Nov 04Nov 04 11

TENANT’S RIGHTS TENANT’S RIGHTS SEMINARSEMINAR

With special emphasis on the With special emphasis on the Municipal Rates Act and Municipal Rates Act and Landlords and Tenants Landlords and Tenants

Rights thereunderRights thereunder

held atheld at

RANDPARK CLUBRANDPARK CLUBonon

9 NOVEMBER 20049 NOVEMBER 2004

presented bypresented by

VAN DER HEEVERVAN DER HEEVER & ASSOCIATES& ASSOCIATES

Note: To view in full screen - Right mouse click and select“Full Screen”

Nov 04Nov 04 22

CENTRAL THEMECENTRAL THEME

Building competitive Building competitive advantageadvantage

and five forcesand five forces

1. Industry CompetitorsRivalry among existing

retailers

2. Potential Entrants

4. Landowners/ Landlords

5. Customers

3. Substitutes

Threat of new entrants

Bargainingpower of Customers

Threat of substitute property

Bargainingpower of Landlords

WHERE IS THE POWER IN THE PROPERTY GAME? The Five Forces

Nov 04Nov 04 33

How can a property managerHow can a property manager

help improve the Company’shelp improve the Company’s

competitive advantage?competitive advantage?

In order to build competitive In order to build competitive advantage, the property advantage, the property manager can contribute in at manager can contribute in at least the following ways:least the following ways:

-- The property manager The property manager must must ensure that the ensure that the barriers to entry barriers to entry into the into the company’s particular company’s particular industry is raised through industry is raised through

judicious renting/letting judicious renting/letting policies;policies;

Nov 04Nov 04 44

Prevent loss of market share Prevent loss of market share to the company due to the to the company due to the fact that competitors are fact that competitors are resorting to alternative resorting to alternative property arrangements, e.g. property arrangements, e.g. sale and leasebacks or sale and leasebacks or property loan stock;property loan stock;

Managers must ensure that Managers must ensure that negotiations are more negotiations are more effective with landlords, e.g. effective with landlords, e.g. gaining market intelligence gaining market intelligence in order to strengthen in order to strengthen bargaining position;bargaining position;

Nov 04Nov 04 55

What does Warren Buffet What does Warren Buffet say about say about

enduring/durable enduring/durable competitive advantage?competitive advantage?

The purpose of this The purpose of this lecture is to improve lecture is to improve

the leasing manager’s the leasing manager’s own knowledge base, in own knowledge base, in such a way as to impart such a way as to impart

and enhance and enhance competitive advantage competitive advantage

to her/his business.to her/his business.

Nov 04Nov 04 66

In order to describe the In order to describe the concept of endurable concept of endurable

competitive advantage, competitive advantage, Buffet likes to use the castle Buffet likes to use the castle

and moat analogyand moat analogy

Your company Your company (collective (collective competitiveness)competitiveness)

I, myself I, myself (individual, (individual,

competitivenescompetitiveness))s))

Nov 04Nov 04 77

Castle and Moat Castle and Moat analogyanalogy

• Cashbuild’s castle is its Cashbuild’s castle is its superior ability to superior ability to distribute building distribute building material in Southern material in Southern Africa, using its Africa, using its properties as trading properties as trading platform. Mutual’s platform. Mutual’s castle is a variety of castle is a variety of financial products as financial products as well as properties. FNB well as properties. FNB has financial services as has financial services as its core, and leverages its core, and leverages its property portfolio to its property portfolio to compliment its core compliment its core business. Zotos is a business. Zotos is a thoroughbred property thoroughbred property trader.trader.

Nov 04Nov 04 88

CompetitivenessCompetitiveness

• The moat around the The moat around the castle is the company’s castle is the company’s competitive advantage.competitive advantage.

• Without the moat or, Without the moat or, should the moat run dry should the moat run dry or become too shallow, or become too shallow, the castle will become the castle will become vulnerable to attack.vulnerable to attack.

Nov 04Nov 04 99

CompetitivenessCompetitiveness

• The purpose today is to The purpose today is to dredge the moat deeper dredge the moat deeper and to make it wider in and to make it wider in order to make the order to make the castle less susceptible castle less susceptible to competition.to competition.

