Dangers of leasing a commercial/industrial property

CAPE TOWN - Mr G owned a medium size business and needed a fairly large factory to house his machinery and various operations. On renewal of his lease his landlord decided to significantly up the rental, so G decided to relocate his premises. He signed a five year lease with a new landlord in a new area, the lease was worth about R10m over five years.

Six months later G's business was struggling and he couldn't pay the rent. The landlord started jumping up and down but after three months of not paying rent, G's business is liquidated. Clearly, at least in this case, the business was already in trouble when G signed the lease and actually should not have qualified to sign a new lease for an amount of money he was always going to struggle to pay. G signed personal surety for the rental but the landlord was not first in line and after liquidation did not receive any compensation for unpaid rentals, leaving him significantly out of pocket and looking for a new tenant.

The question is does a landlord and /or his agent have any obligation to do a financial check on a company signing a long-term lease and what can they do to protect themselves?

Property lawyer Arno Watson, a director at Mansons Inc in Cape Town, says the short answer is no. "There is no obligation on either the landlord or agent to check the prospective tenant's financial position, BUT by not doing so he runs the risk of having a very bad experience!"

"Therefore you would normally have an agent contracting with the landlord and one of his obligations will be to vet the tenant as far as his ability to pay the monthly rent is concerned. That would not be a guarantee that the tenant can fulfill his obligations, but at least obvious or existing problems can be identified. This would be the case whether it is an individual or company signing the lease. (The landlord should normally get the individual who signs on behalf of the company to stand surety for the obligations of the company in terms of the lease)."

David Reid, manager, broker services for JHI in Gauteng says it goes to great lengths to vet potential tenants and make sure the above scenario does not happen.

Prospective tenants must be FICA compliant; "If the tenant is an individual then the individual is credit vetted in terms of the credit bureaus to which JHI subscribes. If the tenant is a company then they will call for the company registration documentation to determine who the directors are and each can be credit vetted using the above credit bureaus. If the tenant is a company they will ensure that a director is responsible to sign and is authorised to do so. If the credit vetting is unsatisfactory they will advise the client and may propose a higher deposit."

In addition it calls for personal sureties if needed instead of or in addition to any deposit/guarantees. A deposit or guarantee could be as much as three months' rental, in addition to the first month's rental, often a deposit may have to be paid before the tenant can gain access to the premises.

Using all of the above, Reid says, it tries to determine, to the best of its ability, the company's ability to pay its rent and meet its obligations. In addition it may also call for a current balance sheet and any number of references on the company or the directors.

In summary, the landlord is ultimately the one left holding the can and should his tenant default it could take many months before the tenant is replaced and that income stream restarted. Those months could cost him plenty. While the agent may do all the necessary tests, it's up to the landlord, who signs the lease and stands to make sure his tenant owns a solid business and can meet all obligations on time.

Article by: Barry Washkansky - www.realestateweb.co.za