For Whose Account, Tenant or Landlord? Costs Involved In Leasing Commercial Property

Making the decision to commit to a commercial property lease seems daunting - especially as businesses may still accommodate flexi-hours while devising practical in-office attendance policies. However, a careful and thorough consideration and calculation during your property search phase will be the difference in the long run between a rented property succour and saboteur. Tenants who accurately assess the potential costs that could incur over the course of a commercial property lease are more likely to undertake a commercial space that will not only remain affordable to the business for the duration of the lease, but also help it to thrive with each passing year.

By now, we are all well-aware of the benefits to the physical office space; increased productivity, separated work and home spaces, and of course more authentic collaboration between teams and the ability to check in on the emotional well-being of your employees. However, the property also needs to fulfil certain criteria in order to make it a viable expense for the company over the course of the lease.

Calculating the costs can be a tedious task, but acquiring the services of a property broker can be significantly helpful in expediting the process, while also relieving part of the stress. These industry experts are well connected and equipped to assist tenants in negotiating with the landlord certain terms to the lease. Depending on the landlord, premises and type of lease, costs shift between the tenant and landlord's accounts, so it's vital to clarify these before signing any legal documents.

With years of property experience and a background in law, Annie Swan, a commercial property broker at Vermaak Properties applies a keen eye, ensuring no stone is left unturned when she advises her clients regarding lease terms and conditions.

Annie provides clarity on some commonly asked questions around the costs involved in a commercial property lease, and whose account receives the bill.

1. Who pays the utilities, rates and levies (Rates, electricity and water, sewerage, refuse)?

When it comes to costs for a new premises there are various additional expenses to consider not included in the rental charged specifically for occupying the premises. Utilities may include electricity, water, sewerage, and refuse, and could be billed as per consumption (in arrears and billed to the tenant, whereas rental billed in advance needs to reflect in the landlord's account by the first of the month, in most cases). It is noted that supply charges for services are also billed to the tenant, as they are part of the utilities billed by council for the convenience of the service.

If a building is multi-tenanted and utilities are metered, the various tenants will be billed pro rata as per their participation quota (PG), which is calculated on the portion of space rented in relation to the total gross lettable area. Remember that gross lettable area consists of usable area plus common area included in share as per the PQ.

Where a prepaid meter is installed, a pay as you go system is utilised and units loaded by the tenant as required, it is noted that the supply charge is still billed in this scenario, and the first units loaded will go towards this.

In terms of rates we find most commonly that the landlord would pay for the rates when dealing with sectional title units, but with freehold buildings there are two scenarios. The first is where the landlord pays the initial rates and the tenant pays for any increases - rates normally increase from council by the 1^st of July each year. The tenant will then be liable for that marginal amount between starting figure and new amount. With a triple net lease, rates and any increases to these are recovered from the tenant.

In areas where there are CID levies, the tenant will normally pay the levy - again a marginal amount, and in my opinion money well spent, as CID (City Improvement District levy) goes towards bettering the area.

2. What falls under "Operational costs"?

With sectional title, operational costs (the running costs of a building or a park) are often included in the levies, commonly covered by the landlord unless it is a triple net lease. With Freehold buildings, operational costs will be noted as an expense per meter squared in addition to the rental. An additional contribution is allocated to items such as lift maintenance and repairs, landscaping, if there is a manned security reception, etc.

3. Who covers the broker commission?

Our broker fees are billed to the landlord or seller, unless a different arrangement is made on an ad hoc basis and acceptable to all parties.

4. Who pays the TI and how does it work?

TI is short for tenant installation allowance. This is an incentive offered by some landlords as an added benefit to attract quality tenants, or used as a negotiation tool when structuring a deal.

The structure of a TI allowance varies between landlords, depending on their position. Popular structures among landlords include a contribution to the value of a months' rental per year signed, or a specific amount per square meter.

5. Who pays the lease fee?

Lease fees are recovered from the tenant - these cover administrative fees, cost of credit checks and drafting of documentation, and are paid to the party handling the above.

6. Who pays for the aircon servicing?

Let's make sure what your contract states! There are different scenarios, depending on the landlord. The most common would be a certificate provided showing that the units were services prior to the new tenant occupying the unit. The new tenant would then be liable for the annual servicing of the units, as well as providing a certificate at the end of the term showing that the units were serviced regularly.

7. Who pays for the fire extinguisher, etc.?

Sectional title units become the body corporate's responsibility, but it depends on what the contract states for a freehold property.

8. If there is a generator, who pays for the costs of it?

Again - always make sure what your contract says. There are different components to the costs for generators... a landlord may agree with its tenants to install a generator (this cost may be split between landlord and tenant or covered by landlord, or even permitted by landlord but for tenants cost depending on negotiation between parties).There might be a generator levy charged as part of the monthly rental, in addition to it, or billed annually for the maintenance and servicing of the infrastructure. Lastly there is the consumption costs on fuel that will be billed to tenants as per consumption.

9. Who pays for the plumbing, etc. (a flood, burst geyser)?

Always revert back to your contract and never make an assumption without checking that contract first! Even if the norm would be for the landlord to pay for damages in a freak accident case like this, we've seen some cases where the contract dictated differently. Different scenarios may also be considered, i.e. if 50% or more of the building is destroyed, what is stipulated in the contract etc.

10. Who pays for reinstatement of the unit?

The contract should make provision for reinstatement proceedings prior to termination and exit of the tenant. Some property funds may require reinstating to whitebox at the tenants costs, so check that lease!

11. Who pays for any electrical faults?

In most cases this will be for the landlord's costs, unless it is caused by the tenant's conduct.

Although lease conditions can vary between landlords and properties, acquiring the assistance and guidance of a property professional such as Annie Swan can help tremendously to accommodate yours and the landlord's interests and arrive at a commercial property lease that will serve your business and staff well.

If you're still on the fence about whether to undertake a commercial property lease in Cape Town, connect with Annie Swan and the team at Vermaak Properties for expert property leasing advice, and guidance with a smile.

Annie Swan

0797367912 / annie@vermaakproperties.co.za