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Understanding Lease Agreements

Understanding Lease Agreements

What is a contract of lease? This is an agreement between a Lessor (usually the owner) and a Lessee (or tenant) which allows the tenant to enjoy the property in return for the payment of rent (Paralegal Advice, www.paralegaladvice.org.za, 2015). Understanding every clause contained in a lease is cardinal for you to know what the implications are for signing and what it will actually entail on your part. In as much as most leases have been standardised and would appear standard at face value, time should be spent on reading the lease and understanding the potential implication of each clause contained therein.

Since a lease is an agreement that stipulates the terms and conditions as agreed between two parties, it can take the form of either a verbal or written agreement. A verbal agreement is just as binding as a written agreement, but due to the potential of misinterpretation by the different parties or failure of a mental recollection of the details of the agreement, it is always advisable that such an agreement be captured in writing. Hence a lease agreement is such a document. A lease agreement that does not adhere to provisions of the different Acts that apply to that type of lease renders it defective, hence void. A defective lease cannot be enforced by any court of law and hence the aggrieved party cannot claim remedial compensation.

Owing to the high number of lease agreements that the different Commodity Project Allocation Committees (CPACs) receive attached to funding applications, it became imperative to the CPACs to have a standard measure by which all these lease agreements should be judged against. The CPACs requested the Unit for Technical Assistance (UTA) to develop a standard lease agreement, generic enough to be used as a yardstick against which all new applications with leases will be measured against. The standard lease has since been developed and has been used on a number of occasions as a yardstick to measure the application leases for compliance and validity. According to the decision by the DPAC, henceforth, all leases, accompanying funding applications, shall be subjected to UTA scrutiny for compliance.

Below are some typical examples of clauses that may render a lease defective:

  • A lease for agricultural land whose period of lease is 10 years or more. According to Section 3 (d) of the Subdivision of Agricultural Land Act 70 of 1970, no lease shall be entered into, unless the Minister of Agriculture has consented in writing, in respect of agricultural land of which the period is: ten years or longer; or is the natural life of the lessee or any other person mentioned in the lease; or which is renewable from time to time at the will of the lessee, either by the continuation of the original lease or by entering into a new lease indefinitely, or for periods which together with the first period of the lease amount in all to not less than 10 years. Thus, any such lease agreement entered into without the consent of the Minister of Agriculture will be void. The Act further states that any application to the Minister of Agriculture shall only be made by the Lessor.
  • Legal entity’s registration number, if the entity is a sole proprietor, then it should be stated on the lease, or ID number of the contracting parties.
  • Vague rights and obligations of both the Lessor and Lessee. This should be avoided to circumvent open interpretation and subsequent manipulation of the rights and obligations to suit either the Lessor or Lessee.
  • For CASP projects where there are substantial investment in infrastructure and permanent assets, it is advised that a clause be included that require a valuation of the assets at termination of contract and that the Lessor is held liable for payment of those assets to the Lessee at the valued amount.

A good lease agreement should comply with the following:

  • The agreement should cover all of the important issues in clear, concise language that you can understand
  • It should contain the name of all parties involved in the lease agreement, the address and description of the property, the rental lease period and rental amount
  • The lease should state the exact size of the space you will be leasing, the position within the broader premises (if necessary) and anything else
  • (property/building-wise) included in the rental • All costs included or excluded from the lease amount (e.g. electricity, security, maintenance, insurance, etc), should be clearly stated
  • The lease amount escalation, by how much, and how much notice period will the Lessor give you in this regard
  • The lease should state exactly what kind of changes you’re allowed to make to the premises, either structurally or with regards to the general look and feel
  • Who is liable for costs related to damage to your business’s property or the premises, a burglary, damage to the building, etc?
  • Under what circumstances can the lease be voided, either by the Lessee or the Lessor?
  • The lease should state what the procedure is should the landlord become insolvent or intend to sell the property
  • What is the procedure and who is liable for costs in the case of legal proceedings between you and the landlord or a third party
  • What are the conditions for renewing the lease, once it expires?

Source: Business Partners Ltd (2014) SME Toolkit, South Africa.

 

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