Rent increases – how much is too much?

Along with petrol and food prices and every other commodity, commercial property rentals need to increase annually, and in the past it was accepted that landlords would expect their 8 to 10 percent annual increase, irrespective of economic circumstances.

“However, today it is more frequently accepted that rent increases will be negotiated by landlord and tenant to set a figure agreeable to both parties,” says Leon Breytenbach, national manager of the Rawson Property Group’s commercial division.

“Landlords must cover their costs relating to the property. They can’t be expected to maintain the original rental indefinitely, as inflation, the prime lending rate, insurance, property maintenance and municipal rates, to name just a few, are never static.

“They would therefore argue in favour of a higher escalation to cover the ongoing obligations of owning a commercial property. However, it’s necessary to ensure that the property rental remains at a market related level to make it attractive to prospective tenants or to retain good tenants who have leased it for years, while still achieving a viable profit.”

Tenants, on the other hand, want to maintain the status quo and would argue in favour of a lower escalation. They would question the value derived from the monthly rental spend and the applicable increase, generally without any visible added value.

If pushed beyond what they regard as a reasonable increase, they may advise the landlord of their intention to move out at the termination of the lease. A longer term of lease is far better than a short one.

“Generally there is a clause in the contract that the existing rentals, together with the previous rental escalation agreed to, will continue to apply on a month to month basis while the parties negotiate the terms of the renewed lease,” says Breytenbach.

“Before renewing a lease, property owners should consider whether the tenants proved themselves to be worthwhile lessees. Was the rental paid timeously? Were unreasonable requests made during the lease term? Was the use, upkeep and maintenance of the property acceptable? Did the tenants get along with the neighbours?

“They must also decide if it is worth the trouble of finding replacement tenants. How difficult would it be to source new, hopefully good, tenants? What are the current market rentals? Is it worth it to rock the boat and risk having your good tenants leave?

“Tenants must then consider their past relationship with the landlord. If it was good, could the situation improve with a different landlord? What value will they get for the rent paid and is the value comparable to similar properties in the area? What will it cost to move to new premises and what other implications, such as inconvenience, locality, accessibility, will arise out of such a move? Tenants could possibly get the landlord to agree to carry out some improvements to the property in return for renewal and renegotiation of the lease.”

Breytenbach says that when deciding on rental increases, both parties should maintain reasonable expectations, respect the other party’s view and be prepared to compromise, if needed, to sign up for another three or more years.

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