Lucia Caldiera of Rina Caldiera Attorneys.
While large property companies and landlords have their own legal teams covering contractual issues in the landlord/tenant relationship, smaller businesses may not have easy access to legal advice.
Lucio Caldeira, partner at Rina Caldeira Attorneys, offers the following advice to SMMEs taking the leap of renting their own business premises.
How much rent are you really paying?
Be sure to get clarity on what the total rand per square metre rental cost for your premises is to avoid unpleasant surprises when you get your first month’s rental statement. Generally, commercial premises letting costs are listed as a rand per square metre price which may exclude several additional costs. Always ask for the “gross rental per square metre”, as this may include additional charges such as operating costs, marketing fund contributions (common in retail environments), security costs and the like.
Don’t forget the deposit
There’s more to renting space than the monthly costs — before you can move in, there’s the matter of the rental deposit to include in your budgeting. A rental deposit is an amount of value (either in cash or security) that a landlord will require as security to ensure that you will pay in terms of the lease. The usual rate is between one and three months of the monthly rental value of the last year of your lease agreement. The rationale behind this is that this money will mitigate the landlord’s damages should you breach the lease agreement and they are then forced to take legal action against you.
Check your tenant installation allowance
Never forget that a lease is the embodiment of an agreement between you and a landlord and you have the right to negotiate the lease, to the point that both parties agree.
One point of negotiation is the tenant installation (TI) allowance, which is an amount that the landlord offers to the new tenant to make it easier for them to move in. This could be set off against rental, or could be used to subsidise the shop-fitting of the new space — or a combination of the two.
The general rule of thumb is that a tenant should expect to receive value equivalent to one month’s rental per year of lease. Therefore, if you’re signing a five-year lease, you should expect to receive between three and five months’ worth of rental value to be used as TI. However, the TI is not a blank cheque that you can siphon off to buy that high def TV you’ve had your eye on. Landlords generally want to know what you intend allocating the value to — this ensures that their premises benefit from a well represented tenant.
When will you have access?
Another term to negotiate in the lease is beneficial occupation, which is a period of time that the tenant has access to the premises in order to complete shopfitting, furnishing and the installation of cabling and other infrastructure — during which time they don’t pay rent.
In Caldeira’s experience, landlords who are not willing to negotiate leases or who don’t recognise TI and beneficial occupation for good reasons, “are to be approached with caution”.
Get the basics right
Once you have dealt with the issues above, there are some fundamentals that need to be checked.
Be sure that the parties to the lease are accurately recorded — ie know who your landlord is. Make sure that you are entering into the lease agreement using the correct legal entity. For instance, do you intend entering into the agreement in your personal capacity or are you representing a company or closed corporation? “If you enter into the agreement in your personal capacity, then you are personally liable for the obligations in terms of the lease such as rental payments. This may have consequences for your spouse or family should a dispute arise between the parties,” Caldeira says.
Align the duration of the agreement with your purpose. If you have purchased a franchised business, and in terms of that contract you have an obligation for a period of time to the franchisor, then you must ensure that the period of the lease agreement should at least match this time period. Should you require the premises for a short period, don’t commit to a longer period as this will lead to a dispute. Disputes cost money.
Read your lease agreement before signing it (or better yet, get a lawyer to read it). Know and understand your and your landlord’s obligations. Make sure the agreement contains all the terms you agreed upon while negotiating the lease.
Generally, if you enter a lease on behalf of a company or closed corporation, you will be asked to sign a suretyship for the obligations of your company in favour of the landlord. In other words, if your company can’t pay, you undertake personally to pay. “This is usually one of the conditions that landlords will insist upon. However, there are other options to offer a landlord instead of a personal suretyship, as we advise our client’s to avoid signing suretyships unless absolutely necessary. Try offering the landlord a larger rental deposit amount, or provide an asset owned by the company as security for the performance of it in terms of the lease agreement,” Caldeira says. “Don’t ever agree to provide a suretyship and security. This is unreasonable and unfair to you as a tenant.”
If you have to sign a suretyship, make sure that it is not a Continuing Covering Suretyship (as banking institutions are wont to provide) in favour of the landlord.
Caldeira says most important advice is: “Don’t sign anything until you’ve checked it with an attorney. A small cost upfront is preferable to major heartache later.”
The final word
“Always communicate with your landlord. Always record in writing any issues you experience, good or bad, always let your landlord know in advance if you foresee paying your rental late, and don’t avoid your landlord. Communication is key to a successful lessor/lessee relationship,” says Caldeira.