Agreement to Lease vs Deed of Lease

By Tania Moran and Cassie Davison from Neverman Bennett Lawyers for On Your Terms

19 July 2023

You’ve been searching for the perfect commercial premises for your business and, after months, you’ve finally found it. What’s next? Is it an agreement to lease or a deed of lease? Or both? Whether you are looking to lease a commercial property as a tenant or lease out your own property as a landlord, it is crucial that you understand the difference.  

When do you need an Agreement to Lease?

When there are works to be completed or other conditions to be met by the landlord or the tenant, before the tenant moves into the premises, you will need an agreement to lease.  If there are no works to be completed or conditions to be met before the tenant moves into the premises, then you don’t need an agreement to lease and can go straight to a deed of lease. 

What is an Agreement to Lease?

Usually, the first document to be signed in a commercial leasing arrangement is an agreement to lease. It sets out the basic commercial terms of the lease (i.e. the lease term, any rights of renewal, rent, rent reviews etc) and any requirements to be satisfied before the deed of lease can be prepared.

An agreement to lease will also detail any work that needs to be carried out by either party before the lease commences or any conditions that need to be met before the tenant can move into the premises.  Once the premises are ready for the tenant to move in and any conditions have been met, a deed of lease can be signed.

All negotiations, including the terms of the deed of lease, should be finalised and recorded in the agreement to lease before it is signed.  Where not all matters can be negotiated upfront, you can deal with those matters in the agreement to lease by adding a condition (think matters you have to spend money on which you don’t want to do before you have agreed to the terms of the lease e.g. obtaining a resource consent).

It's time-consuming and expensive for both the landlord and the tenant if negotiations are not completed and documented before the agreement to lease is signed.  It can also impact the ongoing relationship between the parties where they have to compromise to sign a deed of lease.  A fully negotiated and documented agreement to lease will start your commercial leasing relationship on the right foot and reduce misunderstandings.

When do you need a deed of lease?

A deed of lease is the final document in a commercial leasing arrangement.  It extends on the basic commercial terms contained in the agreement to lease and sets out in full detail how the day-to-day operation of the lease will work (i.e. what insurance is in place for the premises, what costs the tenant is required to cover for the premises, what the requirements are for the tenant to assign or sublet the premises etc.).  The Auckland District Law Society Deed of Lease is commonly used. While that document is reasonably fair as between the landlord and tenant, it needs to be amended to suit your specific arrangement.

Generally, the landlord will draft the deed of lease but there is no contractual obligation for them to do so.  

Do you really need a deed of lease?

Usually, a signed and unconditional agreement to lease will bind both parties to a lease by stating that if a deed of lease does not get signed, the parties are bound by the provisions in the nominated form of deed of lease regardless.  So, do you really need to sign a deed of lease then?

There are several benefits to signing a deed of lease, including:

• A deed of lease removes any uncertainty between parties. It provides assurance and comfort.  It clearly sets out the full terms of the lease so you can easily and quickly refer to it for answers should you need to in the future.
• It’s important to know exactly when your lease starts and ends. As an agreement to lease contains matters that need to happen before a tenant takes over a premises, it may only state an estimated commencement date.  Knowing your specific commencement date is essential as this determines other relevant lease dates, e.g., expiry date, any rights of renewal or rent reviews.
• Normally, agreements to lease state that they can’t be assigned – meaning it can’t be transferred to anyone else. This prevents a tenant from negotiating special lease terms and then transferring their rights to another party the landlord doesn’t want to deal with.  However, it is generally standard for a deed of lease to include the ability to assign the lease.
• A bank will commonly require a deed of lease to be signed. If a party needs to borrow money from a bank in relation to the premises, then it will make life easier if you get one signed at the outset to avoid any potential issues with this down the track.
• Keeping complete records also assists when it comes to selling the premises.

Key points

The leasing process can be complex and confusing.  You can avoid wasting money and time by signing the right document for your leasing situation.  If conditions are to be met or work must be completed before a tenant moves in, then an agreement to lease should be signed first.  If the premises and tenant are ready, then a deed of lease may be more appropriate at the outset.

If you need a simple, easy to understand Agreement to Lease with reduced legalese that is balanced and fair to both sides, see On Your Terms Agreement to Lease (coming soon).

If you have any concerns when negotiating the terms of an agreement to lease or deed of lease, please feel free to contact our property law firm partner Neverman Bennett Lawyers to discuss further.

On Your Terms makes it faster, simpler and more affordable for New Zealand starts ups and small businesses to access top quality legal solutions and connect with legal experts. Neverman Bennett Lawyers is known for its specialist knowledge and experience in all areas of property law.

Tania Moran is a Director, and Cassie Davison is an Associate, from Neverman Bennett Lawyers.  Tania has over 10 years’ experience in property law and can assist with a wide range of property matters from leasing arrangements to complex property developments.  Cassie also deals with a wide range of private and commercial property matters and has in-depth knowledge of the Land Registry.