• Bear in mind that many Bear in mind that many businesses have businesses have competitive advantage competitive advantage over others but the over others but the sustainability or sustainability or durability of that durability of that advantage varies advantage varies greatly between greatly between businessesbusinesses

Nov 04Nov 04 1010

Competitiveness in the Competitiveness in the Property GameProperty Game

• A company that has to spend A company that has to spend great sums of capital to great sums of capital to maintain competitive advantage maintain competitive advantage might not be sustainable.might not be sustainable.

• The trick therefore is to The trick therefore is to negotiate leases and acquire negotiate leases and acquire properties in the most cost-properties in the most cost-effective way.effective way.

• A property manager who rents A property manager who rents property too expensively or property too expensively or pays too much for a new store pays too much for a new store development, creates question development, creates question marks over the durability of the marks over the durability of the company’s competitive company’s competitive advantage.advantage.

• A manager who A manager who generalisesgeneralises property deals and property deals and administration damages the administration damages the moatmoat

Nov 04Nov 04 1111

HOW DO WE RAISE HOW DO WE RAISE THE BARRIERS TO THE BARRIERS TO

ENTRY?ENTRY?• From a tenant’s perspective, the From a tenant’s perspective, the

barriers to entry for other barriers to entry for other competitors is raised by way of competitors is raised by way of the following innovations:the following innovations:

Superior networking with a larger and Superior networking with a larger and more reputable pool of landlords;more reputable pool of landlords;

Building a solid and reliable relationship Building a solid and reliable relationship with landlords and landowners, causing with landlords and landowners, causing them to call for less security. Smaller them to call for less security. Smaller operators sometimes have to pay six operators sometimes have to pay six months to a year’s rent upfront, whereas months to a year’s rent upfront, whereas a national retailer a get away with a national retailer a get away with reduced guarantees;reduced guarantees;

Emphasising property maintenance in Emphasising property maintenance in order to enhance the usability and appeal order to enhance the usability and appeal of the company’s trading location. It is of the company’s trading location. It is easier for competitors to access the easier for competitors to access the market where a competitor’s premises are market where a competitor’s premises are in disrepair since the new entrant can in disrepair since the new entrant can compete effectively by renting property at compete effectively by renting property at lower levelslower levels

Nov 04Nov 04 1212

PREVENTING PREVENTING SUBSTITUTES FROM SUBSTITUTES FROM

ENTERING THE ENTERING THE MARKETMARKET

• Selecting prestige and Selecting prestige and low maintenance low maintenance premises is clearly a premises is clearly a strategy for preventing strategy for preventing substitutes taking substitutes taking market share from the market share from the company;company;

• E-commerce between E-commerce between landlords and tenants is landlords and tenants is taking a firm hold in the taking a firm hold in the property industry in property industry in general.general.

Nov 04Nov 04 1313

HOW CAN WE USE HOW CAN WE USE LANDLORDS, MUNICIPALITIES LANDLORDS, MUNICIPALITIES AND OTHER SUPPLIERS MORE AND OTHER SUPPLIERS MORE

EFFECTIVELY?EFFECTIVELY?

• Tenants have to expand E-Tenants have to expand E-commerce to municipalities commerce to municipalities and other suppliers such as and other suppliers such as Eskom;Eskom;

• On-line communication On-line communication between landlord and between landlord and tenants obviates rent and tenants obviates rent and services disputes;services disputes;

• Landlords are amenable to Landlords are amenable to finance tenant’s finance tenant’s installations such as goods installations such as goods received and goods received and goods dispatch accesses to the dispatch accesses to the premises;premises;

Nov 04Nov 04 1414

HOW CAN WE USE HOW CAN WE USE LANDLORDS, MUNICIPALITIES LANDLORDS, MUNICIPALITIES AND OTHER SUPPLIERS MORE AND OTHER SUPPLIERS MORE

EFFECTIVELY?EFFECTIVELY?

