Developing or refurbishing buildings for lease
What is an ‘agreement to design, build and lease’?
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Developers of commercial property will generally want to secure an ‘anchor tenant’ or tenants before they commence the design and construction or refurbishment of a building. They will do so by entering into an agreement with the tenant or tenants to “design, build and lease” the building.
An ‘agreement to design, build and lease’, is an agreement between a landlord and a tenant that provides for the tenant to lease a premises (or part of a premises) from the landlord following design and construction of the premises by the landlord.
For the tenant it will ensure a purpose-built facility (save for any tenant fitout work that is to be carried out by the tenant). For the landlord it will help provide the necessary tenant commitment and construction detail that the landlord requires to commence construction.
Terms of the agreement
The ‘agreement to design, build and lease’ (Agreement) can take various forms. It could be a bespoke agreement drafted by the parties’ solicitors or, as is often the case with smaller buildings, using The Law Association of New Zealand (formerly known as the Auckland District Law Society) form of Agreement to Lease with an extensive set of further terms added to cover all facets of the construction and lease.
Some of the more important terms that are usually included in the Agreement are discussed below:
Conditions: The Agreement may need to be made subject to either party satisfying certain conditions before it becomes unconditional. The conditions will ultimately depend on the stage of the design/construction and requirements of the parties. The landlord will often require the Agreement to be conditional on obtaining resource and building consent and finance. It may also be conditional on the tenant approving the landlord’s plans for the premises; and conversely the landlord approving the tenant’s fitout plans.
Dates: The Agreement usually includes several important dates.
The ‘access date’ is the date that the tenant will gain access to the premises to start its fitout and is typically subject to the project manager or architect confirming that construction has reached a certain stage.
The commencement date is the date that tenant’s lease of the premises will commence. This is generally tied to ‘practical completion’ of the construction of the premises and issue of a code compliance certificate or certificate of public use.
Some Agreements include a sunset date by which the construction of the premises must be completed. If for any reason construction has not been completed by this date, then the tenant can cancel the Agreement.
Landlord and tenant works: The Agreement will provide for the work to be completed by the landlord (i.e., construction of the premises) and any work to be completed by the tenant (i.e., fitout of the premises). These clauses will set out the standard of construction required and other relevant details with reference to the plans and specifications for the build. The Agreement should consider how any variations to the plans and specifications will be dealt with and how and when any required remedial work will be carried out.
Term: Landlords entering into an Agreement often require a substantial initial lease term reflecting the landlord’s investment in the premises. This will obviously be a matter for negotiation between the parties and can vary markedly based on several factors.
Rental: The simplest way to provide for the rent payable under the lease is for the parties to agree a flat rental to apply prior to signing the Agreement. More often the Agreement will provide for a base rental, calculated using an agreed $/m2 rate and the approximate rentable area of the property taken from the plans and specifications, with the actual rent to be determined by a final measure following commencement of the lease. In some cases, the parties may agree a rental based on the cost of construction or a base rental which is subject to a market review immediately following commencement of the lease.
Tenancy inducements: Some form of tenancy inducement may be required to secure the tenant. The quantum of the inducement can vary significantly and will be subject to the market at the time. Inducements can take several different forms, the most common being a ‘rent free’ period during which the tenant is not required to pay rent. Others include contributions to fitout and capital payments. Ultimately the form of inducement will be dictated by the requirements of the individual parties.
Form of deed of lease: The Agreement will often include a schedule with the form of the Deed of Lease (Deed) to be signed by the party’s following commencement of the lease. The Deed is usually a standard form Deed amended to incorporate the parties’ specific requirements or in some cases a bespoke form of Deed prepared by one of the parties (typically where a party has a specific form of lease that they require).
If you require any assistance entering into an Agreement to design, build and lease please contact a member of Cavell Leitch’s commercial leasing team.