Commercial leases - what to look out for
A commercial lease (Lease) can be a
complicated agreement with binding implications for both the landlord and
tenant. Before you enter into a Lease, it is vital that you understand the
rights and responsibilities of each party. The following are some of the more
notable points of a Lease for your consideration when negotiating and/or
reviewing your Lease.
One of the most basic but important considerations of a Lease is the renewal
dates. A common wording for a renewal clause is "three (3) rights of five (5)
years each". This means that once the initial term of the Lease (which is
defined in a separate clause) comes to an end, the tenant has the right to
renew the Lease for a further five years, three times. After the third term of
five years comes to an end, the Lease term must be re-negotiated by the
parties. Quick Tip: Make sure you know how to formally renew your Lease and
always do it in writing.
Whether you are a landlord or a tenant, it is important to note whether a
'ratchet clause' is present in a Lease. This clause states that the rent shall
not fall below the rent paid in the previous year. This may mean that despite
a reduction in the property value, the rental amount will either remain what
you paid previously, or potentially rise. This clause is for the sole benefit
of the landlord.
Where you may be sharing a commercial space with other tenants, it is
important to check that there are no restrictions on the type of tenancy you
intend to operate. It is also important that the portion of the outgoings to
be paid by each tenant is reflective of each tenant's proportional use of the
building and its services.
If you intend to make minor alterations to the premises to prepare it for your
tenancy, then it is important to pay attention to any "fit-out" clauses in the
Lease. These dictate the extent of alterations or works that can be carried
out, in conjunction with any further terms noted by the landlord. In the
circumstances where you have put up signage or fixtures during your tenancy,
which aren't referred to in the fit-out clause, you may be required to return
the premise to its original state when you moved in, at your cost, when you
leave. This could be problematic if the tenant has made structural changes
during their Lease term.
Inside this edition
Commercial leases -what to look out for
Employment agreements from an employer perspective
- make sure your employment
agreements, and their clauses, stand up against the law
- What needs to be considered when raising a PG
Terms of trade
Major Transactions - Your obligations as a Director and Trustee
Changes to the Food Act
What the fence?
Most Leases should specify what the tenant/landlord are responsible for with
regard to maintenance and repair if damage occurs to the premises or fixtures.
Being aware of the details of this clause is important to ensure you are not
hit with unexpected costs for maintenance or repairs. It is also beneficial to
understand what is expected of you before you begin your tenancy. Quick tip:
We strongly suggest that you take detailed notes of any items/areas that are
damaged or look worn when you move into the premise.
Finally, whether you are a tenant or landlord, you may want to check whether
your Lease can be assigned to another party. Having the ability to assign a
Lease means that you can have another party take over your responsibilities
and liabilities under the existing Lease. This is beneficial if for any reason
you decide you no longer want to continue with the Lease. Note: Check the
requirements for landlord approval regarding the potential assignment of the
Lease before signing the Lease.
What we have highlighted above are some of the more notable points of a Lease.
If you are considering entering into a Lease, we strongly suggest you meet
with a legal professional to ensure you are getting the most out of your Lease
and understand your responsibilities under the Lease.
employment agreement (Agreement) is a written agreement that contains the
terms and conditions of the employment as negotiated by an employer and
employee. An Agreement is a useful tool with which the employer can set clear
performance expectations, standards, processes and responsibilities for an
employee before they start work. It is also used as a reference point in
It is a requirement of the Employment Relations Act 2000 (the Act) that the
employer holds a copy of each employee's Agreement or they risk being fined or
prosecuted under the Act by a Labour Inspector or the Employment Relations
An Agreement is required to include the following:
1. The names of the employee and employer;
2. A description of the work to be performed;
3. Where the employee is to perform the work;
4. The agreed hours or an indication of the employee's work schedule;
5. The wages or salary payable to the employee; and
6. A plain language explanation of the services available to the employee for
the resolution of employment relationship problems, including a reference to
the period of 90 days within which a personal grievance must be raised.
An Agreement cannot contradict any New Zealand legislation or record less than
the employee's minimum rights under New Zealand law. Employers can find it
useful to include manuals, a job description and workplace policies,
procedures, rules and regulations in the Agreement to give the employee a
clearer view of the standards of practice that are expected in the workplace.
A 90-day trial (Trial Period) was introduced under section 67A of the Act by
the National Party in March 2009. It allows an employer to dismiss an employee
without reason during the Trial Period. Dismissal during the Trial Period is
still subject to the notice requirements under the Act.
