Key Points to Consider When Leasing Commercial Property for Your SME

Leasing commercial property is a significant decision for any small to medium-sized enterprise (SME) in South Africa. The right lease agreement can support your business growth, while the wrong one can become a financial burden. Understanding the different types of lease agreements, knowing how to mitigate risks, and being aware of suretyship agreements are essential steps in this process.

Types of Lease Agreements

1. Gross Lease

   - Definition: The tenant pays a fixed rent, while the landlord covers most, if not all, property expenses such as taxes, insurance, and maintenance.

   - Best Used When: Suitable for businesses that prefer predictable costs without worrying about fluctuating property expenses.

2. Net Lease

   - Definition: The tenant pays a base rent plus additional costs such as property taxes, insurance, and maintenance (operating expenses).

   - Variants:

     - Single Net Lease: Tenant pays rent plus property taxes.

     - Double Net Lease: Tenant pays rent plus property taxes and insurance.

     - Triple Net Lease: Tenant pays rent plus property taxes, insurance, and maintenance.

   - Best Used When: Ideal for businesses that want more control over property expenses and maintenance issues.

3. Percentage Lease

   - Definition: The tenant pays a base rent plus a percentage of their sales revenue.

   - Best Used When: Commonly used in retail spaces where the landlord benefits from the tenant’s success, and the tenant’s rent varies based on their performance.

4. Modified Gross Lease

   - Definition: A hybrid between a gross lease and a net lease. The tenant and landlord share the property expenses.

   - Best Used When: Suitable for businesses that want a balance between fixed costs and shared property expenses.

5. Full-Service Lease

   - Definition: Similar to a gross lease, but includes additional services such as utilities, janitorial services, and security.

   - Best Used When: Ideal for businesses that prefer an all-inclusive package with minimal hassle.

Reducing Risks in Lease Agreements

1. Understand the Terms and Conditions: Thoroughly review the lease agreement, focusing on rent increases, renewal options, and maintenance responsibilities.

2. Negotiate Favorable Terms: Don’t hesitate to negotiate terms that better suit your business, such as longer lease periods with fixed rent increases, or capping the amount of maintenance expenses.

3. Seek Legal Advice: Consult with a legal professional who specializes in commercial property leases to ensure you understand all terms and to negotiate any unfavorable clauses.

4. Evaluate the Location: Consider the property’s location in terms of customer accessibility, visibility, and proximity to suppliers and other amenities.

5. Check Zoning Laws: Ensure the property is zoned for your type of business to avoid legal complications later.

6. Inspect the Property: Conduct a thorough inspection of the property to identify any potential issues that could lead to unexpected expenses.

Suretyship Agreements

Many lease agreements in South Africa require tenants to sign suretyship agreements. A suretyship agreement is a legal document where a third party (the surety) agrees to be responsible for the tenant’s obligations under the lease if the tenant defaults. Here’s what you need to know:

1. Understand the Implications: Signing a suretyship agreement means that if your business cannot meet its lease obligations, the surety (often the business owner or a guarantor) will be held personally liable.

2. Assess Financial Risk: Before signing, assess the financial risk and ensure that the surety can meet the obligations without jeopardizing their financial stability.

3. Negotiate Limits: Try to negotiate limits on the surety’s liability, such as capping the amount or duration of the suretyship.

4. Explore Alternatives: Consider alternatives such as a higher security deposit or a bank guarantee, which might reduce the need for a personal suretyship.

5. Review the Release Clause: Ensure there is a release clause in the agreement that allows the surety to be released from their obligations once certain conditions are met, such as a set period of timely rent payments.

Minimizing Risk Exposure

1. Create a Financial Cushion: Maintain a financial cushion or reserve fund to cover unexpected expenses or periods of low revenue.

2. Diversify Revenue Streams: Reduce dependency on a single source of revenue to ensure your business can meet its lease obligations even if one revenue stream falters.

3. Regularly Review Financial Health: Conduct regular reviews of your business’s financial health to identify potential issues early and take corrective action.

4. Maintain Flexibility: Consider shorter lease terms with renewal options to provide flexibility if your business needs change.

5. Document Everything: Keep detailed records of all communications and agreements with the landlord to protect your interests in case of disputes.

Conclusion

Leasing commercial property is a crucial step for any SME in South Africa. By understanding the different types of lease agreements, knowing how to mitigate risks, and being aware of suretyship agreements, you can make informed decisions that support your business growth and sustainability. Always seek professional advice and carefully review all lease documents before signing to ensure you are fully aware of your obligations and rights as a tenant.

For personalized legal advice and support, consider consulting with The StartUp Legal, your trusted partner in navigating the legal landscape of entrepreneurship. Our rates are affordable. Book a complimentary consultation with us using the following link:  https://calendar.app.google/iLfgvLRa1T1xS4MG6