Thursday, 12 November 2020

The Do’s and Don’ts when signing a Corporate Lease Agreement

Written by
Jamie Louw, Financial Director of FM Solutions

In view of the tough economic climate facing businesses as a result of the COVID-19 pandemic, many companies will be reviewing their space requirements and lease agreements.  According to Jamie Louw, Financial Director of FM Solutions (FMS) – a division of the AFMS Group (Pty) Ltd. and one of South Africa’s leading integrated Facilities Management companies – there are various important considerations that need to be deliberated before signing on the dotted line for a commercial space.

“You don’t know what you don’t know. There is a trend emerging where landlords are locking tenants into leases that incorporates facilities management Jamie cautions.  Because tenants are not always aware of what their rights are as the lessee, they sign away their flexibility and agility and subject themselves to maintenance and service standards they have little control over simply because it is incorporated into the lease agreement and executed by their third party contractors. Our purpose is to empower our clients and the business community with knowledge that will help them make good business decisions and allow for FM services to be delivered with impartiality, greater efficiency and effectiveness,” Jamie says.

Don’t get hooked in with promises of a low rental price per m2 or a Tenant Installation allowance

It is vitally important that you understand exactly what the Total Cost of Ownership will be before you sign a lease. Don’t get hooked by a perceived lower rental per square metre or a tempting Tenant Installation allowance offered by the landlord to fit out and modify the space with new carpets, tiles, partitioning, electrical work and painting in order to make it more suitable to your needs. Instead, consider what the long-term operating costs will be in order to run the facility optimally. A well maintained, fully functioning workspace has a huge impact on the mental and emotional well-being as well as the productivity of the people housed in the facility and reliability is key.

Don’t sign a lease agreement which includes Facilities Management in the contract

When you’re signing a lease that has FM costs and services already included, chances are good that the maintenance of the property will be managed by the landlord.  Jamie warns that this is problematic, as ideally the tenant should have a contractual agreement with the FM company of their choice in order to avoid having to address maintenance and repair issues via a third party. Because the FM service provider is not directly beholden to the tenant, it is easy for a gap to exist between service delivery and operational FM outcomes, with the lessee often ending up frustrated and suffering poor service as a result.

Don’t just look at costs when selecting a service provider

The cost of maintenance and repair services plays a big role in a landlord’s decision about who will be looking after his building. Most owners would typically want to prescribe to their tenants who will be providing the maintenance services at their properties, as they have built relationships of their own with these service providers. While loyalty and trust are important, Jamie warns that such a scenario can also easily allow for complacency and a lack of attentiveness to the needs of the lessee.

Don’t skip on maintenance and repair tasks

All maintenance and repair jobs must be done as soon as they require attention. Certain assets have legislated periods that specify by when they need to be serviced in order to ensure that their warranties are maintained. Other items require less maintenance, but regular servicing remains key to ensure that the asset remains in good working order. Explains Jamie: “As FM professionals we emphasise the importance of Planned and Prepared Maintenance (PPM) activities over reactive maintenance.  When drawing up a lifecycle management of a client’s assets, we carefully plan, budget and execute maintenance tasks according to planned schedules. This allows us to keep costs down due to unexpected and expensive repairs. However, where assets require increasing amounts of reactive maintenance, it is our job to help the client identify which assets are costing them money and whether to repair, replace, rent or consider alternatives. We also assist our clients by coordinating and supporting them with landlord lease and legislative obligations”.  more

Do sign a clear SLA directly with the service provider of your choice

Successful Facilities Management is rooted in good relationships. For it to work optimally, both parties need to be formally engaged by having signed a Service Level Agreement (SLA) that clearly states which services will be provided, at which costs, frequency and what the expected levels of quality will be. The lessee plays an active role in developing and agreeing to the service level outcomes, and must ensure it receives the service it pays for.

Do scrutinise your monthly rental bill carefully and ask for a detailed breakdown

For too long, operating expenses have been lumped together and vaguely marked as “overheads”. Jamie stresses the importance of tenants understanding the granularity of their costs.   

“The devil is always in the detail and you must know exactly what you are paying for.  Ask for a breakdown of your core monthly rental, water and electricity usage, parking bays, incidental costs to access facilities, repairs and maintenance, cleaning, catering and security costs. By splitting up and itemising each of these expenses, you will be able to benchmark and develop metrics to gain a better understanding of where your money is going. Ultimately, this will allow for more accurate budgeting, forecasting and controlling of costs. Any savings you make, can be used to pay for value-add projects that will improve the overall experience for the inhabitants of your facility. Ultimately that is what FM seeks to do - namely improving efficiencies and rendering a more meaningful facility experience for the users”. 

Do appoint a company with OHS qualifications, accreditations and a proven track record

“Do your homework before agreeing to a service provider to manage your regular maintenance and repair services. Make sure you appoint a company that specialises in FM and has a good track record of handling issues with a quick turn-around time and within budget. Ensure that the company you use also holds the requisite Health and Safety qualifications and accreditations, or else you could put all your employees at risk. Vet them thoroughly and contact references to confirm the legitimacy and professionalism of the company. We strongly advise against blindly allowing the landlord to prescribe who will be used, as you run the risk of exposing yourself to non-compliant and unscrupulous operators,” Jamie warns. 

Do use FM Service provider to boost your B-BBEE scorecard

In our South African context, companies need to actively demonstrate transformation in their Supply Chains and are expected to procure from B-BBEE compliant businesses. The AFMS Group is a Level 1 B-BBEE value adding supplier with 51% black ownership.  “We invest significantly in the growth of our B-BBEE SMME partners and consider it our social and economic responsibility to develop and sustain the communities in which we operate”, Jamie stresses.   

Do weigh up fit-for-purpose vs future expansion

Leasing a space that is fit for purpose and suits your current operating needs, is central to the decision that you will be taking. However, make sure that you don’t lock yourself into a facility without considering the future growth and expansion of the business.  This will have a significant impact on cost and logistical arrangements downstream if the lease agreement does not cater for future expansion and changes. 

Do ask the advice of professionals before you commit to anything

Before you sign a lease agreement, make sure you understand the contract and that you know exactly what you are committing to. You can avoid nasty and unexpected surprises by getting a commercial lawyer to review the contract, addendums and contractual requirements in respect of costs and clarify any clauses that you feel uncertain about. Likewise, get an FM professional to conduct a thorough pre-inspection of the entire facility and help you understand the age, state and level of operation of the assets in the property you are planning to lease, such as lifts and air-conditioners.  

FM professionals provide time, cost and quality value propositions that are no longer seen as a luxury, but a necessity for modern businesses. By taking an asset-orientated approach, all service requirements within the broader facilities ecosystem are carefully managed and executed in line with the life cycle of the asset. Reactive work is reduced and proactive efforts are amplified for the sustainable use of the asset over its lifecycle.  This not only regularizes cost and ensures appropriate budgetary control mechanisms for future planning, but co-ordinates key stakeholders and aligns overall organisational goals in respect of the organisation’s infrastructure needs.  

For more information on the FM Solutions and the specialised maintenance services they offer, please visit www.fm-solutions.co.za