Be Alert When Leasing!

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Location, location, location!

Any commercial property agent will confirm that the location mantra is one of the most important considerations for a business. If exposure to lots of feet is important to your business, then an unattractive location could be the death knell. However, with high exposure, comes high rentals; small retailers often paying up to ten times more per square meter than larger businesses.

Given that the rent is a major expense in any business, tenants ought to really pause and ‘think before they ink.’ Choosing the right location, at the right price with the right landlord can be the make or break factor in the success of a business. I was a shareholder in a book shop where, in our haste to get started, we opted for a quiet corridor in a busy shopping center, rather than waiting for a better option. Three months after opening the doors, we were in trouble; locked into an onerous lease and buried in stock. I got my MBA the hard way.

Landlords are notoriously unsympathetic to the struggles of a small business, some horror stories are reminiscent of a Dickens novel.  A walk through many shopping centers, where shops are padlocked, will attest to the fact that small businesses close all too often. Just because the business is no longer trading does not mean that the rent is no longer due.

Although the Consumer Protection Act (CPA) has brought some relief to tenants through sections 14 and 48-51, this is limited in reality because it will be up to the courts to interpret and enforce. Very few tenants have the deep pockets required to litigate so it is vital to be familiar with tenant rights and obligations before signing. Once a contract is signed, there is little or no leverage to negotiate better terms.

Section 14 of the CPA, allows a tenant to cancel the lease at any time, provided the landlord is given 20 business days’ notice. This is a major departure from the past where a tenant was held liable for the full duration of the lease. Unfortunately, this is not a straightforward get-out-of-jail card for small businesses. This only applies to natural persons (human beings of legal age), not to juristic persons e.g. companies. Even though the law does not allow for discrimination on the basis of natural vs juristic persons, landlords are unsurprisingly insisting on the lease being in the name of a registered business to avoid section 14.

Section 14 protection is further watered down by the rather grey requirement that If the tenant cancels the lease prematurely, the landlord may charge a “reasonable” cancellation penalty. Exactly what constitutes “reasonable” is not defined.

There is some good news in that the CPA also requires that the lease should be substantively fair, understandable (by the tenant) and that the tenant should be made aware of any clause that may potentially increase his/her risk. While these requirements will ultimately only be tested in the courts, it has placed an obligation on landlords to review their usually one-sided contracts. Nonetheless, it is advisable to seek a legal opinion before signing a standard form lease.

 

So what can you do to reduce rental risks?

  • Do your research.

  • Choose the location carefully according to the needs of your business and compare rentals of other locations.

  • Consider alternatives, such as virtual office rentals, or pop up stores.

  • Check with other tenants about their experiences with the landlord.

  • Ensure that you know exactly what are the rights and obligations of both landlord and tenant.

  • Ensure that there is an option to renew clause, with the first right of refusal and try to negotiate a capped increase. Needing to move premises because of an unaffordable hike in the rental may mean having to re-build a customer base from scratch for most retailers.

  • Ensure that you are protected should the landlord alter or redevelop the premises, causing disruption and potential loss of custom.

  • Stipulate any changes or improvements you require from the landlord, before you sign.

The reality is that large commercial landlords will not be very interested in negotiating, but forewarned is forearmed and there is no harm in trying to protect your interests. Rather spend time and money on the lease process upfront to prevent future tears.

Key take out: Choose the business location carefully and scrutinize the lease agreement. Have you tried to reduce your risk and negotiated the best terms before you sign?

Author: Janet Askew

 

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