A well-structured commercial lease is vital to protect landlords and tenants alike. This is our roundup of some of the key considerations to ponder before putting pen to paper.
When it comes to renting commercial property, the lease agreement is far more than just paperwork; it’s the foundation of the relationship between tenant and landlord and, as such, needs careful consideration if it is to protect the rights of both parties.
The rights and obligations of tenants and landlords are governed by the Rental Housing Act when residential leases are entered into, however, no specific legislation covers commercial rental contracts. The principles of South African contract law apply and certain requirements like mutual agreement, consideration, capacity to contract and lawful purpose must be satisfied.
Certain aspects of the Consumer Protection Act may apply to a commercial lease, unless renting property is NOT in the landlord’s “ordinary course of business”. If it is, any “natural person” or “juristic person” whose asset value or annual turnover, at the time of signing the lease, is less than R2 million is deemed to be a consumer and will be covered by the Consumer Protection Act.
Such tenants are protected from unfair terms in the lease, but what constitutes an unfair or unreasonable term is vague, so anything that could be interpreted as such, and anything that imposes obligations or risks on the tenant, needs to be carefully discussed and explained by the landlord.
Marketing the property, duration of the lease, cancellation, expiry and renewal procedures may also be governed by the Consumer Protection Act.
As the terms of the contract will be the guiding framework for how the parties will interact with one another, it is important to be guided by an experienced commercial property professional and to have sound legal advice, whether you are a tenant or a landlord.
Types of commercial lease agreements:
There are three basic forms of commercial lease agreements.
- Gross lease: The tenant pays a fixed rental, and the property owner covers the property expenses, the assessment rates and other levies.
- Net lease: The tenant pays a fixed rental plus a proportional share of the property’s operational costs.
- Triple net lease: The tenant bears most of the property expenses, including maintenance costs, the assessment rates and other levies, and a lower basic rental applies.
A managing agent can explain these options in detail, help both parties choose the best fit for their needs, and ensure the lease terms are transparently documented.
Key clauses in a commercial lease agreement
A well-crafted commercial lease should clearly outline every detail, from rent terms and maintenance duties to sub-letting conditions and termination procedures. Think of this document as both your shield and sword: safeguarding your rights and defining your responsibilities. Working with a managing agent will ensure that your lease is well-drafted and that both parties are legally protected and fully aware of their obligations throughout the tenancy.
In addition to clearly stating the parties involved in the lease (the landlord and tenant), to ensure clarity on who is legally bound by the agreement, the lease must include a detailed description of the rental property, including the address, the type of property it is (e.g. office, industrial space, retail space) and specific features that apply to that property. It is important to be accurate in these descriptions to prevent disputes later on.
Some of the contract terms that will help facilitate a mutually beneficial arrangement that protects all parties include the following:
Rental and escalation
This clause stipulates the monthly rent, due dates and payment methods. Escalation refers to how and when rent may be adjusted. This may be a fixed percentage, or it could be linked to inflation. To avoid unexpected costs, it is important to understand the formula used for rent increases.
Lease duration and renewal
The start and end dates of the lease, distinguishing between fixed-term and periodic leases, is one of the most important terms in any commercial lease. Depending on the type of space and its use, lease durations can range from one year to 10 years. Important considerations include information on lease renewals and renegotiations, which should be clearly stated in the agreement. A managing agent can assist with negotiating these terms to suit your business plans or investment strategy.
Utilities and other costs
In many cases, tenants are responsible for payment of more than just the monthly rental. Depending on the lease agreement, tenants may also be required to cover certain operating costs, parking and municipal rates. A clear breakdown of these costs should be stated on the lease agreement so that tenants can plan their monthly expenditure accurately from the outset.
Security deposits
Commercial security deposits – usually the equivalent of between one and three months’ rental and must be detailed on the rental agreement, which should specify the amount of the deposit, where it will be held, conditions for its return, which party will receive interest accrued and how it may be used, e.g. for damages.
Maintenance and repair
This clause should outline who is responsible for what when it comes to property maintenance. It should list the specific responsibilities of the landlord, as well as those of the tenant. In most cases, tenants are responsible for maintaining the interior of a rented space, and the landlord is responsible for maintenance of the exterior, as well as structural maintenance. Maintenance is another good reason for working with a managing agent; they will coordinate maintenance obligations, ensure the work is done properly, and avoid disputes.
Permitted use of the property
A tenant’s business operations should align with what is permitted by the landlord and what is allowable in the space. To prevent future disputes, the lease agreement should clearly state the intended use of the property. It should also address whether or not the property may be altered and set out the process whereby the tenant should seek the landlord’s consent to make alterations. It is usually the tenant’s responsibility to ensure that the intended use of the premises aligns with the current zoning of the property.
Subletting clauses
This clause sets out whether the tenant is allowed to sublet the property (i.e. assign the lease to another party) and under what conditions. Restrictions on subletting and conditions under which this action is permissible should be stated in detail.
Dispute resolution
A clear understanding of how disputes between the landlord and tenant will be resolved is a must. It plays a crucial role in defining the terms of the rental agreement, ensuring legal compliance, and protecting the rights of both parties, and may involve negotiation, mediation, arbitration or legal action. An experienced managing agent can help resolve disputes quickly and cost-effectively, often avoiding the need for litigation.
Termination and exit clauses
The lease agreement should clearly state the grounds for termination of the lease – such as breach by either party or failure to maintain the property, as well as notice periods or penalties for early termination, as applicable. Some leases contain automatic renewal clauses, which should also be clearly stated on the agreement to avoid unwelcome surprises down the line.
Ultimately, whether you are a landlord or a tenant, investing the time to understand and negotiate the terms of your commercial lease agreement and seeking professional legal advice when necessary will protect your interests.
Partnering with an experienced commercial property professional or managing agent adds a layer of protection and expertise. They act as your guide, negotiator and administrator, making sure your lease agreement is not only sound on paper but practical and sustainable in a way that aligns with your business goals and protects your rights.
