding premises, consider what sort of restrictions might be put on the tenant or landlord.

 

Leases 2 – the movie

Sandra Bullock is known to do sequels (think Speed 1 & 2 and Miss Congeniality 1 & 2). The topic of leases probably deserves a sequel. Who would play Sandra Bullock? Who will play George Clooney? Burning questions. Hang on to your seats!

 

Joshua Garnett | Partner | Whaley Garnett

PO Box 17181, Greenlane,  Auckland 1546

p. 09 520 4477

f. 09 522 0894

e. jkg@whaleygarnett.co.nz

w. www.whaleygarnett.co.nz

 

 



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