Long-term leases have traditionally been the norm in the commercial property sector, but this strategy may need to be reconsidered in the current economic climate. Building owners may need to weigh up the security of a longer-term tenant against the flexibility and opportunities that a shorter-term lease presents.
In this article, we’ll take a look at the case for and against long-term leases and help you decide which is more suitable for your building or your business.
Long-term leases – reliable but limiting?
While residential leases tend to expire after 2 years at most, commercial property leases have been known to last up to a decade – and 10 years is a long time.
Thinking back 10 years to 2010, South Africa’s economy and political landscape was vastly different than it is today.
- If you had signed a 10-year lease on your commercial property Cape Town in 2010, you probably would have been expecting more robust growth and generous annual rental increases than you would today.
- If these were stipulated in your lease, you or your tenants may have had significant trouble keeping up their obligations.
- After a decade of problematic payments, a renewal would be highly unlikely.
While long-term leases provide some assurance of rental income for commercial property owners, this is by no means guaranteed.
Your tenant may sign a lease in good faith, with the best of intentions. But if economic conditions deteriorate and they are unable to pay on time, you’ll find yourself facing the financial consequences.
Flexible medium-term leases are the way to go
It may not be feasible to sign short term leases on a commercial building, especially with the initial renovation and remodelling expenses that you may incur.
Medium-term leases with an option to renew are a good option because they provide the stability of a longer lease period with the flexibility to negotiate the terms of renewal.
- Aim for a 5-year lease with an option to renew on flexible terms.
- This will let you negotiate a higher rental amount in a strong economy while giving your tenant some financial relief in tougher times.
As the commercial property market evolves, you may find that it makes sense to repurpose your premises after 5 years. A medium-term, flexible lease will allow you to do just that.
Whether you’re in the market to lease your commercial property or are looking for new business premises, we’d love to hear from you today. The Commercial Space team is ready and waiting to assist you.