Commercial lease agreements and their types of rentals differ from those in residential lease agreements. They are generally longer term, involve more financial commitment, and are also not governed by the Rental Housing Act or Consumer Protection Act.
What is a lease?
A lease is a legal contract between a property owner and a tenant, it should always be in writing and include all the terms and conditions of the contract, including but not limited to:
- Details of the lessor, or landlord
- Details of the lessee, or tenant
- Details relating to the property and space being rented
- Size of areas in m² including parking bays, warehouse, offices, mezzanine, guardhouse, ablutions etc.
- The rental payable per m²
- Operating costs payable by the tenant and landlord respectively
- Length of the lease
- Annual escalation rate in percentage
- Date of annual escalation
- Renewal options and notice periods
- Remedies to breach of contract
- Permission clauses relating to modifications and repairs by the tenant
Types of Leases
- Gross Lease
The tenant pays an all inclusive amount per m² per month for the space, this rental includes all costs but generally excludes metered council charges including water, electricity, sewage, and refuse.
The landlord/lessor is then responsible for:
- Rates and taxes
- Building insurance (contents insurance will be for the responsibility of the tenant)
- Management fees
- Audit fees
- Pest control
- Exterior maintenance
Specific costs can also be excluded from the landlords responsibility if agreed to by the tenant and specified in the lease agreement e.g. Landscaping, pest control, cleaning.
Gross lease variations
- Gross lease with fixed operating costs where costs are limited to a specific amount for the tenant to pay. For example the net rental is R50/m² plus operating costs of R10/m², the gross rental is then R60/m².
- Gross lease with pro rata future increases, where the operating costs are calculated at the time of lease but the increased amount will be for the cost of the tenant. I.e. an increased amount in the rates and taxes of the property will be for the tenants account.
- Net Lease
With a net lease the tenant is charged a rental of say R50/m² and an additional recovery rate per m² for contributions to expenses. Utilities like electricity and water can be metered and billed to the tenant to be recovered.
- Triple Net Lease
A triple net lease is more common with a single tenanted building where the tenant will pay all the running costs and the landlord receives a lower rental amount equal to net operating income. It also happens with newer properties where it is more difficult to calculate maintenance costs or when insurance covers defects etc.
4. Sale and Leaseback
A sale and leaseback is often used by larger international groups whose core focus is not property, they may have purchased or developed a property so service their long term needs and decide to sell it to an investor on the basis that they will sign a long term (7 to 10 year) triple net lease. or
It can also be used by owner occupiers to unlock equity in their property, they may decide to sell the building to an investor also on a long term lease in order to increase cash flow which can also be used as working capital during tough economic periods.
Negotiating and entering into a lease agreement is a long term commitment and its important to understand commercial lease agreements and types of rentals before making a commitment. We can help you understand both your rights and obligations thoroughly. If you need any assistance or advice with regard to understanding your current lease or negotiating a new lease then please do not hesitate to contact us for assistance.