Contractual and legal insights into commercial leases

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This article does not purport to be exhaustive, but will highlight some important issues and aspects you need to be aware of when negotiating and concluding a commercial lease.

Beware the standard form lease

It may seem to be the simplest and cheapest route to use the letting agent’s or landlord’s standard form lease agreement, but unless the lease is tailored to suit your specific requirements, you could end up with problems later. These leases are generally designed to protect the landlord’s interests.

Premises

Describe the premises as accurately as possible, as to location and size. Attach a floor plan if available. Know what access and use the tenant has to common areas such as hallways, rest rooms, kitchens, lifts and whether rental will be charged on these areas and at what rate. It is also imperative, if the rental is based on lettable area', as opposed to a fixed rental, that the parties agree on how the premises are measured, and what is included in the lettable area e.g. balconies, terraces, storerooms.

The South African Property Association has a standard measurement method which is commonly used. The tenant should be afforded an opportunity after occupation to note defects in the premises, which the landlord is then required to remedy. Whether the landlord remedies all defects or only material defects, is the subject of negotiation. If the defects are of such a nature that the tenant cannot enjoy the use and occupation of the premises, the landlord will be in breach.

Rental

Understand what is included and excluded from the rental. Often a base cost rental is charged per square metre for the premises. Over and above that, there may be charges for the landlord’s operating costs, parking, rates and taxes, body corporate levies, consumption charges for electricity, water, refuse collection and sewerage, insurance. Know who is paying for what.

Lease period and renewal

Whilst the initial period is agreed, leases will often state that any renewal is to be agreed between the parties at a later stage. If you are looking for certainty, this is not ideal, as if the parties cannot agree there will be no renewal and the lease ends. Negotiate provisions that guarantee the renewal, provided certain conditions are met and include an objective basis to determine the rental in the renewal period.

Deposits, suretyships, guarantees

It is usual for the landlord to require a deposit to be paid either in cash or in the form of a guarantee. The landlord may also require personal suretyships. As tenant you may wish to negotiate that this requirement be waived in exchange for a more substantial deposit or parent guarantee.

Occupation date

Where the premises are still being constructed the lease may provide for the agreed occupation date to be moved to a later date when the premises are certified complete by the landlord’s architect. There should be a cut-off date agreed after which if the premises are still not available for occupation, either party can cancel. It is wise for the tenant to negotiate a rent-free period after occupation within which to effect installations.

Installations and reinstatement

If the landlord is contributing towards the cost of installation, specify exactly what the tenant installation allowance is, how and under what circumstances it must be paid. It is also imperative that the parties agree what installations will belong to the landlord, what belongs to the tenant, and what must be removed by the tenant when the lease ends. The tenant may be required to reinstate the premises to the condition they were in at the occupation date – if occupation was given in a shell state, the reinstatement obligations could be onerous. The landlord would be well advised to request a reinstatement guarantee to cover the costs of reinstatement if the tenant fails to do this.

Repairs and maintenance

Generally the tenant is responsible for maintaining the interior and the landlord for the exterior of the premises, the tenant returning the premises at the end of the lease in the same order it was given, fair wear and tear excepted. The parties could conclude what is called a 'triple net' lease where the tenant is responsible for all maintenance, repairs and upkeep, as if the tenant is the landlord. The parties must be certain as to the extent of their respective obligations.

Warranties and exclusion of liability

In most standard commercial leases the landlord will give very few warranties and will contract out of all liability, even negligence or damage caused by landlord’s breach of its obligations. As tenant you would want the landlord to be held responsible at least for its gross misconduct, wilful misconduct or losses caused as a result of the Landlord’s breach.

Change in control

It is prudent for the landlord to insist that change in control or ownership of a juristic tenant only be done with its consent, as the change in risk profile could be detrimental to the landlord.

Redevelopment

It suits a landlord to be allowed to redevelop its property, and in its discretion to cancel the lease or relocate the tenant, however this can cause considerable cost and inconvenience to the tenant. Compromises can be negotiated, e.g. landlord’s contribution towards the tenant’s relocation costs, preventing the landlord from cancelling for an initial period.

Consumer Protection Act

The landlord needs to be aware that the CPA could apply to its leases – where it leases property in the course of its business and where the tenant is a natural person or juristic person with an asset value or annual turnover of less than R2m per annum. This can have far-reaching consequences for both parties, e.g. any lease longer than two years may be unenforceable and the tenant may be entitled to cancel the lease, even a fixed-term lease, on 20 business days' notice at any time.

The aim is to negotiate lease terms that match the very different needs of both landlord and tenant and parties would be well advised to seek legal advice before concluding a lease. Even if the tenant is unable to renegotiate a landlord’s standard form lease, at least the tenant will be aware of potentially onerous and one-sided provisions.