The lease is the key asset
When you buy a commercial property, you are primarily buying the income stream. Although the building may appreciate in the long run, until then it serves as the physical driver of that income. This makes lease analysis critical to your investment decision.
A property with a long-term lease to a strong tenant is worth more than an identical building with a weak tenant or vacancy. You need to understand exactly what you are buying.
We help tenants too
While this guide focuses on buyers and investors, we also help commercial tenants. Whether you are entering a new lease, negotiating a renewal, or dealing with landlord issues, lease analysis from the tenant's perspective is equally important. The same expertise that helps investors assess risk helps tenants protect their interests.
Key lease terms to review
How long is left? What renewal options exist and on what terms?
Current rent, review mechanism (market, CPI, fixed), review dates
Does tenant pay all outgoings ("net rent") or do you ("gross rent")
Who is responsible for repairs, maintenance, and make-good?
Can the tenant transfer the lease? On what conditions?
Tenant covenant strength
The lease is only as valuable as the tenant's ability to pay. Consider:
- Financial position: Can you access recent financial statements?
- Payment history: Any late payments or arrears?
- Business viability: Is their industry growing or declining?
- Guarantees: Are there personal or company guarantees?
Common lease issues we find
Real examples from our practice
- - Renewal rights allowing tenant to renew for another 12 years at below-market rent
- - Side agreements reducing rent that weren't disclosed in due diligence
- - Tenant in arrears with vendor waiving enforcement to maintain appearance of full occupancy
- - Unusual permitted use clause preventing re-letting to standard commercial tenants
- - Missing or expired personal guarantees on tenants with limited company assets
Lease variations and side agreements
Don't just review the original lease. You need to see all variations, side letters, and informal arrangements that may affect the tenancy. These might include rent abatements, agreed maintenance obligations, or expansion options.
Commercial leases are usually based on ADLS (Auckland District Law Society) standard forms, but with extensive variations. Understanding how variations affect your position requires legal expertise.
What Carlile Dowling does
Our lease analysis includes:
- • Review of all lease documents including variations and side letters
- • Analysis of key terms affecting income and risk
- • Schedule of lease expiries, review dates, and renewal rights
- • Identification of unusual or concerning provisions
- • Request list for additional documents and tenant information