The Labour Government is in the process of amending the Act so that only small
businesses with less than 19 employees can use the Trial Period. An employer
may only use the Trial Period if the clause is included in the written
Agreement. The clause must include the following terms:
* The employee will serve a Trial Period for a specified time (generally 90
* During the Trial Period the employer may dismiss the employee without
* The employee is not entitled to bring a personal grievance or other legal
proceedings in respect of the dismissal.
After the employer has finalised the Agreement with their prospective
employee, and the employee has possession of the Agreement, the employer must
give them sufficient time to read the Agreement and take legal advice if they
choose. Generally, 24-48 hours is an acceptable timeframe. However, we note
that the more complex the Agreement, the more time the employer will need to
give the prospective employee to consider it.
Before the employee starts work, the employer
should encourage the employee to sign and return the Agreement to the
employer. If the employee does not return the Agreement before commencing
work, the employer must have a comprehensive record of what was agreed before
the employee started work and a record of them attempting to retrieve the
We note that an employee cannot be on a Trial Period if they have worked for
the employer before. This also means that if a new employee begins working
without handing in their signed Agreement, by the time they give the Agreement
to the employer, they may not be considered a new employee under the Act. If
this is the case, the Trial Period, if contained in the Agreement, will no
In a case before the ERA, prior to a new employee giving her signed Agreement
to her new employer, she commenced work. She worked a total of one day at her
new workplace before being dismissed. The employer relied on the Trial Period
stipulated in her Agreement to dismiss her without reason. The new employee
successfully argued that as she had commenced work before giving her Agreement
to the employer, she was no longer a new employee and therefore the Trial
Period did not apply. A personal grievance was successfully raised for
The Agreement will guide you through the employer/employee relationship.
Therefore, it is always recommended that you seek advice from an Employment
specialist when drafting the document.
A personal grievance (PG) is a formal
process in which an employee may raise a complaint against their employer if
they have been dealt with unfairly or illegally. The grounds available to
raise a PG are outlined in the Employment Relations Act 2000 (ERA), together
with the process for raising a PG.
A PG means any grievance that you may have as an employee against your
employer or former employer, including but not limited to the following
* Unjustifiable dismissal (unless the dismissal was during a valid 90-day
* Unjustifiable action which disadvantages the employee;
* Sexual harassment;
* Racial harassment; or
* Duress in relation to membership of a union or other employee organisation.
Whether a dismissal or action is justifiable depends on whether your employer
acted in a way that a fair and reasonable employer would have done under the
circumstances prevailing at the time the dismissal or action occurred. In the
context of an unjustified dismissal, this includes assessing whether your
employer followed a fair process in dismissing you and whether your employer
had good reason to dismiss you. For example, was there an action serious
enough to warrant immediate dismissal under the employment agreement? If not,
did your employer provide you with warnings or conduct performance review
In the event of conflict in the workplace, informal discussions with your
employer or mediation are more pragmatic ways forward to find a solution and
maintain a positive employee-employer relationship before instigating a PG.
Raising a PG can be costly, time-consuming and stressful.
A PG must be raised with your employer within 90 days of the date that the
conflict or issue occurred. For example, if you are dismissed from your job,
you have 90 days from that date to make a claim for unfair dismissal. However,
your employer may allow you to raise a claim if you exceed the 90 days. If
your employer does not consent to you raising a PG after the 90-day threshold,
you can request the Employment Relations Authority (the Authority) or court to
allow your claim, due to exceptional circumstances. These circumstances may
* You were so traumatised by the conflict that you could not raise the claim
within 90 days;
* You made reasonable arrangements with an agent to raise the claim but your
agent failed to meet the deadline;
* Your employment agreement did not stipulate the services available for
resolving employment disputes including the 90-day time period to raise a PG;
* Your employer did not state reasons for dismissal when required.
You should write to your employer
detailing the conflicting event and the reasons why you are raising a PG. This
keeps a record of your claim and is also beneficial in the event that a
dispute arises. You can find a sample letter for raising a PG on the
Employment New Zealand website, to use as a starting point.
