Evaluating the power of lease terms

Small businesses hardly negotiate lease terms with property owners although some issues when overlooked may prove to be costly.
Some issues may seem irrelevant in the early stages, but may turn out to be the crux of the agreement.
Common examples are terms, which cover the remodelling of the property, usually referred to as leasehold improvements.
Small business owners are to ensure that the lease specifies each improvement that the landlord will make to the property (those requested by tenant or planned by landlord) and when those improvements are to be made. Ideally these should be completed before the move in date.

The landlord’s willingness to pay for such improvements will depend on other factors in the lease, a common example being the business value of tenant to the landlord.
The proposed improvements by tenant should add a long-term business value to the landlord to make it attractive.
Where the improvements are of no beneficial value to the landlord in the long term and are tenant specific, the tenant is better off proposing a lease term that gives him leeway to make his own improvements to accommodate his business.

The landlord can secure limitations to the extent in which a tenant makes improvements by including them into the lease guidelines and restrictions.
The length of the lease is of paramount importance to both parties because it determines the extent both parties will invest in the property.
There are advantages and disadvantages for both long-term and short-term leases.
To the property owner a long-term lease may ensure financial stability while the same lease may safeguard the tenant in his investments on property improvements, amount of money spent advertising new business premises as well as location related goodwill.

Short-term leases are beneficial to landlords in periods where rental rates are not stable and for the tenant it ensures an easy exit in case of decline in business or if conversely the business becomes profitable and a bigger space maybe required.
A mid-range lease safeguards both positions, a common compromise is to include an “option clause” in the contract so that the lessee can stay or renew at the conclusion of the original lease. Where property for letting is a mall or a large building, the small business should where possible negotiate an exclusivity clause.
This clause provides the tenant with an exclusive right to sell his or her product or service on the property. This will ensure that your business will get all the business in that sector and prevent other businesses that come after your business from benefiting from your mileage.

This is not always an easy term to negotiate because some premises are built specifically for retail and to convince the landlord to allow exclusivity will be impossible.
In contracts, where the tenant uses the property for commercial purposes, the landlord may require the tenant to secure insurance.
This will normally cover periods where customers suffer injuries on the premises.
The landlord may even specify the dollar amount of liability coverage required by the tenant.

The tenant should also insure the property in the likelihood they damage the property. The landlord has to insure the building in respect to liability and property damage.
While cover for both parties may overlap, the property insurance covered by the landlord includes everything except the interior contents of the tenant’s space.
Proof of insurance by the tenant to the landlord is always an advantage. The landlord should ensure that he captures what he wants in the lease, whether he permits the lessee to change his trading to something else with or without consent should be expressly stated in the lease.
A commercial lease is a complicated as not everything can be captured within this article, but I will list some of the issue that are of interest to both lessor and lessee.
These include signage, its erection, style and size.

Whether the proposed business comply with local council requirements, subletting and lease assigning, security deposit, landlord’s right to re-enter the premises, default provisions, hours of operation, landlords and tenants duties of repair.
There are other terms that are lease specific that will need to be included. Seasoned lawyers or estate agents should only draft these leases. Laymen should never attempt to draft them because of the complexities involved.

Vengai Madzima is a property investment consultant and analyst and writes in his own personal capacity. He can be contacted on 0772 468093 email: [email protected].