Avoid being trapped in long-term commercial or industrial property leases
Category News
When you sign a commercial or industrial lease on a property, you're gambling on the future looking a certain way. Most leases for these property types are negotiated for a longer term - between two and 10 years - and it can be difficult to know what may happen in that period of time.
If you're a tenant, you have no choice but to rent space based on what you think you will need, taking into account your plans and market trends. Many things can change over time, however. You might get to a point where you need a substantially bigger or smaller space than you'd imagined. It could be because the economy has taken a turn for the worse or the better, or because you've opened a new division or decided to outsource a function you used to run in-house. You might even get to the point where the size of the property is still suitable, but you want to move premises for some other reason. For example, to raise the premium profile of your brand or to avoid growing traffic congestion.
Whatever the case may be, you may find yourself trapped in a long-term property lease. But according to Sithembiso Nkosi, Head of Leasing and Investment Broking at Eris Property Group, that does not mean there is no way out.
"Many tenants are not aware that they can call on a reputable property broker to engage with the landlord to consider a lease buyout," says Nkosi. "This requires the tenant to pay a lump sum to the landlord to end the lease early, but that sum is generally significantly lower than the total remaining payouts on the lease. While there are always consequences of ending a lease early, these do not have to be as onerous as ending up in court, which is a fear that keeps many tenants from exploring early lease exit."
Nkosi notes that an experienced broker can help to structure the lease buyout transaction to meet the tenant and landlord's requirements. "The tenant is protected from lease liability and the landlord is able to cover the costs of re-tenanting the property," says Nkosi.
"Other options that a broker may be able to help you negotiate include sub-leasing the property you're renting, or assigning it to another company," he adds. "It all depends what your contract says, so it's important to find someone who can help you to make sense of your lease agreement and see what your best options will be."
Tenants should look for a broker with a good reputation and track record. Nkosi says that good property brokers don't just look at the legal or financial aspects of the transaction, but take a holistic view based on the tenant's specific requirements. "You need someone who will take the time to understand your business and work out a plan that will support your strategic objectives," he says.
In fact, the ideal situation is to get input from an expert like this right at the beginning of the, before signing a lease agreement, but a good broker will still add value later on. "A top broker will help you to make sure your contract protects you as well as the landlord. For example, they may suggest that there is a five-year rental review written into your 10-year lease, which means you're able to renegotiate based on where your business is at that point," Nkosi says. "If the broker is coming to the table when you're looking to exit a contract, there's less that they can do, but they can still help you to understand the options available and negotiate the best deal with the landlord on whatever you decide to do."
Nkosi also suggests choosing a broker who can help beyond the lease transaction itself. "At Eris, one of the major benefits we can offer clients is that we can bring in expertise from our other divisions too. For example, our facilities management experts can help tenants lower their operational costs, while our fit-out business can ensure best use of the space being leased. We can even offer assistance with things like negotiating infrastructure assistance and branding options with landlords. We show clients how to review their operational costs at the end of every year to ensure they're not just automatically being escalated unfairly in their lease. We also work with landlords to help them find good tenants, and can project-manage the entire process so that the landlord only needs to deal with one point of contact. In many contexts, the middleman has a bad name, but when it comes to commercial and industrial property rentals, we work very hard to make sure we're protecting and serving both parties so that it's a win-win situation. Without a broker, it's tricky to get all the nuances right."
For more information on leasing and investment broking, contact Sithembiso Nkosi on +27 11 775 1317 or snkosi@eris.co.za.
Author: Eris