As an employee, you have three years to begin proceedings with the Authority
after raising a PG. If you exceed this time period, you can seek permission
from the Authority to continue with your claim; however, this is rarely
If the court or the Authority settles a PG, it may provide any one or more of
the following remedies to you as an employee, including but not limited to:
* Reinstatement of your job or similar role;
* Reimbursement of a sum equal to the whole or any part of the wages or other
money lost by you as a result of the grievance;
* Compensation paid to you by the employer for humiliation, loss of dignity,
and injury to your feelings; or
* Recommendations to your employer on what to do if a colleague was harassing
you; for example, transferring that colleague or taking disciplinary or
rehabilitative action against that colleague.
It is important for employees and employers to deal with each other in good
faith and have a clear understanding of their rights and obligations under an
employment agreement to avoid any PG claims. If you are in a position where
raising a PG is necessary, it is recommended to seek legal advice.
Time and time again, we are approached
by disgruntled business owners and dissatisfied customers to help resolve
disputes arising from deals made on the basis of informal arrangements. The
law certainly assists in defining and clarifying certain aspects of the
contractual relationship between parties. The starting point is usually a
consideration of what the parties intended and agreed on at the time the goods
and/or services were purchased. The intention of the parties is undoubtedly
easier to determine with clear written evidence.
In our experience, one of the most useful tools for businesses is having
effective processes and procedures for engaging a client or customer. This is
achieved through Terms of Trade, which are sometimes known as conditions of
sale or simply terms and conditions.
"Terms of Trade" in a nutshell are the terms of the contract between a seller
of goods and/or services and the buyer of those goods and/or services. Entry
into the Terms of Trade agreement creates a relationship that is legally
Effective Terms of Trade
Effective Terms of Trade protect all parties' interests by limiting any
Terms of Trade outline key rights, duties, obligations and available remedies
if the Terms of Trade are breached. This information must be simply reflected
in the Terms of Trade in a way that both parties understand.
Businesses should find a balance between protection from risk and being
user-friendly in order for third parties to understand and feel confident
about engaging in a business relationship with them.
A dispute resolution clause is an important part of Terms of Trade that should
not be excluded. This acts as a safeguard when the Terms of Trade have been
breached. Having specified avenues or methods that determine how disputes will
be dealt with may avoid costly and time-consuming resolutions such as
The standard Terms of Trade can
include (but are not limited to):
* Who the parties to the contract are;
* Expectations regarding the nature of the goods or service;
* The cost of the goods or service, including relevant factors such as fixed
or varied payments, quotes or estimates and the inclusion of taxes or GST;
* The payment method, whether guarantors are required, and whether interest
rates will be imposed;
* The recovery process when payments have not been made and debt has
* The procedure that will be followed if goods or services have not been
* Limited liability; and
* Dispute Resolutions clauses.
Terms of Trade can also include terms relating to termination of the
agreement, delivery, installation, transfer of ownership, requirements for
insurance, copyright, intellectual property, returns and warranties.
One size does not fit all
As not all businesses are the same, it is essential that Terms of Trade are
individually customised to fit a business's needs. When Terms of Trade are
incomplete or do not have sufficient information, a business risks being
unprotected in an unfavourable situation.
Terms of Trade should regularly be updated and given 'health checks': firstly,
to ensure your Terms of Trade are up to date with the law; and secondly, to
ensure consistent assessments of risks are being maintained.
Good Terms of Trade
It is ideal for any business to have Terms of Trade that are simple,
informative and complete. They will help to maximise cash flow by reducing
risks, limiting liability and offering avenues for resolution if a dispute
If your business does not currently have Terms of Trade, or if it has been
some time since they were reviewed, we recommend a review be undertaken
without delay. The preparation of Terms of Trade requires a significant degree
of legal expertise. Where this expertise is not used, there are real risks
that the business may fall into one of the many pitfalls in this area. As
such, we recommend you seek advice from a lawyer when drafting and/or
reviewing this document.
Terms of Trade are, in the long run, cost-effective and simple risk management
tools, which promote effective interactions and positive experiences between a
business and its customers.
A general principle of the Companies Act
1993 (the Act) is that the board of directors is appointed to manage and
control the day-to-day operations of a company without having direct
interference or oversight by shareholders (the owners of a company). However,
some decisions may substantially change the nature or direction of a company
and accordingly, the shareholders are required to approve these decisions.
These substantial decisions are known as major transactions.
Major transaction defined
A major transaction is where a company purchases or sells assets or incurs an
obligation that has a value of greater than half of the company's existing
assets. For example, if a company was created to own a dairy farm and it
subsequently sells the farm, this would constitute a major transaction as the
farm was a significant company asset.
