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Commercial Leases –What To Look Out For Prior To Signing

This article is provided by Mohamed Madhani & Co 


When you take on a commercial property, you probably have a lot of things to worry about that don’t directly relate to the property itself – business plans, securing funding, and so on.

 

However, that does not mean you should become complacent about your new premises. Just like buying a house, signing a long-term commercial lease is a major undertaking that could ultimately decide the success or failure of your entire enterprise.

It will be noted that most commercial leases are usually very long, complex and often printed in very small type. For the most part, everyone hates to read them. But there are grave consequences to this inaction. Most landlords usually take advantage of your ignorance and innocently ask you to sign what they refer to their “Standard Lease”. In fact they will faithfully tell you everybody signs them. My take on that - When the landlord says "It's our STANDARD lease, everyone signs it!" STOP! 

 

"Standard" does not mean right or fair to the tenant. "Standard Form Lease" represents the landlord's wish list and if not appropriately modified, may not serve their interests when issues arise.  Big companies, who have their property estate department, in-house advocates and multiple business locations, are used to modifying leases to their own standards and landlords are used to negotiating those changes. If you don't fit that profile, you're going to have to do a little work to protect yourself. Consider the following sampling of concerns:

 

  • Lease Term-The Lease term should be your main and primary concern in a lease.  Practically; all commercial leases in Kenya provide a minimum fixed term of five years and three months or six years and have no termination clause meaning that if you wished to vacate the premises prematurely, you would only do so upon paying the full rent of the remainder or get a replacement tenant wiling to pay the same rent. Failure to do so may lead to the seizure of your possessions by your landlord under the Distress for Rent Act, Cap 293 Laws of Kenya, whereupon if you do not pay up within 14 days then your possessions would be auctioned to compensate the Landlord.

Your Landlord at the advice of his smart lawyer will prefer this exaggerated period of time in an effort to prevent the lease from qualifying as a controlled tenancy and therefore regulated by the Business Premise Rent Tribunal. A controlled tenancy can be simply defined as that lease whose term does not exceed five years and has a termination clause. Controlled tenancies are governed by the Landlord and Tenant (Shops, Hotels and Catering Establishments) Act, Cap 301 Laws of Kenya. This Act was essentially enacted to govern commercial leases and protect businessmen to enable them conduct business without harassment from the Landlords. The Act provides inter alia that where the landlord intends to terminate a controlled tenancy, he must give the tenant a termination notice of not less than two (2) months in the prescribed form. The termination notice must inform the tenant of his right within one (1) months from the date of the notice to communicate to the landlord of whether or not he intends to comply with the notice or oppose it. If after receiving the termination notice, the tenant does not communicate, it is presumed that the tenant will comply.

Generally, this Act deprives the Landlord of certain rights over his property in order to protect the tenant.

It is therefore not surprising that owners of commercial properties invariably seek to avoid the application of the Act by eliminating any provisions in the lease which would give it the character of a controlled tenancy.

If your business is new and for a number of reasons you may not wish to remain in the same premise for the whole of the 5 years and three months or six years as the case may be you may want to negotiate with your prospective landlord on this term before signing on the dotted lines. It is generally recommended that businesses, especially the small ones negotiate one- to two-year leases with the option to renew. Typically, an option to renew gives you the right to exercise your option to stay by notifying your landlord in writing a certain number of days or months before the initial lease period expires.

 

  • Rent and Rent Increases- Another primary issue to consider when leasing space is how much rent you'll pay. It's sensible to check out rates for comparable spaces. If the rent seems unjustifiably high, try asking for a reduction. Landlords will usually include an annual increase to your rent in your lease terms. If the landlord insists on keeping the clause, try to get a cap on the amount of each year's increase, and try to exclude a rent increase for the first year. 

 

  • Expenses- In addition to your monthly lease payment, find out what expenses you may incur beyond rent. Commercial land landlords often incorporate extra expenses into the lease such as maintenance fees, service charge, legal fees etc.  Other expenses to consider are utilities. These charges are usually the responsibility of the tenant, so find out how these are measured. Are they individually metered or apportioned by square footage? Find out whether you will have to pay them directly to the utility or service provider, or if they are included in rent. Please note to find out who will bear the costs of the landlord’s Advocates legal fees and if you, how much.

 

  • Maintenance and Repair- Commercial leases vary regarding maintenance and repair – some stipulate that the tenant is responsible for all property upkeep and repairs while others specify that the tenant is responsible for systems like plumbing.. However, at all times, it is imperative to ensure that the lease limits your repair and maintenance to the interior surfaces of the leased premises, excluding any structural elements and regular wear and tear or items that are usually covered by the landlord’s property insurance.

 

  • Subleases and Assignments- Ask for the right to sublease or assign your space. That way, if you need to move out, you'll be able to have another tenant take your space and pay the rent, without having to break the lease. Or, if you rent enough space to grow into, you can sublease some of the space until you're ready to use it. 

 

·         Tenant Improvements- If you'll need lots of improvements to the space, you may want to use your bargaining power to have the landlord provide them at no cost to you. Where the landlord concedes make sure a clause on a free- fit out period is incorporated in the lease. i.e the obligation to pay rent and other charges does not begin until the improvements are complete.

 

  • Security Deposit- go through the lease and determine the amount of the security deposit that you have to pay before moving in, as well how the deposit will be refunded and under what circumstances the landlord can keep portions of it. 

 

  • Business signage- most of the landlords would not permit you to affix signboards or even placards within the premises. In any case, most leases provide that where you go contrary to this provision and affix such signboards without the consent of the landlord, then the landlord has a right to enter the premises and remove such signage at your costs. It is therefore recommended that you negotiate this term with your prospective landlord before binding yourself with the terms of the lease.

 

  • Paying Property Taxes- virtually all leases will provide that the tenant will be liable to pay all the Value Added Tax (VAT) levaible from time to time in law in respect of any amounts payable by the tenant. Simply this means that you will be liable to pay VAT tax on the rent you pay to your landlord. In respect to this, ensure to inquire the mode by which the same is payable. Find out whether the rent is inclusive or exclusive of VAT.

 

  • Termination- When you vacate the leased premises, you will be required to surrender it in its original condition. This means that you have an obligation to remove your personal property, furniture, equipment and trade fixtures, like signs. In fact your landlord will also require that you repaint the premises and fix anything that is not in order. It then follows that even if you had fitted fixtures in the premises with the consent of your landlord, you would be required to pull them down. In practice, where a tenant modifies the premise to suit his business, he usually pays the landlord some amount of money to cater for the waste rather pull down fittings which more often than not proves more expensive. It is therefore in order to find out in advance how your prospective landlord deals with this issue and where he prefers money, negotiate and fix the amount ahead of time.

 

  • Stamp Duty and Registration Fees- by law, leases for terms beyond two years should be registered. Before the same can be registered, you will be expected to pay stamp duty and registration fees for the lease. The duty is usually pegged on the annual rent or average annual rent and it is usually 1% for leases of three years and below and 2% for the leases of more than three years.

 

Putting it All Together

Looking for space should be exciting and fun, not scary. Do not be shy about taking notes, measurements or pictures of any space you look at. These things can help you research and compare more options after you leave the site. Perhaps the most important things to remember are almost all leases are negotiable in some way. When it comes to signing the actual lease, if you do not understand something, it pays to get a lawyer or trusted estate agent to explain the terms to you.

 

Copyright © 2016 Mohamed Madhani & Co . All Rights Reserved.

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