Commercial Property Leases: Avoiding the Pitfalls – Read Before You Sign

Once you find the ideal space in Cape Town and deal with a few minor details, the only steps remaining are to pack up your office for relocation and sign your commercial lease agreement – at least that’s how it would work in an ideal world.

Knowing what’s involved in a commercial property lease and how to proceed before you put pen to paper could make the difference between a secure long-term business relationship with your landlord and a rental that’s problematic and short lived.

Navigating the ins and outs of a lease agreement can be tricky, especially for first time tenants. To assist both landlords and commercial building occupants to reach a mutually beneficial agreement, and avoid unnecessary disputes, we’ve put together an extensive guide to on how to avoid the most common commercial lease pitfalls:

Help you decide whether to lease or buy your office premises
Cover the necessity of a well drafted and comprehensive lease agreement
Highlight some specific clauses and requirements that tenant, and landlord should be aware of
Guide you through the process of exploring your ideal property and ensuring that it’s right for you before you sign.

Getting started: should you buy or lease a commercial property?

As a business owner, you have two basic choices when it comes to your commercial premises: buy or rent and with the transition to hybrid working during Covid and the more recent return to office, companies need to carefully weigh up the pros and cons to make a future-fit decision.

Deciding between these two strategies is both the first and most important step you’ll need to take before you consider signing a lease agreement.

Buying a commercial property offers the potential for capital appreciation in the long run and rental income in the short run. This is especially true if the building contains more offices than you end up using for your own business.

As a building owner, you’ll have more freedom when it comes to renovating and repurposing the inside of your structure. Making changes to the building’s exterior would be easier too, and there would be few if any limitations to the type of commercial activities you could carry out.

Leasing some of your buildings’ rental units, creating a coworking space, and renting parking spaces to building users and people living and working nearby are additional sources of income that building owners regularly benefit from.

On the other hand, as with any investment, it’s essential to consider the cost of ownership and financing before you even consider buying a commercial building.

Interest rates, which are at a 14 year high of 8.25%, have driven up the cost of borrowing significantly at a time when commercial property prices in Cape Town are surging due to high demand and short supply.
While a commercial building may end up being an excellent investment, it’s especially important for small business proprietors to consider the significant monthly cost of financing such a large asset purchase. Business owners should ask themselves whether these funds would not be better allocated to expanding their business or exploring alternative investments.

For most companies, the decision to lease a property makes better business sense, at least in the short to medium term with monthly rental being a tax-deductible expense while the capital portion of a bond repayment is not tax deductible.

The commitment level, both in terms of time and investment, is far smaller when leasing, and it’s easier to relocate to a different building without having to place your entire commercial premises on the market.

If you’ve weighed up the pros and cons and decided that leasing is the best option for you, it’s essential to understand the legal aspects of a lease and the obligations that it places on both landlord and tenant before you proceed.

Commercial property leases 101

A property lease agreement is an essential legal protection for both the landlord and tenant, but unlike a residential lease, a commercial lease offers little built-in protection. The lease creates a legally binding agreement that both parties will perform on the contract they have signed – and adhere to a few common rules during the duration of the lease.

The landlord or building owner enters into the lease as a provider of commercial space and is obliged to ensure that the premises are available to the tenant in good condition on the move-in date.

In addition to this, the landlord is responsible for several common duties during the course of the lease:

Maintaining the building exteriors
Dealing with tenants’ maintenance concerns in a timely manner
In some cases, paying a certain portion of the utility bills
Ensuring that the tenant has uninterrupted access to the commercial premises under normal conditions

From the tenant’s side, signing a lease agreement means promising to pay the agreed-upon rent on time every month, and to use the premises only for its intended purpose. Some of the duties of a tenant include:

Ensuring that the company’s business activities do not intentionally damage the inside of the premises
Carrying out business activities as promised at the time of signing the lease and avoiding any activities that are against the terms of the lease and the building’s rules and regulations.
Reporting any damage, security, issues, or maintenance requirements to building management and the landlord in a timely manner.
Informing the landlord in advance if any changes are to be made to the lease or when giving notice to vacate.

If your business assets or turnover are under R2 million a year and you lease a property from a property management or investment company, your lease may be subject to the Consumer Protection Act (CPA). This provides a raft of protections for the tenant but only applies to smaller businesses and sole proprietors due to the income requirements.

Check before you sign

How to avoid the most common property leasing pitfalls

Finding the ideal space can be challenging, especially in Cape Town’s current market where vacancies are low, and supply is limited. Nonetheless, hastily signing a lease simply to secure premises is never a good idea. Here are some common issues that prospective tenants encounter and how to avoid them.

Choosing the wrong location

Signing a lease simply for the sake of having an office may seem like a prudent thing to do especially as your business grows, but the specific location of your premises is crucially important.

Businesses that rely on logistics to sell large amounts of products may want to be near the airport or Cape Town harbour, and not in a busy mixed-use area like the southern suburbs where daily traffic can slow down delivery times substantially.

By the same token, a small business with relatively low overheads should not be tempted to lease premium grade property in the CBD or Century City until it reaches a level of revenue that can easily support larger overheads.

More economical alternatives in areas like Epping, Kenilworth, or Observatory may be far more suitable for startups and SMBs in the initial stages of growth.

Not budgeting effectively

Signing a commercial property lease is both a financial commitment (since you’ll need to budget for the monthly rental expense) and a time commitment (since most leases span a period of several years). A new office space could be a major investment in the future growth of your business, as long as the premises you choose are perfectly suited for your needs with the flexibility to expand as your business grows.

As a rule, businesses are typically advised to spend between 2% and 20% of their monthly revenue on rent. This amount may be higher for client facing businesses in premier buildings while online businesses or delivery-based retailers and wholesalers will probably opt for more affordable premises with increased storage space.

Not negotiating with your future landlord

Communication is key when it comes to establishing a relationship with your landlord and agreeing on a mutually beneficial lease. It’s also worth noting that a commercial lease is not a standard document – everything is up for negotiation.

When you deal with your future landlord through your commercial property agent, it’s important to focus on the following points:

The exact floor space you’re renting and what amenities it includes. If you’re unsure about your access to amenities like shared board rooms, coworking spaces, parking areas or office kitchens, it’s essential to clarify this before the lease is signed to avoid any disputes later on.
Allowed activities. The specific activities that your business carries out on a regular basis should be in line with the regulations of the building as well as the landlord’s expectations.
Lease duration, renewals, and annual rental increases. Knowing exactly how much your office space will cost over the next few years will help your business with its financial projections. Reaching an agreement on rental increases is especially important if the base cost of your premises is relatively high, and many landlords will be open to negotiation if it means securing a reliable long-term tenant.
Commercial space designation. Tenants who lease for office space tenants who wish to carry out retail activities in spaces not specifically designed to be used as shops may find themselves in disagreement with their landlords. To avoid this, it’s essential to understand exactly what the premises can be used for before signing a lease agreement.

Let our team guide you in your search for the ideal office

Taking the decision to rent office space in Cape Town could be the best decision you make for your business going into 2024 and beyond.

The Commercial Space team has decades of collective experience in securing ideal office spaces for commercial clients across the Cape peninsula. Our extensive range of services include:

Property sales and marketing of office and light industrial space
Working with landlords and tenants to ensure a successful long-term partnership
A network of experienced agents with expert knowledge of the Cape Peninsula property market covering the city’s most sought after areas

To view our portfolio of modern, stylish office premises in Cape Town, and begin your journey to finding the ideal office space, contact our team today.