The world of commercial lease agreements has evolved, and the law relating to these types of agreements is unique. Furthermore, there are several industry-standard practices that the average business owner simply does not know about. Combine this with the extensive financial and other obligations imposed on a prospective tenant, and it is simply enough to send shivers down the spine of even the hardiest entrepreneur.
When one considers the duration and costs associated with a commercial lease, usually spanning into the hundreds of thousands, if not millions, of Rands, over periods of 3, 5, or 10 years, it is easy to understand how important it is for business owners to enter into these types of agreements with open eyes, and a full appreciation and understanding for the risks and obligations involved.
To prepare this article we were very fortunate to rely on industry knowledge, which was shared with us by Warren Stevenson, a property consultant with more than 20 years’ experience in the commercial property industry.
Warren contends that a lack of knowledge and insight into the peculiar nature of commercial lease agreements on the part of not only tenants, but also some letting agents, is often a recipe for disaster.
The problem, says Warren, can be quite easily summed up as follows.
An inexperienced tenant approaches a letting agent to look for a commercial property. The letting agent is usually (but not always) not well versed in the principles of property law, and specifically the law of landlord and tenant.
The landlord, on the other hand, deals with numerous lease transactions daily, especially if they are a large company that makes commercial leases their primary source of income. Immediately, an imbalance in the bargaining power and/or bargaining acumen is apparent.
Very often, in these situations, a tenant will approach a well-meaning attorney, who will provide them with numerous reasons why they should not (under any circumstances!) sign the lease agreement because it is simply too favourable to the landlord. Very often, potential commercial lease agreements, which could have been mutually beneficial to the landlord and tenant come to an abrupt halt at this stage, because the tenant, now thoroughly spooked, ends up backing away from the deal.
In essence, the above scenario boils down to the tenant not having a thorough understanding of why seemingly “one-sided and unfair” provisions are included in a draft lease agreement, says Warren. Warren further contends that often, these provisions are simply designed to create a displacement of risk; in other words, the landlord simply cannot feasibly take all the risks associated with each of the commercial properties which they lease.
At worst, the unfortunate result is a failed lease agreement, due to the spooked tenant. At best, if the parties reach some accord, there would have been much unnecessary haggling over clauses which, Warren says, have simple solutions. In both scenarios, valuable time, and energy on the part of the landlord, the tenant, and the letting agent would have been wasted.
In addition to the above, parties further run the risk of not having the correct clauses tailored to mitigate the risks to the landlord and tenant.
All the above leads to an immediately strained landlord and tenant relationship which could have been avoided had a more seasoned third-party intervened between the landlord and tenant.
The solution, says Warren, is quite simple – appoint a property broker, consultant, or letting agent with the necessary industry experience to guide the parties to a fair, and above all, symbiotic business relationship.
To this end, Warren has highlighted some factors to keep in the back of your mind when entering into a commercial lease agreement.
- Lease agreements are always drafted to favor the landlord (and that’s okay!)
Warren pointed out to us that many lease agreements seem to, overwhelmingly, favor the landlord’s rights over those of the tenant. He clarifies, however, that this seemingly one-sided drafting is not necessarily “unfair”.
Warren qualifies this statement by pointing out that most landlords are forced to mitigate their own risk, especially, when they lease a high number of different properties.
Warren points out that most risks which are transferred from the landlord to the tenant are risks that are quite easily insurable by a short-term insurance policy. Therefore, many deadlocks can be avoided by tenants simply approaching their short-term insurance company to see whether the risk can be underwritten by an insurer.
- Moving is not always feasible (speak to someone who knows!)
Ironically, for someone who earns their bread and butter from concluding commercial transactions, Warren is a proponent of tenants not moving their offices unless a real and pressing need exists to do so.
Warren contends that, due to the financial and other implications of moving premises, it is sensible to first speak to a property professional to ascertain whether a move with the concomitant cost is really feasible and/or necessary.
- Understand the power-imbalance when it comes to negotiating with seasoned landlords.
Warren cautions against tenants trying to “go it alone” when negotiating commercial leases. It is extremely important to bear in mind that landlords generally spend much of their time in negotiation situations, whilst most business owner (when it comes to commercial leases), do not.
It is imperative for business owners, and particularly small business owners who do not have much financial bargaining power, to engage the services of an expert in the field to guide them to a mutually beneficial and fair lease.
At Vermeulen Attorneys, we are proud to partner with industry professionals such as Warren to assist our clients to achieve the best results possible.