June 28 2024 10:00
This is a guest article by Savannah Solomons of Solomons Attorneys and Solomons Legal Consulting. She has worked with a range of companies including start-ups, large groups and multinationals. In this piece she delves into the nuances of commercial leases. Contact Savannah at: savannah@solomonsattorneys.co.za or on 073 503 0812
Considerations
- Introduction
Commercial property is an investment and a commercial lease protects your rights as a property owner. Unlike private housing, which is governed by the Rental Housing Act 50 of 1999, there is no legislation which governs a commercial lease. Commercial leases are therefore vital to ensure that the commencement and termination of the least and the deposit are protected by agreement.
The Consumer Protection Act also does not apply to any Juristic persons with an asset value or annual turnover or less than R2m, and will therefore generally not be applicable to commercial leases.
- Legal Framework
- Mention the primary legislation governing commercial property leases, such as the Common Law and the Rental Housing Act.
- Explain the role of the Consumer Protection Act (CPA) in regulating lease agreements.
2. Types of Commercial Leases:
- Gross Lease:
A gross lease is an agreement where the tenant pays a monthly fixed rent. In this case the landlord will be responsible for all of the operational and maintenance expenses on the property, which typically include property management, insurance, utilities, and taxes.
- Net Lease:
A net lease agreement varies slightly from a gross lease because it provides for more involvement on the part of the tenant.
The tenant will have a stipulated rental and will also have a proportional share of some of the other operating costs of the property.
The landlord in this case will cover the cost of maintenance and operations for the common areas of the building along with taxes and insurance.
- Triple Net Lease (NNN):
A triple net lease is when a landlord distributes all cost for the common area across all tenants. Costs for the common area includes:
- maintenance;
- property taxes;
- property insurance.
This is the opposite of a gross or full service lease.
Landlords and tenants alike should understand the pros, cons, and implications of each type of commercial lease beforehand to understand their rights and obligations in terms of the lease and whether it is suitable to each party before the lease is signed.
By understanding the types of leases and the type of lease presented landlords and tenants can ensure that they avoid disputes and the potential for unnecessary costs on both sides.
3. Key Components of a Lease Agreement:
- Duration:
Is the lease for a fixed-term vs. month-to-month leases. Fixed term would refer to a lease signed for a specific period, for example 12 months, while month-to-month leases run on a monthly basis.
This is important because the damages for early termination of a fixed term lease can be severe while a month-to-month lease may be terminated on 30 days which is beneficial to the tenant but provides no security for the landlord.
- Rent and Escalation Clauses:
How rent is determined and increased over time. This is important to detail in the contract to ensure that the tenant is aware of the agreed rental escalation terms and there is no room for dispute.
- Security Deposits:
Security deposits are required to be paid upfront and will be applied to any damage to the property once the lease has terminated. The landlord is entitled to deduct the damages from this deposit. The deposit is required to be kept in an account but interest is not required to be paid to the tenant at the end of the lease in the case of a commercial lease. This is different from the practice for residential leases.
- Maintenance and Repairs:
This clause in the lease is specifically designed to determine whose responsibility it is for the duration of the lease to deal with maintenance and repairs and to highlight which maintenance and repair responsibilities are that of the landlord and which of these responsibilities are that of the tenant.
- Use of Premises:
This clause provides the restrictions and allowances on the property’s use by the tenant and should be reviewed carefully on a case by case basis.
4. Negotiating Lease Terms:
- Importance of thorough negotiation to balance the interests of both landlord and tenant.
- Tips on negotiating favorable terms, such as flexible lease durations and tenant improvement allowances.
5. Rights and Responsibilities:
- Landlord Rights:
- to collect rent;
- for the tenant to maintain property maintenance standards;
- to evict non-compliant tenants.
- Tenant Rights:
- to have a safe and habitable premises;
- to privacy;
- to fair treatment.
- Responsibilities of both parties:
It is both parties responsibility to comply with lease terms and local laws and to maintain an amicable relationship in order to avoid disputes and additional costs.
7. Termination of Lease:
- Grounds for terminating a commercial lease:
- Termination by notice;
- Termination by mutual agreement;
- Termination by breach of contract.
- Legal considerations and risks associated with terminating a commercial lease:
Terminating a commercial lease in South Africa is subject to certain legal considerations and risks. These risks are associated with the landlord and tenants rights and obligations, stipulated notice periods, and the grounds for termination. If a tenant in a commercial lease does not follow due process they run the risk of having a court order against them compelling the tenant to:
- Return the premises to the landlord;
- Pay the remaining rental for the entire duration of the lease period;
- Fully comply with the other obligations in terms of the lease;
- Potentially pay the legal costs of the landlord.
8. Practical Tips:
- Importance of legal advice: Consulting with a property lawyer before signing.
- Due diligence: Conducting a thorough inspection of the property.
- Clear documentation: Ensuring all terms and conditions are explicitly stated in the lease agreement.
9. Conclusion:
It is clear that the legal landscape of commercial leases is vastly different to that of residential leases. The lease for a commercial property governs the entire relationship between landlord and tenant and will dictate the risk on termination of the lease by both the landlord and the tenant.
For this reason, it is vitally important to seek professional legal advice when either drafting or signing a commercial lease agreement to understand the risk beforehand. Not only to ensure that neither party is tied into a lease that is commercially not viable for their companies but also to reduce the risk of delay and acrimony associated with commercial lease disputes.
Should you need any legal advice before entering into a commercial lease, either as the landlord or tenant, you are free to contact me at the following details:
Savannah Solomons
Cell: 079 503 0812 Email: savannah@solomonsattorneys.co.za
