Heads of Terms for Commercial Leases: What NZ Businesses Should Review

A heads of terms document can look harmless, but it often sets the tone for the whole lease. Many New Zealand business owners skim it, assume the formal lease will fix any problems later, or focus only on rent and term while missing the clauses that really affect cost and control. That is where expensive surprises creep in.

Common mistakes include agreeing to vague renewal rights, overlooking who pays for fit-out or reinstatement, and relying on verbal promises about exclusivity, car parks, signage, or landlord works. Another regular issue is signing too early, before checking whether the premises are actually suitable for the business you plan to run.

A careful heads of terms review helps you spot those issues before you sign a lease or spend money on setup. This guide explains what heads of terms usually cover in a New Zealand commercial leasing context, what legal issues deserve close attention, and where businesses often get caught during negotiations.

Overview

Heads of terms are the commercial framework for your lease negotiation. They are often short, but they can shape your bargaining position, your occupancy costs, and the parts of the formal lease that become hardest to change later.

A good review should focus on commercial reality as well as legal drafting. If a point matters to your business model, staff, customers, or fit-out budget, it should usually appear clearly in the heads of terms before you sign.

• Rent, rent reviews, outgoings, and hidden occupancy costs
• Lease term, renewal rights, notice dates, and any early termination options
• Permitted use, exclusivity, and whether landlord consent is needed for your actual operations
• Fit-out obligations, landlord works, contribution amounts, and reinstatement at the end
• Premises details, car parks, storage areas, signage rights, and access arrangements
• Assignment and subleasing rights if your business grows, restructures, or sells
• Conditions that need to be satisfied before the lease becomes fully binding, such as board approval, finance, or consent for works
• Repair, maintenance, insurance obligations, and damage clauses that can shift major risk to the tenant
• Whether any promises made in meetings or emails are written into the document

What Heads of Terms Review Means For New Zealand Businesses

A heads of terms review is an early legal and commercial check on the deal you are being asked to accept. Before you sign a lease, it helps confirm whether the summary terms actually reflect what you discussed, and whether key risks have been left vague or pushed into the landlord's formal lease.

In New Zealand, commercial leases are often negotiated through a short summary before the full lease documents are prepared. Sometimes this is called heads of agreement, a term sheet, proposal, agreement for lease, or heads of terms. The label matters less than the substance.

The main point is simple: a short document can still have serious consequences. Even where the parties intend it to be non-binding in part, it often drives the final lease drafting. Once both sides have treated a commercial point as agreed, it can be harder and more expensive to reopen it later.

Why this stage matters so much

The most useful time to negotiate is usually before the formal lease lands in your inbox. Once the landlord's standard lease is issued, the document can be long, detailed, and weighted in the landlord's favour. At that stage, every change can become a separate debate.

This is where founders often get caught. They assume the real legal review happens later, but by then they have already accepted the commercial basics. If those basics are weak, the later contract review becomes damage control.

What a review should actually do

A proper heads of terms review should answer a few direct questions. Is the deal clear enough to proceed, are there missing terms that matter to your business, and are there clauses that expose you to more risk than you expected?

That can include checking:

• whether the rent structure is workable over the full term
• whether your intended business use is allowed under the lease and the building arrangements
• whether timing assumptions around fit-out, opening, and possession are realistic
• whether landlord promises are precise enough to enforce
• whether the end of lease obligations could create a large exit bill

Heads of terms are not just about price

Many businesses focus on headline rent and term first. Those are important, but they are not the only things that shape the value of the deal.

A lower rent can still be a poor outcome if you are exposed to broad outgoings, frequent market reviews, strict make good obligations, or limited assignment rights. A slightly higher rent may be worthwhile if you secure a rent-free period, a fit-out contribution, exclusivity, signage rights, and a clear renewal option.

That is why a heads of terms review should connect the document to your actual business plan. A café, clinic, warehouse operator, retailer, and office tenant will all care about different pressure points. Before you sign, the document should reflect how the premises will really be used.

