By Liad Hadar, Director at Hadar Incorporated, Specialist Property Law Firm
This article first appeared in Asset Magazine’s May 2025 edition
In the world of property investments, leases are often viewed as routine paperwork – standard templates to be slightly tweaked for each tenant. Yet, as any seasoned landlord or managing agent will tell you, the strength of your lease agreement can determine the long-term performance of your asset, especially when market conditions tighten or tenants fall on hard times.
The excitement at the stage of concluding a lease agreement with a new tenant can be romantic but it is equally important to think of the endgame scenario or when things go wrong and the lease must be cancelled. It is akin to signing an antenuptial agreement when getting married!
As a property lawyer who regularly crosses over between litigation and commercial drafting, I’ve seen firsthand how certain lease clauses, or their absence, can create risk, erode value or spark costly disputes way down the line in the landlord-tenant relationship.
Although there are plenty, I’ve focussed on certain key clauses that I believe deserve more than a cursory glance when concluding lease agreements with tenants. By including these clauses, or by bolstering your current templates, you can save yourself a substantial amount of money in the future and protect your asset values in the long term.
Reinstatement Obligations: The Hidden Cost of Fit-Outs
Many leases include a vague, generic reinstatement clause, a mistake that can cost landlords dearly when the tenant ultimately exits the premises.
Reinstatement refers to the tenant’s obligation to return the premises to its original condition at lease expiry. Without absolute clarity, landlords may be left with vacated premises full of unusable fittings, unfinished items or structural changes, becoming their burden to remove or fix.
Well-drafted clauses should clearly spell out not only whether the tenant must remove installations, repaint and repair damage (beyond fair wear and tear) but also the exact condition to which the premises must be collapsed. Avoid ambiguous terms like “reasonable condition” as this opens you up to interpretation and commonly lead to disputes.
An additional practical tip on this is to have as much photographic, videographic and other visual or written documentation as possible that clearly indicate the initial condition of the premises. This assists by providing tenants with an easy point of reference and removes any uncertainty or potential for dispute.
Escalation Clauses: CPI-Linked vs. Fixed Increases
A major driver of rental growth is the annual escalation.
In South Africa, fixed escalations (typically 7%–10%) were longstanding standards. However, in the current economic climate, tenants are not inclined to accept this and more sophisticated leases are adopting CPI-linked increases to match broader economic conditions.
While CPI-based increases offer realism, they can underperform in low-inflation cycles. A hybrid clause — e.g., “CPI or 6%, whichever is greater” — can provide both flexibility and a minimum income floor. Understanding that not much is currently standardized in the industry, my input is that you choose these parameters based on your asset class, tenant profile and investment strategy.
Sureties and Security: Personal Guarantees Still Matter
In today’s real threat of liquidations and business rescues, landlords must consider tenant risk carefully. A lease with a company is only as strong as its solvency — unless backed by a personal surety or substantial bank security.
Whilst Landlords often forgo personal sureties for “blue chip” tenants, even larger operators can default.
Strong leases include personal guarantees from directors or substantial cash deposits / bank guarantees, with clearly drafted provisions governing when they can be called upon and that if such funds or guarantees are utilized in the event of a breach, that they must then be immediately replenished.
One critical thing to remember is that simply obtaining suretyships is not sufficient. A prudent landlord concludes a brief but in-depth due diligence of the proposed surety’s true financial position to establish whether they are a man/woman of straw or financial substance. This will greatly help if called upon to pursue the surety.
Use Clauses: Protecting the Tenant Mix
The “permitted use” clause defines the business activities allowed on the premises. If too loosely drafted, it can result in unexpected tenant behaviour, such as food operators adding alcohol sales or retail tenants turning into service providers, upsetting the tenant mix or zoning compliance.
I’ve come to learn that tenant mix, particularly in retail assets, is an art rather than a precise science. This means that landlords must remain in control of the ability to perfect their tenant mix and not allow any tenant to trade outside of this particular clause and upset any balance so carefully created by the landlords.
Maintenance and Compliance: Who Does What and Pays?
Maintenance obligations often spark conflict. Triple net leases, for example, are easy as they push many responsibilities onto the tenant but in regular leases the line between structural and non-structural upkeep can be blurry.
From my experience on common issues, your lease should clearly define obligations around:
- Servicing of HVAC and equipment
- Structural repairs and waterproofing
- Health and safety compliance
- Fire, zoning and municipal bylaws
Where tenants are responsible, inspections and reporting duties should be clearly documented and defined so that the risk of dispute and uncertainty on obligations are removed.
Early Termination and Penalty Clauses: Avoiding Legal Pitfalls
A tenant’s early departure can affect income forecasts and even potentially breach finance covenants.
Penalty clauses provide some level of protection but must be drafted with care.
Whilst The Conventional Penalties Act prohibits arbitrary or excessive penalties, a sound lease should define early termination penalties as fair pre-estimates of loss. For example, such penalty clauses could be for amounts up to six months’ rental or the balance of lease income until the actual termination date, discounted to present value, plus re-letting and reinstatement costs.
Conclusion: Leases Are Strategic Documents
Leases are not merely operational tools, they are strategic documents that allocate risk and protect asset value. For landlords and asset managers, the fine print today determines the asset performance (and headaches!) tomorrow.
Whilst you could always rely on what you believe are good template leases, you could outperform your historical returns by investing properly into the right clauses, tailored to particular tenants, your property and your growth strategy.
In essence, you could protect your returns, manage your risk and enhance the quality of your income stream.
The first step is to ensure that you have a very good template lease agreement and then, when required, obtain specialist legal advice for particularly important and substantial leases with new tenants. I believe that the investment will pay itself back many times over!