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Being a business owner, running a company, worrying about your overheads, and ensuring you make a profit weighs heavily on the head of every CEO, director, or manager. Finding suitable premises to lease in order to run your business should not be another burden added to the list of your concerns.
South Africa’s economy continues to evolve each day with new businesses emerging, established businesses expanding, and others downsizing due to changes in industries and the increasing shift towards working remotely. Entering into commercial lease agreements is an essential component of running a business and must be given due consideration before signing on the dotted line.
This article briefly sets out what every tenant should know before entering into a commercial lease agreement to ensure that their interests are protected and that they are not entering into a contract that is not in their favour or one that they may later struggle to exit.
The Validity of a Commercial Lease Agreement
A commercial lease agreement is a contract. Once the terms have been reduced to writing, read, understood, and signed by both parties, those terms become legally binding and enforceable.
Commercial lease agreements differ significantly from residential lease agreements. While residential leases are subject to statutory protections for tenants such as the Rental Housing Act and the Prevention of Illegal Eviction from and Unlawful Occupation of Land Act (PIE), commercial leases are strictly governed by the terms of the contract entered into between the landlord and the tenant.
This means that tenants must carefully consider the terms of the agreement before signing, as it may be difficult to challenge or escape the contract at a later stage.
Terms to Watch Out For
Duration of the Lease
Commercial lease agreements can remain in place for several years. It is not uncommon for commercial leases to run for periods of three, five, or even ten years.
Tenants must pay close attention to this clause, as the circumstances of a business can change significantly over time. A clear example of this was seen during the COVID-19 pandemic, where many businesses were forced to close down, downsize, or move to working remotely. Businesses that had long-term commercial leases in place often found themselves locked into agreements they could not easily terminate.
If a lease agreement does not provide for early termination or flexibility, a tenant can be bound to the lease and continue paying rent for the entire duration of the term, even if the business is no longer able to operate from the premises.
Breach Clauses
Breach clauses set out what happens if either party fails to comply with the terms of the lease agreement, such as failing to pay rent on time or failing to maintain the premises. In many commercial lease agreements, landlords are entitled to cancel the lease and claim damages if the tenant breaches the agreement.
Tenants must ensure that they fully understand what constitutes a breach and what remedies the landlord can exercise in such circumstances. Furthermore, tenants must ensure that the breach clause extends to the landlord; should the landlord breach the agreement, the tenant needs to have recourse against them as well.
Rent Escalation Clauses
A rent escalation clause provides for the annual increase of rental payments over the duration of the lease.
Tenants often focus only on the starting rental amount and fail to consider how the escalation clause will affect them in the future. A reasonable rental amount may become significantly higher over the years if the escalation is unreasonable. Therefore, it is important for tenants to understand what the projected rental will be over the duration of the lease.
Operating Costs
In many commercial leases, tenants are responsible not only for the base rental but also for certain operating costs associated with the property. These costs may include items such as utilities, security, refuse removal, municipal charges, insurance contributions, or shared maintenance costs within a commercial complex or building.
Tenants should ensure that the lease clearly sets out which operating costs they are responsible for, whether they are reasonable, and whether these costs increase over time.
Maintenance and Repair Clauses
Maintenance and repair clauses set out which party is responsible for maintaining the premises during the duration of the lease.
In some commercial leases, tenants may be liable for maintenance, including certain structural maintenance or repairs. If this is the case, the tenant could face unexpected expenses if something within the premises requires maintenance or repairs.
Suretyships
Many landlords require the directors or owners of a business to sign suretyships when entering into a commercial lease agreement.
A suretyship means that the individual signing it becomes personally liable for the obligations arising out of the lease. This can have serious financial implications for a surety. Tenants and business owners should therefore fully understand the consequences of signing a suretyship before agreeing to it.
Early Termination
Some commercial lease agreements provide for early termination, while others do not.
If the agreement does not contain an early termination clause, the tenant may remain liable for rental payments for the entire lease period even if they vacate the premises. Where early termination is allowed, the agreement will usually stipulate the exact conditions under which it may be permitted.
Penalties
Commercial lease agreements often contain penalty clauses which apply if the tenant cancels the lease early, fails to pay rent on time, or otherwise breaches the agreement. These penalties may include additional fees, damages, or liability for outstanding rental for the remainder of the duration of the lease. You must ensure that when you agree to the terms of the lease, the penalty clauses are reasonable.
Conclusion
Entering into a commercial lease agreement is an inevitable step for a lot of businesses, but tenants need to fully understand their rights and obligations before signing.
Seeking legal advice before entering into a commercial lease agreement can assist tenants in identifying potential risks and negotiating terms that are fair and commercially viable.
Here at Van Deventer & Van Deventer Inc., we specialise in curating commercial lease agreements. Because of our niche understanding of this sphere of law, we are able to advise tenants on exactly what to look out for before entering into such agreements. Consult with us today to review your commercial lease agreement to ensure that it is suitable for your needs and that your interests are fully protected.