Business premises lease: Key legal considerations

Business premises lease: Key legal considerations

NAMATIRAI RUZVIDZO

On the bustling streets of Cameron near the ever busy Copacabana bus rank, Delight Foods believed they had found the perfect spot for their new restaurant.

The traffic alone and the customer diversity where enough for them to conclude that they had scored a jackpot. They forgot one crucial detail: getting a lease agreement in writing. Mr. Makore, the landlord, seemed like a nice guy, so they shook hands and got to work. Big mistake. Fast forward a few months and Delight Foods was knee-deep in renovations, ensuring they installed world class fittings and alternatives.  On the other hand, Mr. Makore driven by greed, had found an alternative tenant who was going to offer double the rental. He suddenly developed cold feet. Without a signed lease, the restaurant was at his mercy. Rent increased overnight and Delight Foods found themselves facing a costly eviction notice.

The drama that unfolded would put a soap opera to shame. Delight Foods learned the hard way that a handshake was not enough when it comes to business deals. In our latest article, we explore the importance of lease agreements and how to avoid similar pitfalls.

When it comes to securing a business premises, one of the most critical documents one will encounter is the lease agreement. A well-negotiated lease can provide stability and security for your business, while a poorly drafted one can lead to costly disputes and disruptions.

What is a lease agreement?

A lease agreement is a contractual arrangement between a landlord (lessor) and a tenant (lessee) that grants the tenant the right to occupy the premises for a specified period in exchange for rent. It’s essential to understand the terms and conditions of the lease, including the length of the lease and options for renewal, the amount of rent, outgoings, and any potential increases, the condition of the premises and responsibility for maintenance and repairs as well as any restrictions on the use of the premises, such as zoning or exclusivity clauses.

Lengths of leases

Most leases have fixed terms between six months and up to 25 years. The length of the fixed term is usually negotiated by the landlord and the tenant before the lease is created. With respect to businesses, generally, a short term is more beneficial to the tenant and not the landlord. Finding tenants costs money, both in the cost of search and legal fees, and in the lost opportunity cost of having a property vacant. Provided the tenant is of high quality, most landlords will want a long term.

An advantage of a longer term is that, generally, the longer a tenant occupies a property, the more likely they are to stay, even if the rent increases. Property investors give greater valuations to properties let long term because the risk of the tenant leaving is perceived to be lower.A longer term provides time for goodwill to be built around the particular premises – more useful for retail premises than for an industrial unit. However, a tenant might need a longer term for an industrial use if they intend to install machinery or install fixed plant.

Key clauses to negotiate

When negotiating a lease, there are several key clauses to focus on. Both the tenant and the landlord must come to an agreement on how rent increases will be calculated and negotiated. Parties should be able to clarify the circumstances under which the lease can be terminated, such as breach of contract or insolvency. Further, there is need to determine whether the lease allows subletting or assignment, and under what conditions. The lease must establish responsibility for maintenance and repairs, including any necessary upgrades or improvements.

Best practices for tenants

To protect your interests as a tenant, one must research the landlord’s profile and history with other tenants. A tenant must clearly understand their responsibilities under the lease, including rent payments, maintenance, and repairs. A tenant must also consider business needs and growth plans when negotiating the lease term and renewal options.

Common disputes arising in commercial lease agreements and how to curb them

In as much as business premises leases are a crucial aspect of commercial operations, providing a space for companies to conduct their activities, these agreements can also be a source of disputes between landlords and tenants. Common disputes in commercial lease agreements include disagreements over rent increases, rent reviews or rent arrears. Disputes can arise over responsibility for maintenance and repairs, including who is liable for damages or upgrades. On the other hand, disagreements over subletting or assigning the lease can lead to disputes between landlords and tenants. Disputes also tend to arise over termination notices, including whether the notice was valid or not. Further, disputes can arise over the use of premises, including whether the tenant is using the premises for an unauthorized purpose. Lease agreements that are poorly drafted or ambiguous can lead to disputes. A lease agreement should be in writing as a matter of principle and should be properly signed by the parties. We there are one or two companies entering into a lease agreement, a board resolution should be in place to ensure that the parties have due authority to contract on behalf of an organisation. Poor communication between landlords and tenants can also lead to misunderstandings and disputes.

How to curb disputes

Both parties to need to ensure that a lease agreement is clearly drafted and unambiguous. Often at the beginning of every relationship there is trust and high expectation that both parties will always be cordial. This is rarely the case. Lease conditions should be clear and unassailable at the very beginning so as to govern the relationship between the landlord and tenant when and if it turns sour. Tenants and landlords are encouraged to adopt open and effective communication, establish clear expectations and regularly review lease agreements to ensure they remain relevant and effective.

Best practices for landlords and tenants

Either party, that is; the landlord and the tenant are urged to conduct thorough due diligence on the property and the other party. Landlords are advised to ascertain the bankability and financial capacity of prospective tenants before forming a relationship. Tenants are also encouraged to carry out investigations on the prospective landlord, to ascertain whether they have a good or bad history with former tenants. Ordinarily, individuals or businesses near the premises would be aware.  Lease terms should be negotiated at the very onset.  Lease terms should be fair and reasonable. There is also need to maintain accurate records of rent payments, maintenance requests, and other lease-related matters. In times of disputes, parties to a lease agreement should seek mediation or alternative dispute resolution methods to resolve disputes.

A recipe for disaster: lessons learned from the Delight Foods scenario

In the end, Delight Foods managed to negotiate a settlement with Mr. Makore, but not before incurring significant financial losses and stress. The experience taught them a valuable lesson: when it comes to business deals, a handshake is not enough. A written lease agreement would have protected their interests and prevented the drama that unfolded. As Delight Foods rebuilt and recovered, they made sure to prioritize the importance of solid contracts and legal agreements. Their story serves as a cautionary tale for businesses everywhere: parties must never under estimate the power of a written lease agreement. Readers are urged to safeguard their business against similar pitfalls. Whether one is a seasoned entrepreneur or just starting out, one ought to remember that the devil is in the detail. Disputes in commercial lease agreements can be costly and time-consuming. Clearly drafted lease agreements, effective communication, and regular review of lease agreements can go a long way in preventing disputes.

Namatirai Ruzvidzo is a registered Legal Practitioner, Conveyancer and Notary Public with the law firm, Ruzvidzo Legal Counsel. She can be reached on +263 784 228 534 or email namaruzvidzo@gmail.com, copying hello@rlcounsel.co.zw