Legal Talk – Leases of Commercial Property from a Tenant’s Perspective

By far the greater number of businesses are operated from rented (as opposed to owned) premises. In every case there is a lease between a landlord and a tenant. Such leases need not necessarily be in writing, but may be constituted by way of an oral agreement or even by conduct. From an evidential point of view it is desirable that leases should be reduced to writing and signed by the parties.

I would also venture to say that the majority of business premises, whether industrial, retail or offices, are owned by financial institutions and/or property funds. A large number of such premises are owned by smaller land owners and investors. Customarily these landlords have "standard" forms of lease which are prepared on their behalf and generally are intended to protect the landlord’s interests. This is often done skilfully and in such a manner that the "standard" form of lease appears to be fair and innocuous. Understandably landlords have significant investments which must be protected – both in the sense of the protection of "bricks and mortar" and the protection of the rental income to be earned from the premises concerned.

Landlords, and particularly owners of larger portfolios, are generally not willing to depart from their "standard" lease terms and will do so only in respect of large or "anchor" tenants. Lease terms which vary from tenant to tenant impose a significant additional administrative burden on landlords as standardised policies and procedures cannot be implemented.

However, all of this does not mean that smaller tenants should not challenge some of the more onerous provisions contained in the so-called "standard" leases and that they should merely rely on the integrity of the landlord concerned. Circumstances change. Market rentals may escalate at a rate greater than the escalation rate provided for in a lease concerned. A landlord may wish to redevelop the property. Any number of circumstances may arise which may cause a landlord to enforce its strict legal rights in terms of a lease to the potential detriment of the tenant.

Some onerous provisions commonly contained in "standard" forms of lease include the following –

• Renewal options are often stated to be at a rental to be agreed upon. Such renewal options are unenforceable and do not confer any rights on the tenant. Similarly, renewal options are often stated to be subject to the tenant having strictly complied with all of its obligations in terms of the lease. Effectively, if the tenant has at any time breached any of the terms of the lease, no matter how minor and whether or not any action was taken by the landlord with regard thereto, such a clause may enable a landlord to frustrate the renewal option.
• A waiver of claims against the landlord if the supply of electricity or other services is interrupted for any reason howsoever. The implication of such a provision is that if (by way of example) the tenant pays the landlord for the supply of electricity, but the landlord in turn fails to pay the authority concerned and the authority concerned terminates the supply of electricity, the tenant will have no claim against the landlord.
• A waiver of claims and indemnity in respect of any conduct, including negligent or wrongful conduct, of the landlord and/or its representatives. Effectively the landlord is protected against its own wrongdoing.
• Breach clauses where no notice to remedy the breach is required to be given by the landlord to the tenant before the landlord is entitled to invoke the remedies available to it. This will enable a landlord to terminate a lease where a tenant has committed a breach of a lease through a mere administrative oversight. The tenant is not afforded an opportunity to first remedy the breach.
• Clauses which allow the landlord to redevelop and/or alter premises thereby causing the tenant considerable inconvenience and loss of business, without the tenant being entitled to a reduction in rental.

These are but a few examples of a number of onerous provisions which are customarily incorporated in standard leases.

Bearing in mind that rental is a major expense in any business, tenants will be well advised to seek professional advice with regard to leases before they are signed. Once signed, a landlord will be even more reluctant to renegotiate the terms of a lease. Even if a tenant is unable to renegotiate the lease terms, at the very least the tenant will be aware of the onerous provisions and will be able to take steps to mitigate against the impact thereof.

Courtesy: Frans van Hoogstraten from Bowman Gilfillan