A lease is an agreement or contractual arrangement whereby one party, known as the lessor, leases out an asset, for example an immovable property, to another party, known as the lease, for consideration in the form of lease premium or rent. The lessor is usually the owner of the asset, in the case of immovable property is the landlord. The lessee is the party that intends to use the asset, in the case of immovable property is the tenant. Assets may include immovable property such as offices, a house or an industrial property or may include equipment such as machinery. In lay terms leases are also referred to as rental agreements.
This article will focus on two areas, namely key aspects that need consideration and negotiation, in a business this can be referred to as the business aspects. The second part involves the essential elements or essentialia of a lease agreement at law. For ease of explaining we refer to immovable property hereinafter.
Key aspects for consideration and negotiation
Prior to signing a lease agreement the lessee and lessor, especially the former, should pay attention to certain factors explained below. For example, the lessee has to decide whether the property meets his / her requirements. It is not prudent to lease a property which does not meet one’s requirements or does so for a very short period. It has to be clear to the parties which asset is being leased. This is why it is important to visit the property for viewing. The purpose for which the property will be used has to be understood by both parties. This is usually backed up by restrictive conditions under terms and conditions of the lease.
The deal breaker can easily be the lease premium or rent. The lessee should negotiate fair and affordable rent that will not tempt the lessor to make frequent or steep reviews or frustrate the lessee or not renew the lease agreement. The lease premium has to be fair and acceptable to the lessor. In determining fair and acceptable lease premiums consideration is usually given to factors such as facilities offered by the asset, condition of the asset, market conditions, economic conditions, tenure of the lease, frequency of review, and many other factors. It should also be clear whether the lease premiums are inclusive or exclusive of taxes such as VAT, operating costs such as security, utility bills, etc. In order to decide on a tenant or lessee the lessor or landlord usually carries out financial evaluation or vetting of the tenant through for example a questionnaire or asking for bank statements.
The parties have to agree on the tenure of the lease agreement and conditions for renewal or non-renewal. Short leases may result in instability especially on the lessee. Long leases are advised especially in the case of businesses.
Essential elements of a valid lease agreement
Generally contracts are governed by common law, the beauty being that contracts can be customized to meet the requirements of the parties to the extent that it is not unlawful. There are essential elements or essentialia that have to be met for a contract to be valid. This varies with the type of contract. In the case of a lease agreement the contract should address the following:
- Parties to the lease arrangement, being the lessor and lessee as already explained.
- Object or asset being leased. This is usually immovable property or equipment.
- Duration or tenure of the lease agreement, usually showing the start and end date
- Lease premium or rent. This should state the currency, whether gross or net, frequency of review, etc.
Additionally a lease agreement usually includes conditions for renewal, security deposit, damages and repairs, responsibility for rates and utilities, insurance, restrictions in use e.g. no sub-leasing, provision for termination, breach and dispute resolution.
It is therefore advisable to consult a financial or property advisor and a legal practitioner before signing a lease agreement.
Godknows Hofisi is a lawyer, chartered accountant and business rescue practitioner. He writes in his personal capacity. He can be contacted on +263 772 246 900 or gohofisi@gmail.com
