Knightfrank - Is Your Commercial Property Lease Up For Review?2017-12-07 The monthly rental of business premises is often one of the largest expenses facing a business. However, due to the nature of commercial leases, which usually run for lengthy periods of time, it is essential for commercial tenants to understand all the factors that could affect their future obligations as outlined in their contract.
One of the factors that is often not understood by tenants is that of the rent review clause. In commercial property leases, this clause is a common practice amongst landlords and tenants worldwide. Essentially, the purpose of a rent review clause is to protect the value of the landlord's property and to reflect the changing value of the property during the term of the lease. The intention is for both parties to secure a long lease and at the same time ensure rentals are re-aligned to market levels at agreed intervals. In South Africa's inflationary environment, these are typically set at five yearly intervals. Many of the commercial leases granted are initially on favourable terms for tenants, simply to get the space let. A problem that small business owners often encounters is that the rent review provides for 'market rental value' that results in a possibly unaffordable rent hike. In addition, the incidence of 'ratchet' clauses - preventing the renewal rental from falling below the rent under review - is a practice that undermines the purpose of the review terms. Tenants who have fallen foul of this provision have only themselves to blame. The review provision commonly prescribes three processes. Firstly, that the renewal rental and escalation be agreed between the parties. Secondly, that failing agreement, the parties agree either to separately nominate their own expert with provision for the experts to agree, or failing agreement, between the experts, then thirdly, a third-party expert or arbitrator is introduced to review and rule on the experts' opinions, the outcome being binding on the lease parties. It is the expert's job to properly research, interrogate and analyse recently negotiated leases on similar terms and for similar premises (showing similar quality, size and location attributes). Where these are scarce, then substantiated adjustments should be made from the source data and aligned to the premises under review. The parties and their appointed expert/s are responsible for ensuring that the full lease terms under review form the specification for the review. While the lease provisions are clear --problems may arise when the experts are called in. The parties affected need to be sure that the expert has been diligent in the search for a 'market rental' benchmark derived from similar premises and under similar lease terms in prevailing market conditions. The following factors need to be considered:
Landlords also need to be wary of drafting 'User' clauses into leases which confine tenants to a specific activity and can negatively impact on rental collection. In conclusion, poorly conducted rent reviews can lead to financial loss, stalemate in agreeing new rents, and even termination of the lease. T: 031 303 8722 arbee.arbee@za.knightfrank.com www.KnightFrank.com |
Knightfrank - Is Your Commercial Property Lease Up For Review?
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