31 May 2024
Signing a commercial lease is a significant commitment for any business. Whether you're a startup seeking your first office space or an established company looking to expand, understanding the intricacies of a commercial lease agreement is crucial.
Craig Mott, Head of Business Development at the Rawson Property Group, explains exactly what you need to know to make a smart decision that protects your rights and allows your business to thrive.
Key components of a commercial lease agreement
“South African commercial leases are less standardised than their residential counterparts, so you will find a fair amount of variation between them” says Mott. “That said, there are six core components that every commercial lease should include.”
- Parties involved
“That’s the lessor or landlord – or their representative – and the lessee or tenant,” says Mott.
2. Premises
“There should be a clear definition of the location and specific space being leased, including
the physical address and unit numbers, if applicable,” says Mott. “Pay attention to things like parking, which is often leased separately at an additional cost, and the rules around any shared spaces like communal reception areas, kitchens and/or bathrooms.”
3. Lease term
“There are two key aspects of the lease term to look out for,” says Mott. “The first is the lease duration. The most typical range is between three and five years, but longer and shorter options are not unheard of. Long lease terms offer more stability, while short lease terms mean more flexibility. Tenants will need to weigh up the risks and benefits of each.”The second thing to look out for is renewal options. Mott says the ability to renew a lease – and the conditions of that renewal – can be vital for a business that requires continuity, or has high setup costs that make frequent moves unaffordable.
4. Rental terms
“Commercial rent has several components,” says Mott. “The first is the base rental – the agreed amount paid every month, or annually in some cases. The second component is the municipal charges and utilities – your rates, water, sewerage and electricity. The third is operating costs – things like security, cleaning, landscaping and general maintenance.”
Mott explains that some leases include operating costs in their base rental. These are known as gross leases. Other leases bill these separately, in which case they are known as net leases. Either way, Mott says it’s vital that tenants fully understand their annual financial commitment – particularly in light of the fact that almost all commercial leases include an annual escalation clause.
“Escalations rates usually apply to the base rental rate and parking, and are normally around 8-10%,” says Mott. “That can make a big difference to your bottom line over the course of a multi-year lease, although you may be able to negotiate this down if you’re signing up for three years or longer.”
5. Deposits and guarantees
“Commercial security deposits are usually equivalent to 1 to 3 months’ rent, including parking, operational costs and rates,” says Mott. “The exact figures can be negotiated based on the tenant’s credit rating and history. In some cases, a personal or bank guarantee may be requested for extra security.”
Commercial deposits are refundable, with interest, at the end of the lease term, subject to certain conditions. In rare cases, tenants may be permitted to hold the deposit in their own bank, subject to an irrevocable bank guarantee.
6. Use of Premises
“Commercial properties are always leased for specific purposes, whether that’s retail, office space, hospitality or industrial,” says Mott. “Each property comes with certain restrictions that could impact your business operations. Make sure you understand exactly what you are and aren’t allowed to do on the premises before committing to anything.”
Landlord and tenant responsibilities
“The specific breakdown of commercial landlord and tenant responsibilities can vary from lease to lease,” says Mott. “There are some standards that can normally be relied on, but everything should be laid out clearly in the lease agreement.”
1. Typical tenant responsibilities
Rent Payments: Timely payment of rent and any other charges.
Maintenance and Repairs: Generally responsible for interior maintenance and minor repairs. Check the lease for specifics.
Insurance: Tenants must typically insure their contents and may need liability coverage.
Compliance: Adherence to all applicable laws and regulations, including zoning laws and health and safety standards.
2. Typical landlord responsibilities
Property Maintenance: Structural repairs and maintenance of common areas.
Insurance: Coverage for the building and common areas.
Utilities and Services: Sometimes included, but often the tenant pays directly. Ensure clarity in the lease.
Common clauses to watch out for
“Commercial leases aren’t designed to trip anyone up, but they can be on the more complicated end of the spectrum,” says Mott. “These are a few of the clauses that tenants need to look out for – and fully understand – to avoid nasty surprises down the line.”
- Escalation Clause: Understand how rent increases are calculated. Ensure the formula is clear to avoid unexpected costs.
- Maintenance and Repair Clause: Clearly outline who is responsible for what aspects of property maintenance to prevent disputes.
- Termination Clause: Conditions under which the lease can be terminated by either party. This includes notice periods and any penalties for early termination.
- Subletting and Assignment Clause: Rules regarding the ability to sublet the space or assign the lease to another party. Some landlords restrict these options.
- Default Clause: Specifies what constitutes a default (e.g., late payment) and the remedies available to the landlord, such as penalties or lease termination.
- Force Majeure Clause: Addresses what happens if unforeseen events (e.g., natural disasters, pandemics) prevent either party from fulfilling their obligations.
Conclusion
Signing a commercial lease in South Africa involves careful consideration and understanding of numerous factors. By familiarizing yourself with the key components, responsibilities, and common clauses of a commercial lease agreement, you can secure a space that meets your business needs while safeguarding your interests.
“When in doubt, always seek professional advice to navigate the complexities of commercial leases effectively,” says Mott. “We have some exceptionally skilled commercial property professionals in this country who would be only too happy to put their knowledge to work for you.”
