Commercial leases – what to look out for as a retail tenant
As a retailer, a lease is often your biggest expense, and it is therefore vitally important that proper consideration is given to your lease, as not fully understanding your obligations and rights could create major headaches later on.
- Be prepared to negotiate, and get some help – commercial landlords are notoriously unwavering with their terms, and will often present a standard lease which the tenant is expected to accept. This is why it is helpful to employ the services of a skilled attorney to negotiate on your behalf and challenge nuances that you may not be fully aware of.
- Really understand the costs – the cost of a lease is so much more than just the basic rental based on the square meterage of the leased premises. There are fit out costs (remember to find out whether the landlord provides a tenant installation allowance), parking contributions, water and effluent charges, electricity costs, common area charges, and refuse collection. Further to this, there will usually be yearly escalations, irrespective of the term of the lease.
- Suretyships and guarantees – landlords will require a deposit either in cash or in the form of a bank guarantee. Further, you may be required to top-up your deposit yearly when your rental increases. It is vital to budget for these additional costs. It is absolutely commonplace for a landlord to require the directors / members / sole proprietor to sign personal suretyship for the lease, the result of which is that should the tenant be unable to pay its debts, the landlord will be entitled to hold the surety jointly and severably liable for such debt in an action for recovery.
- Renewal – be certain to look out for a provision guaranteeing your right to renew the lease, failing which the landlord would be within its rights to simply allow for termination at the end of the lease period. This could be detrimental if you had grown a successful business with regular customers in the current location.
- Change in control – landlords like to know who they are contracting with. It is for this reason that they will often include a provision in the lease that they have to be notified of any change in control of the tenant entity, and provide consent to such change. Therefore, if at any stage of your lease you anticipate a sale of the business or majority shareholding, it is important to confirm whether your lease agreement includes any restrictive provisions in this regard.
- Maintenance, repairs and renovations – usually the tenant is responsible for the interior of the premises whilst the landlord is required to maintain the exterior. There can, however, be certain exclusions to this general rule and it is therefore important that the tenant fully understands what its obligations are, as these could be costly repairs. Landlords also often include provisions that the premises are to be renovated after a specified period. Again, this would be an added expense for the tenant and it is important to budget accordingly.
- The Consumer Protection Act (“CPA”) – many tenants often believe they can rely on the CPA where they have a dispute with a landlord. It is important to remember that the CPA only applies to consumers with a turnover of less than R2 million. Further to this, section 14.1 of the CPA provides that the renewal and termination provisions of the CPA do not apply to juristic persons, regardless of turnover. Accordingly, a tenant that is a juristic person will not be able to terminate a lease agreement prior to the termination date of the lease on 20 business days’ notice. The result of this is that a landlord will be entitled to demand payment of the full contract value should a tenant terminate a lease prior to the termination date. Should a tenant be unable to continue with the lease, however, it is advised that they approach the landlord to negotiate a workable solution.
Properly understanding and negotiating your commercial lease will be one of the first steps in a successful retail business. Commercial landlords often get a bad rap for their treatment of tenants, but many stresses and disputes can be alleviated by proper upfront negotiations. As already stated, it is ideal to appoint an attorney to help you in this regard in order to have a knowledgeable negotiator at your side.
Originally published on Retailing Arica