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Exiting a Commercial Lease As a Startup

29.11.2018
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We’ve come across this problem time and time again: our clients – often startup companies – find themselves involved in leases that seemed suitable when they entered them, but over time, don’t fit the business anymore. It’s at this point that they want to find a way to get out of their lease, and we usually get involved.

As a juristic entity, cancellation of a commercial lease is governed by the content of the document. The Consumer Protection Act, the Rental Housing Act, or any provincial laws, do not apply, as is the case with residential leases or commercial leases entered into by a sole proprietor.

When you first consider a new premises and the lease attached, you’re going to be primarily excited about getting new office space for your team. However, it’s important to carefully read and understand the fine print. Don’t be afraid to ask the landlord (or Legalese) questions if you don’t understand what a clause means or how it operates practically. Although at the time, all you may care about is the condition of the property and the rental amount, the rest of the contract is as important, as it dictates what will happen when things go awry.

In the majority of commercial leases we review, there is no early termination clause for the tenant. Landlords want tenants who will remain in the space for years so they do not have to worry about finding a new tenant every few months, because of the costs involved. Should you wish to terminate the commercial lease after you’ve occupied the space without a termination clause to guide you, you will need to negotiate with the Landlord since you don’t have an automatic right to cancel the lease before its expiration. This places you in a significant power imbalance because the Landlord can effectively just say “no” if it wants to. If you just up-and-leave the premises, the Landlord would have the right to sue your company (or you personally, if you’ve signed a surety) for the outstanding rental amount and damages, using the signed lease agreement as the basis of its breach of contract claim.

We suggest that before signing a commercial lease, agree with your landlord and get in writing what will happen if you want to terminate the lease early. As a startup, you want to be able to grow or streamline as needed and don’t want your business to be contained by a 5-year lease. Discuss whether you will be able to sub-let or whether you can find a new tenant to which you can cede your lease. You could also agree to a long notice period for termination – for example, 6 months – to allow both parties an opportunity to find a replacement tenant and minimise the landlord’s costs.

Another consideration is what happens if the building is damaged through no fault of the tenant. As unlikely as this may seem, commercial leases will generally provide for tenant termination (or rent reduction) only if the damage to the premises renders your business inoperable, and even then, only after a month or two. As a small business, or depending on what sort of business you run, this could cause serious damage to the services you render. We suggest including that if you cannot operate due to damage or destruction of the property, you can terminate the lease or at least have a reduction in rent for that time you cannot operate.

A quick tip – if you are sub-letting a portion of a property from the main tenant, review the main lease agreement, as the content of the main lease agreement governs your occupation as well.
While I have you thinking about commercial leases, remember that what is stated as the rental amount is rarely the final amount you will pay. Landlords may request VAT, municipality rates, common area costs, sewage and other utilities on top of your monthly rental. Be sure that you get a general idea of what these costs are and be aware that if the municipality increases the rates, the landlord may be able to pass on that increase to you.

If your startup is about to enter into a long term commercial lease and would like to have it reviewed by Legalese to ensure that you’re ready to commit to its content, or you need to negotiate out of an existing lease, send us a mail at info@legalese.co.za.

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