Commercial Leases: Aspects to Look Out For

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Sarah-Lawrence

Sarah-LawrenceYou want to hire premises for your business. Your soon-to-be landlord has premises to let. It sounds simple, but in fact the interests of the tenant and the landlord are not as aligned as you might assume. This article highlights some of the things a prospective tenant should be looking out for in a typical commercial lease agreement. Don’t be afraid to negotiate lease terms – it’s all part of the leasing process.

Commencement Date vs Occupation Date

Are the premises you plan to lease ready for occupation right now, or will the landlord be doing some further construction or fitting out of the premises before you move in? If the landlord has obligations to finish or fit out the premises before occupation, make sure that the content of those obligations is spelled out in the lease.

In addition, make sure the time period within which the premises must be completed is spelled out in the lease. You (the tenant) should only be charged rental from the day that you get occupation, and no earlier.

There might be a delay in getting the premises ready for your occupation. Consider requesting a clause which allows you (the tenant) to cancel the lease and walk away if that delay exceeds, for example, 60 days. If occupation is delayed indefinitely, and you have no ability to cancel the lease and find alternative premises, your business could suffer.

Check the definitions section of the lease to see when the lease agreement itself becomes effective. Do not assume that it will become effective upon signature. If the landlord has obligations to fulfil before you take occupation, the effective date must be earlier than the occupation date – otherwise you could not hold the landlord to any contractual obligations to prepare the premises, prior to the occupation date.

Deposit

It is normal practice for landlords to request a deposit. Make sure the lease agreement obliges the landlord to place the deposit amount in an interest-bearing account for the benefit of the tenant. Two or three months’ rental, held as a deposit over a number of years, could accrue significant interest. The tenant should have the benefit of that interest.

Suretyship

Where the tenant is a close corporation or a company, landlords frequently require that the shareholders or directors of that entity sign surety for the obligations of the entity under the lease.

If a person (such as a shareholder) signs surety for an entity (the tenant), the shareholder will effectively be liable to the landlord to pay what the tenant owes under the lease, if the tenant fails to make payment itself.

The shareholder will be liable for any amount that the tenant may owe under the lease – including outstanding rental, rates and taxes, damages, penalties and interest.

The terms of the suretyship (which may be attached to the lease or contained in a separate document) will determine the extent of the surety’s exposure. If you have been requested to sign a suretyship, and you are not entirely sure about what it could mean for you, consult an attorney for advice before signature.

Municipal Services – rates and utilities

Make sure that you understand which of you (the tenant or the landlord) is responsible for making payment of the municipal accounts to the municipality. If the arrangement is that the tenant pays its share of municipal accounts to the landlord, who then on-pays the municipality, request a clause in the lease which allows the tenant to ask for proof of payment from the landlord.

In addition, request a clause which allows the tenant to pay the municipality directly, if the landlord fails to pay. Having water and utilities cut off because your landlord has failed to pay the municipality (despite having received the money from you) could seriously damage your business.

Many lease agreements will provide that if the tenant fails to pay what it owes for electricity, water and utilities, the landlord is entitled to suspend those services until payment is made. The reality is that every business has cash flow problems at times. For most businesses, having the electricity and water cut off could be catastrophic.

If possible, negotiate so that the landlord has no right to suspend the services for non-payment. If that isn’t acceptable to the landlord, get the terms changed so that the landlord may only suspend the services after the tenant has received written notice to make payment, and then has failed to pay for, say, 90 days. This will give you a chance to rectify your cash flow issues without getting cut off immediately.

Destruction of the Premises

It is common for lease agreements to contain a clause setting out what will happen if the premises are destroyed, or very badly damaged (by an earthquake, a fire, or a bomb-blast, for example).

These clauses are typically drafted in favour of the landlord, and state that while the landlord has the choice of cancelling the lease or continuing with the lease and repairing the premises, the tenant has no such choice and must go along with what the landlord chooses.

Consider what would be reasonable for your business in that situation. You may wish to insist that if the premises are destroyed or so badly damaged that they cannot be occupied, the tenant has the right to cancel the lease and walk away. Alternatively, if you are prepared to give the landlord a chance to repair the premises, the landlord should be held to a timeframe within which the repairs must be complete.

Cost of repairs should never be for the tenant’s account (unless the damage was caused by the tenant being negligent or wilfully destructive).

Importantly, the tenant should never pay rental for any period in which it is denied occupation for reasons other than the tenant’s fault. If the tenant has occupation of 60% of the premises (because the other 40% is damaged), it should only be paying 60% of the usual rental.

Fixtures, fittings and improvements

As the occupier of the premises, you might want to install fixtures and fittings necessary for your particular business. You might also want to make improvements to the premises that your business requires.

Most lease agreements require the landlord’s consent for installation of any fixtures and fittings, or the making of any improvements. If you know in advance that you will want to make particular improvements or install particular fittings, get your landlord’s consent for those upfront. You could even list them in a schedule attached to the lease.

Make sure you understand what happens when you finally vacate the premises. Are you required to re-instate the premises to their original condition, at your cost? Or are you prohibited from removing your fixtures and fittings, and obliged to leave them there for the landlord without any compensation? Read the relevant clauses and negotiate them. You do not want to get caught out at the end of the lease.

Building Insurance

The landlord should have insurance in place for the building and the premises, and possibly public liability insurance as well. If the lease agreement does not mention insurance, ask questions and insist that the lease obliges the landlord to insure the premises.

A clause of this nature should permit the tenant to request a copy of the relevant insurance policy, and to request proof that the landlord has paid the premiums. It should also provide that if the landlord fails to pay the premiums on time (thereby jeopardising the insurance cover), the tenant can make payment of the premiums and recover those amounts from the landlord.

Sub-Letting and Assignment

Consider whether at any time in the future, you might want to sub-let the premises – or a part of the premises – to someone else. Ensure the lease agreement allows for sub-letting, even if the landlord’s consent to the particular sub-tenant is required.

If the tenant is a close corporation or a company which is part of a broader group of companies, negotiate the lease so that any one of the group companies may occupy the premises, without the landlord having to consent.

Most leases will contain a clause stating that the tenant may not assign its rights and obligations under the lease, without the landlord’s consent. In this context, ‘to assign’ means to transfer to another. A clause like this could become a problem for a tenant where the business is sold, because the buyer of a business usually expects to take over the lease for the business premises as part of the deal, and if the landlord withholds his consent, the buyer will not be able to take over the lease.

If possible, change the terms of the lease so that the lease may be assigned without the landlord’s consent, as long as the landlord is given prior notice of the assignment.

Limitation of Landlord’s Liability

It is not uncommon for lease agreements to purport to exclude the landlord’s liability to the tenant for any loss or damage suffered by the tenant – even where that loss or damage was caused by the landlord.

Look out for clauses of this nature. As a general rule, do not accept clauses that allow for landlords to escape liability for loss where the loss was caused by the landlord’s negligence or wilful default.

By the same token, tenants should not be called upon to indemnify the landlord for loss or damage, unless that loss or damage was caused by the tenant’s negligence or wilful default. If the landlord suffers some kind of loss through no fault of the tenant, the tenant should not have to pay for that.

If the legalese of a lease that you are considering signing has you are battling to understand what the position around liability and indemnity actually is, consult an attorney on that question.

Sarah Lawrence

Sarah has a BA from Stellenbosch and a BA Hons and LLB from UCT. She was admitted as an attorney in early 2010 after having completed her articles at ENS. She worked as an associate in ENS’ corporate commercial department for two years, before leaving to focus on her commercial practice. Sarah joined Caveat Legal in 2012.