Legal Issues To Check Before You Sign

The legal issues worth checking are the ones that can change your costs, restrict your operations, or limit your options later. Before you sign, make sure the heads of terms says what the deal actually is, rather than leaving important matters for someone else to sort out later.

1. The parties and the premises

Start with the basics. The correct landlord entity, tenant entity, and premises details need to be clearly identified. If your company has not yet signed the lease before, or if a related entity is involved, get this right early.

Check details such as:

• the legal name of the landlord and who actually owns or controls the premises
• the tenant name, especially if you trade under a business name that differs from your company name
• the exact area being leased, including any storage, yard, mezzanine, or shared areas
• whether car parks, loading zones, and signage locations are included or separately licensed

Small errors here can create confusion later, especially where there are multiple units or side arrangements.

2. Permitted use and operational flexibility

Your permitted use clause needs to match your real business activity. If it is too narrow, you may need landlord consent whenever your offering changes. If it is vague, there may be arguments later about what is allowed.

For example, a food business may need permission for takeaway service, online order collection, delivery dispatch, outdoor seating, grease trap use, or extended trading hours. A professional services business may need rights for client visits, signage, shared meeting use, or data cabling.

Before you sign a lease, check whether your intended use depends on any external consents, building requirements, or landlord approvals. The heads of terms should not assume those issues will sort themselves out.

3. Rent, outgoings, and review mechanisms

The main risk is not just the starting rent, but the full occupancy cost over time. Heads of terms should make the financial structure clear enough that you can budget properly.

Review points such as:

• base rent and whether it is plus GST
• outgoings, what they include, and whether there is any cap or estimate
• rent review dates and the review method, such as fixed increases, CPI, market review, or ratchet style protection
• rent-free periods and when they apply
• bond or bank guarantee requirements
• interest and default charges if payments are late

If outgoings are described too broadly, you may end up paying more than expected for management, maintenance, insurance, or other building costs. This should be clarified before the full lease is drafted.

4. Term, renewal, and exit timing

The lease term must work for your business plan. A term that is too short may not justify your fit-out spend. A term that is too long may trap you if the site underperforms.

Renewal rights also deserve careful attention. Check whether:

• you have an option to renew
• the option is personal to the original tenant or available to an assignee
• strict notice dates apply
• you can lose the option if there has been any breach
• the renewal rent is determined by a clear method

Many businesses think they have security of tenure when they only have a hope that the landlord will discuss an extension of lease later. If staying in the premises matters, the heads of terms should say so clearly.

5. Fit-out, landlord works, and access for setup

Fit-out clauses often create friction because each party assumes the other will pay or deliver more than the document actually says. Before you spend money on setup, confirm exactly who is doing what and when.

This can include:

• any landlord works to be completed before possession or opening
• fit-out periods, rent-free periods, and access rights before the lease commencement date
• who pays for consent fees, plans, building work, and contractor approvals
• fit-out contributions and when they are paid
• requirements to remove the fit-out and reinstate the premises at lease end

Vague wording like landlord to assist with fit-out or tenant may commence works early is rarely enough. If timing matters to your opening date, the heads of terms should be more precise.

6. Assignment, subleasing, and business changes

Businesses change. You might restructure, bring in an investor, sell part of the business, or need to sublease surplus space. If the lease is too rigid, those changes become much harder.

Review whether the heads of terms says anything about assignment or subleasing, and whether landlord consent can be withheld unreasonably or subject to broad conditions. This matters for growing businesses and for founders who want flexibility if the premises no longer fit.

7. Repair, maintenance, insurance, and damage

Repair obligations can look standard, but they can shift a lot of cost onto the tenant. The same applies to insurance excesses, compliance work, and what happens if the premises are damaged or inaccessible.

Before you sign, check whether the heads of terms deals with:

• who maintains base building services and structural elements
• whether the tenant must comply with new laws affecting the premises
• what happens if the building is damaged and trade is interrupted
• whether rent abates during inability to use the premises
• who pays insurance excesses and related costs

These issues are often left to the formal lease, but if they are commercially important to you, raise them now.