Requirements of major transactions
A major transaction must be approved by special resolution, which requires a
majority of 75% of the shareholders of a company to approve the transaction.
A company cannot avoid the major transaction provisions set out in the Act;
however, it can add requirements for passing a major transaction under its
company constitution. For example, a company constitution could state that 80%
of shareholder votes are required for a special resolution in relation to
major transactions rather than 75% as provided for in the Act.
Breach of major transaction provision
Directors of a company may be personally liable if a major transaction is not
approved by a shareholder special resolution.
Where a company has entered into a major transaction without passing a special
resolution and the transaction is not yet complete, shareholders can apply for
an injunction to stop the directors from completing the transaction.
If a major transaction is not approved by the required majority of
shareholders, this is deemed to be unfair and damaging conduct by the
directors and accordingly shareholders may seek remedies. Remedies may
1. Requiring the company to buy the shareholders' shares (this is discussed
2. Requiring the company or any other person to pay compensation;
3. Regulating the future conduct of the company's affairs;
4. Altering or adding to the company's constitution;
5. Appointing a receiver of the company; or
6. Putting the company into liquidation.
Notwithstanding the list above, it may be difficult for shareholders to seek
remedies if they cannot show they incurred a financial loss as a result of the
If the major transaction is entered into without a special
resolution, this breach does not mean that the transaction is automatically
invalid. It is possible for shareholders to later approve the major
transaction if it was not entered into via a special resolution. This can be
beneficial for the company and its directors as it would be more difficult for
shareholders to later challenge the board of directors' decisions.
If you are a shareholder who voted against the major transaction but the
transaction was approved by the majority of the shareholders, you have the
right to exercise minority buy-out rights i.e. require the company to buy your
shares at a fair and reasonable price. The minority buy-out rights provisions
provide an avenue for minority shareholders who do not agree with the majority
shareholding and also allow for the majority shareholding to validly make
changes to the company.
The company may apply to court for an exemption from the obligation to buy the
minority shares on the following basis:
1. The purchase would be disproportionately damaging to the company;
2. The company cannot finance the purchase; or
3. It would not be fair to require the company to purchase the shares.
The major transactions requirements under the Act are vital for keeping
directors accountable and allowing shareholders, as the underlying owners, to
make decisions in the best interests of the company.
Changes to the Food Act
The Food Act 2014 (the Act) has been amended recently.
The key change to the Act is the introduction of a scale assessing the level
of food health and safety risk for each business dealing with food. This scale
includes all food-related businesses, from multinational food processing
companies to street-corner coffee carts.
All food businesses must adhere to different levels of control depending on
their risk. The Ministry of Primary Industries monitors this through:
Food control plans
- written plans for managing food safety on a day-to-day
basis. These are used by higher-risk businesses; and
- "a set of food safety rules for medium- and low-risk
businesses. You must register, meet food safety standards under the Act, keep
some records, and get checked."
If you have a food business, you must adhere to one of these two controls,
together with the general principles under the Act.
What the fence?
Under the Fencing Act 1978, if a property owner chooses to build a new fence
or refurbish an existing fence, the neighbouring property is expected to
contribute 50% of the total price. The proposed fence must be "adequate" to
reasonably satisfy its purpose. The neighbour is not expected to contribute
50% of the cost if the current or proposed fence is more than adequate to
serve its purpose.
A fencing notice must be served on the neighbour 21 days before starting the
build, and must include specific information. Neighbours can object to the
proposed fence altogether, or to the type of fence being built. If an
objection is raised, the neighbour must serve a cross-notice on the owner
building the fence within 21 days of receiving the fencing notice.
If an objection is raised and the parties cannot agree, options include
mediation, arbitration, the Disputes Tribunal or the District Court.
For more information, contact a lawyer who will be able to guide you through
If you have any questions about the newsletter items,
please contact me, I am here to help.
Scannell & Co - 122
Queen Street East, Hastings
(06) 876 6699 or (021) 439 567 Fax: (06) 876 4114 Email:
information in this newsletter is to the best of the authors' knowledge true
and accurate. No
liability is assumed by the authors, or publishers, for any losses suffered
by any person relying directly or indirectly upon this newsletter. It
is recommended that clients should consult S J Scannell & Co before
acting upon this information.
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