The Commercial Tenant - More Unprotected Than Residential
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Commercial tenants aren’t as well protected by legislation as residential tenants, so make sure your lease doesn’t expose you to losses.
One of the largest expenses facing a business is the monthly rental for its premises. It doesn’t help that, often, the business owner is substantially disadvantaged during the lease negotiation.
In my experience, the landlord is usually more sophisticated and experienced at negotiating a lease and often uses the services of an attorney or management company.
These persons, who negotiate leases all the time, often design leases which look attractive, but are actually filled with clauses which are disadvantageous to the business owner.
It is therefore vital to carefully and properly negotiate the terms of a commercial lease before committing to the expenses of moving into a property.
Commercial leases are often extremely long, with small print and complex provisions, so obtain proper legal advice during the negotiations. In most cases, when we do act for tenants, I find that clients come to me only when a dispute emerges, long after signing the lease.
This article will briefly discuss three aspects of commercial leases, and the common errors business owners make when entering into these extremely expensive commitments.
1.Fittings and Fixtures:
“Fittings and fixtures” clauses can deprive the tenant of ownership over all equipment and improvements installed on the property at the end of the lease.
Many tenants actually close down their business rather than facing the economic consequences of losing all their equipment and property.
During the negotiation of the lease, tenants should specify which pieces of machinery or equipment they regard as personal property, and are entitled to remove at the end of the lease agreement.
Include such items in the lease under a proper classification. Since this typically involves equipment that’s very expensive, a mistake in classification may result in substantial costs. An experienced property lawyer can help draft a lease that will correctly classify which items or property are intended to be removed and which will remain at the property when the lease ends.
2.Eviction and Related Clauses:
One of the longest parts of a commercial lease is usually the drastic remedies available to the landlord if the tenant doesn’t pay the monthly rental.
These remedies include eviction, the right to claim damages for lost rental income, the right to specific actions (to force the tenant to pay the rent even if they've abandoned the property), and the right to retain any deposit.
Regardless of what the lease says, while the landlord is certainly entitled to evict a non-paying tenant and seek damages, they must also mitigate such damages by actively seeking a replacement tenant as soon as possible.
In commercial matters the eviction action available to a landlord is usually a short process. However, unlike residential evictions, where there are a large number of statutory protections for tenants, the commercial tenant is relatively unprotected by law. The courts will usually allow the landlord to retake the property, together with any fixtures.
Perhaps most detrimental to the commercial tenant are “penalty” clauses in leases, often providing that the tenant must pay a certain predetermined amount if the lease is breached.
However, the enforceability of these clauses isn’t always straightforward, as the courts often reduce penalties where it’s demonstrated that the penalty is out of proportion to the losses suffered by the landlord.
Commercial landlords can usually enforce the powerful remedies in their leases if the tenant should breach the lease, especially where certain statutory protections, such as those of the Consumer Protection Act, are inapplicable. The prospective business tenant must therefore read and understand these clauses carefully before signing the lease.
3.The Right of Renewal:
A right of renewal at the end of the term of the lease is an obvious benefit to tenants, since it allows them to remain on the property without incurring the costs of moving.
However, although many leases offer such a right, on careful analysis the lease term may merely say the parties will negotiate the future rental "in good faith". If they can’t agree on the future rental, the lease ends.
The courts have held that a term requiring “good faith” negotiation on future rental is unenforceable. Moreover, the landlord can always demand terms the tenant can’t accept, rendering such clauses virtually useless.
Take the recent judgment in the case of Everfresh Market Virginia (Pty) Ltd v ShopriteCheckers (Pty) Ltd 2012 (1) SA 256 (CC).
There, the tenant was given the option to renew the lease on the same terms and conditions, subject to agreement being reached on the rental.
However, the landlord, who did not want the lease renewed, refused to negotiate on the rental for the renewal period. Seeing that the landlord was opposed to the renewal, the tenant remained in occupation, alleging that it had unilaterally, but validly renewed the lease.
The tenant alternatively alleged that the landlord had no right to evict it, because the renewal clause required it to make efforts in good faith to reach an agreement on rental.
Subsequently, the landlord obtained an eviction order in the High Court, which held that an option to renew a lease on terms to be agreed is unenforceable. The Supreme Court of Appeal agreed and dismissed the tenant’s appeal, as did the Constitutional Court.
A more appropriate option is to give the tenant the right of renewal, with the future rental to be based on objective standards, and not solely under the landlord’s control.
Typical terms which have been held to be acceptable, include those which provide for an increase based on a set percentage of the existing rental, or a deadlock-breaking mechanism, providing for the calculation of a fair market value by an independent person if the parties cannot agree. Since the costs of hiring an independent person to determine fair market value may sometimes be excessive, I’d recommend a fixed escalation amount.
As is always the case, the most effective way to obtain legal power is not by litigation, but by preparing legal documents that properly protect your rights. In very few areas will this be more important than in lease negotiations.
Marlon Shevelew - commercial, contractual and compliance attorney at Marlon Shevelew and Associates Inc.