8. Conditions and verbal promises

If the deal depends on something happening first, make that explicit. This might include finance approval, board approval, due diligence, consent for signage, liquor licence timing, or completion of landlord works.

Any promise that influenced your decision should be written in. If a landlord agent says you can use the courtyard, get exclusive product rights, install extra air conditioning, or trade late on weekends, that should not sit only in an email chain or meeting note. Before you rely on a verbal promise, push for written terms in the heads of terms.

Common Mistakes With Heads of Terms Review

The biggest mistake is treating heads of terms as a harmless summary. Before you sign, assume every unclear point will become harder to negotiate later, not easier.

Focusing only on the rent

Businesses often negotiate hard on the headline rent and miss the clauses that change the real cost. Market rent reviews, broad outgoings, reinstatement obligations, and bond requirements can have just as much impact.

A lower starting figure does not always mean a better lease. Look at the full commercial package.

Leaving key promises unwritten

This happens all the time in retail and hospitality leasing. The tenant is told there will be exclusivity, extra seating, signage approval, upgraded air conditioning, or repaired services, but the heads of terms stays silent.

If it matters to your decision, get it in writing before the formal lease is prepared. Otherwise you may hear later that the promise was only indicative or subject to consent.

Signing before due diligence is complete

Some tenants commit before confirming practical issues with the site. They assume the premises can be used for their intended purpose, only to discover access limits, building constraints, or extra works after signing.

Your due diligence may involve property, operational, and regulatory questions. Depending on the business, that could include signage restrictions, services capacity, fire or accessibility issues, local authority requirements, or fit-out consent timing.

Ignoring end of lease cost

Founders often think about entry costs and monthly rent, but not enough about exit. Reinstatement, removal of fit-out, and repair obligations can be significant, especially in fitted retail, medical, or food premises.

If you are investing heavily in the site, the heads of terms should at least flag whether the landlord expects full make good or something more limited.

Using the wrong tenant entity

A lease can expose directors or related entities to risk if the tenant details are not carefully handled. Sometimes a landlord also asks for a personal guarantee, and that needs separate attention.

Before you sign a lease, confirm which entity should hold it and whether any guarantor arrangement is being requested.

Assuming standard terms are neutral

The landlord's standard lease is not usually drafted to balance both sides equally. If the heads of terms is light on detail, the standard lease may fill the gaps in a way that favours the landlord.

That is why the earlier document matters. A good heads of terms review gives you a stronger basis to negotiate the full lease later.

FAQs

Are heads of terms legally binding in New Zealand?

Some parts may be binding and some may not, depending on the wording and the parties' conduct. Even where they are intended to be non-binding, they can still shape the final lease and affect your negotiating position.

Should I review heads of terms before the formal lease is drafted?

Yes. This is often the best time to fix commercial issues, because once the formal lease is prepared the landlord may be less willing to change key points.

What is the difference between heads of terms and an agreement to lease?

Heads of terms are usually a commercial summary. An agreement to lease is often more formal and may contain binding obligations to enter into the lease once conditions are met.

Can I rely on verbal promises from the landlord or agent?

No. If a promise matters to your decision, ask for it to be written into the heads of terms or lease documents before you sign.

What should I do if the heads of terms looks short and simple?

Do not assume that means low risk. Short leasing documents often leave important issues unstated, and those gaps can become expensive once the full lease is issued.

Key Takeaways

• A heads of terms review helps you assess the real lease deal before you sign, not just the headline rent and term.
• Key issues include permitted use, outgoings, rent reviews, fit-out, landlord works, renewal rights, assignment flexibility, and end of lease obligations.
• Verbal promises about signage, exclusivity, access, car parks, or works should be written into the document before you rely on them.
• The earlier you raise commercial and legal concerns, the better your negotiating position is likely to be.
• A careful review can reduce the risk of hidden costs, operational restrictions, and disputes once the formal lease is drafted.

If you want help with lease negotiation points, fit-out obligations, renewal rights, and landlord promises, you can reach us on 0800 002 184 or team@sprintlaw.co.nz for a free, no-obligations chat.