Leasing is a balancing act

Posted On Wednesday, 10 May 2006 02:00 Published by eProp Commercial Property News
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There is less need for tenant concessions, such as rent-free periods and high tenant installation allowances, given improving commercial property market fundamentals in SA, says Wayne Wright, director: Gauteng broking and international of JHI Real Estate.

JHI Real EstateThe quality of the tenant is nevertheless important. Blue-chip tenants, as compared with new business start-ups, present different risks and bargaining positions. Nevertheless, existing and prospective tenants have particular requirements and are entitled to negotiate. At the same time, landlords need to show goodwill and a sense of commitment that will satisfy and retain a tenant, he says.

There are of a number of golden leasing rules tenants should follow when entering into a lease, Wright says.

Tenants must identify the risks a lease imposes on them and take steps to mitigate those risks, such as the risk of rates and taxes increasing and the clause on re-instatement of the premises to their original condition, says Wright.

"It is not always feasible to push these risks back to the landlord, and it is also influenced by the management resources a tenant is willing to spend on managing these items. Big tenants will employ a facilities manager to control the running costs of their building."

Where possible, it is prudent to obtain a rental comparison. Rentals, escalations and other financial incentives must always be reduced to a net present value and assessed or compared on that basis.

"There is a seesaw at work here and astute tenants will always try to understand and then balance the long- and short-term implications."

It is wise for the tenant to understand the implications of all clauses that place onerous conditions on them and object to those where they feel the landlord has contracted out of his responsibilities, Wright says.

"There must be an element of risk that the landlord/owner needs to factor into his investment. An attorney can often advise from an objective viewpoint and indicate the long-term potential cost savings should any untoward action take place."

A tenant should try to assess the timing aspect of the property-market cycle and elect for either long- or short-term leases, depending on rental levels applicable at the time and circumstances more favourable for their business, he says.

Tenants should attempt to limit the amount of personal suretyship by providing performance guarantees and place as much of the performance obligation on the body entering into the agreement, that is, the operating company, says Wright.

"A tenant can secure an option to either purchase the property or extend the lease without onerous terms attached, thereby ensuring a win-win situation with the landlord."

 

Last modified on Sunday, 25 May 2014 15:41

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