Essential factors and lease clauses for investment property (Part 1)
Correspondent | Friday December 11, 2020 13:27
You may not know this but renting out property in Botswana, especially residential property is often fraught with avoidable anomalies. In a good number of instances, it is let without the benefit of a lease. In some cases a lease is drafted, but one or both parties express little or no interest in signing it. A lease is not a nice-to-have or an instrument for use only by business and corporate entities as some people tend to believe.
It is an essential legal tool that regulates and governs the relationship between the tenant (lessee) and the landlord (lessor). Since it is meant to unambiguously spell out obligations of both parties, in theory, it should minimise possibility of friction between lessees and lessors (the two contracting parties) during the course of the lease and at its termination. Agreed terms are susceptible to breach by one or both parties, hence the need to have a living document that would come in handy when there is a need to remind the parties of their legally enforceable obligations.
Any premises let out automatically falls into the realm of investment property. The lessor should realise a competitive return on such investment and ensure that the value of such investment is protected and enhanced over time. An essential prerequisite for ensuring this, is a watertight lease.
This article addresses the following key questions that are central to governing the relationship between the lessee and the lessor: Who can prepare a lease and who has to pay for its drafting? When should a lease be signed? What are the key clauses, which should without fail be captured in a lease?
Who can prepare a lease agreement and who has to pay for its drafting? After negotiating on the heads of terms (key terms) of a lease, either party can commission the drafting of the lease. Normally this role is taken on board by the prospective lessor, as he/she would be eager to ensure that his/her property is let under terms that would not compromise its rental value over time and consequently impair its capital value.
Who has to pay for the drafting of the lease? The commonly entrenched practice is for unqualified people to prepare their own leases. Oftentimes people possessing a little knowledge are completely clueless on issues of leasehold management and landlord and tenant law. Some of them would have rented out property before, and would simply copy and paste terms that they like from several leases they would have laid their eyes and hands on.
However, in some cases, the multiple clauses stolen all over the place end up clashing simply because non-professionals intrude into a space they are not qualified to play in. It is important to defer this to a relevant practitioner in order to avert possibility of clauses clashing between themselves and perhaps even with the country’s laws.
The default position of some landlords is to pass the entire cost for drafting leases to tenants. The law does not require the tenant to carry this cost. In view of this, I would hazard that prospective tenants should consider standing their ground and rejecting any attempt by prospective landlords to transfer such a cost to them. This should be discussed and agreed at the time of negotiating heads of lease terms. A win-win position for both parties would be a 50-50 split in costs.
Almost all sane landlords will backtrack on insisting on this condition when they are desperate to lease their property or when they are keen to attract a tenant of a certain covenant strength. However, for amendments to leases, it would be reasonable to expect the party pushing for amendments to meet the entire cost for preparing the amended lease. But where both parties equally benefit from such amendments, it would be in order for each party to share equally in meeting the cost thereof. In cases of a disagreement between the parties, this issue will never be a deal breaker simply because the cost of preparing leases is not prohibitive.
It is important for prospective tenants to appreciate their value to prospective landlords and take full advantage of their strength to negotiate favourable terms. Of course this does not mean that ‘high value tenants’ should unfairly exploit their strength to the extent that a ‘win-lose’ agreement is drafted in their favour. Some level of reasonableness is legitimately expected from both parties.
When should a lease be signed? It is essential for both parties to do their due diligence before signing a lease.
The prospective lessee has to be sure that they are discussing terms of the lease with an entity endowed with legal title to the property and with authority to rent it out. The prospective lessor should perform a thorough tenant screening and where possible run a credit check with a reputable credit bureau.
All that would be required of the landlord is to produce a legitimate business rationale for the credit check, and the bureau would avail an objective report. Such due diligence might avert heartaches of dealing with tenants likely to default in paying rental.
If this matter is not given the attention it deserves, in time, rental default could negatively affect the projected income stream and consequently the targeted return on investment.
Both parties should take time to read the draft lease in its entirety. Speedreading should be avoided. This is important because some of the legally enforceable obligations carry financial implications. It would be imprudent to find oneself locked in an agreement from which they cannot break free purely because of carelessness. Ideally, both parties prior to occupation of the property should sign the lease. However, sometimes circumstances collude against one or both parties making it impractical for the lease to be signed before occupation. Signing of a lease in good time wards off possibility of one or both parties sneaking in a biased clause that would force the other party to cross it off at the time of appending their signature.
What are the key terms, which should without fail be captured in a lease? There is no limit to the universe of potential lease clauses. Some of them are; the names of the two parties, description of premises, use of premises, duration of the lease, rental payable including annual escalations, rental review during the currency of the lease, lease renewal and determination of rental payable, exclusive possession or quiet enjoyment of the property, lessee’s and lessor’s obligations, force majeure, handling of breaches and termination of the lease.
For leased premises rented out to multiple lessees, the transformative shift is in favour of having binding house-rules over and above signed leases.
These rules could be in the form of annexures recognised in the main body of the lease, or where the lease is already signed, they could be in the form of amendments to the lease.
The purpose of this article is to zero in on six clauses which though extremely important are not normally given the right level of attention by both parties or are hardly ever considered.
Assignment of leased premises
Normally a lease agreement would state that assignment or transfer of the lease will only be allowed where the lessor expresses its consent in writing.
Lessors are not always enthused at the prospect of assignment. Principally because they would have done their due diligence and would be more comfortable dealing with an entity they know, as opposed to one which may or may not be known by the lessee.
It would be imprudent for the lessor to inherit a defaulting tenant from a lessee or a rogue tenant who would only ruin the property.
In view of this, lessors need to capture in the lease a net of safety precautions for the sake of protecting their interest.
If necessary, in the interest of eliminating or curbing risk, the lessor should boldly reject requests for assignments from the lessee.
Where assignment is permissible, both parties should acquaint themselves with applicable legal provisions, which might change from time to time, regarding liability of the initial lessee and that of respective assignees.
Next week’s article will address five more crucial lease clauses for investment property.
PAUL MORE*
*Paul More is a property specialist