• The smaller retailer does The smaller retailer does not have the same clout not have the same clout and has to make do with and has to make do with whatever the landlord can whatever the landlord can offer;offer;

• From a legal perspective, a From a legal perspective, a verbal discussion or verbal discussion or gentleman’s agreement gentleman’s agreement sometimes works in sometimes works in practice, but it is clearly practice, but it is clearly more prudent to commit more prudent to commit these undertakings to these undertakings to writing preferably in the writing preferably in the lease agreement or by way lease agreement or by way of an addendum;of an addendum;

Nov 04Nov 04 1515

BRIEF OVERVIEWBRIEF OVERVIEW

Legal:Legal:

1.1. Temporary use of Temporary use of someone else’s propertysomeone else’s property

2.2. Risks of ownership Risks of ownership remain with Landlordremain with Landlord

3.3. Low initial & Low initial & subsequent capital subsequent capital outlayoutlay

4.4. No borrowing No borrowing considerationsconsiderations

Nov 04Nov 04 1616

BRIEF OVERVIEWBRIEF OVERVIEW

Legal Accounting:Legal Accounting:

1.1. Low charges on income Low charges on income statementstatement- no depreciationno depreciation- interest on borrowing interest on borrowing

savedsaved

2.2. Off-balance sheet itemOff-balance sheet item

3.3. Exception for Finance Exception for Finance Leases (AC105)Leases (AC105)- tenant becomes owner tenant becomes owner

eventuallyeventually- option to purchaseoption to purchase

Nov 04Nov 04 1717

BRIEF OVERVIEWBRIEF OVERVIEW

– Lease endures for Lease endures for asset’s economic lifeasset’s economic life

– PV of rental = fair PV of rental = fair value of assetvalue of asset

– Asset of specialised Asset of specialised nature for tenant nature for tenant onlyonly

Nov 04Nov 04 1818

• Contents of Contents of rates accountsrates accounts now now regulated by regulated by statutestatute

• Account must comply with Account must comply with Section 27(1)Section 27(1)

• Pro forma compliant account - Pro forma compliant account - see next slidesee next slide

• Could be argued that non-Could be argued that non-compliant account compliant account invalidinvalid

• Receipt of account Receipt of account notnot a a prerequisiteprerequisite

• Ratepayer must enquire himself Ratepayer must enquire himself in case of non-receiptin case of non-receipt

• Rates Rates statementsstatements not compulsory not compulsory

RATES ACCOUNTSRATES ACCOUNTS

Nov 04Nov 04 1919

SANDTON / MOKOPANE MUNICIPALITYSANDTON / MOKOPANE MUNICIPALITYRATES ACCOUNT / TAX INVOICERATES ACCOUNT / TAX INVOICE

RATEPAYERS VAT RATEPAYERS VAT REGISTRATION NO.REGISTRATION NO.

CASHBUILD/CASHBUILD/MUTUAL/FNB/MUTUAL/FNB/ZOTOS VAT NO.ZOTOS VAT NO.

VAT VAT REGISTRATION REGISTRATION NO.NO.

DATE:DATE: INVOICE INVOICE NO.NO.

8 NOV 8 NOV 20042004 21782178

INVOICE TOINVOICE TO

DATEDATE DESCRIPTIONDESCRIPTION AMOUNTAMOUNT

AmountAmount

Date PayableDate Payable

Calculation MethodCalculation Method

Municipal Valuation of Municipal Valuation of PropertyProperty

Any discount, if applicableAny discount, if applicable

Additional Rates, if Additional Rates, if applicableapplicable

SubtotalSubtotal

VAT TotalVAT Total

TOTALTOTAL

Nov 04Nov 04 2020

TENANTS & TENANTS & OCCUPIERS LIABILITY OCCUPIERS LIABILITY

FOR RATESFOR RATES• Tenants’ liability is regulated:Tenants’ liability is regulated:

– by contract, i.e. lease agreement; andby contract, i.e. lease agreement; and

– by statute, i.e. Section 28 of MPR Act by statute, i.e. Section 28 of MPR Act

• Lease may Lease may explicitlyexplicitly place rates burden on place rates burden on tenant or it may be silent - Landlord remains tenant or it may be silent - Landlord remains liableliable

• Lease arrangement re Rates has no bearing Lease arrangement re Rates has no bearing on MPR Acton MPR Act

• MPR Act therefore MPR Act therefore trumpstrumps the lease the lease provisionsprovisions

• IfIf rates are rates are unpaidunpaid by owner by owner

– municipality municipality maymay recover amount from tenant / recover amount from tenant / occupieroccupier

– irrespectiveirrespective of contrary contract of contrary contract

Nov 04Nov 04 2121

TENANT’S RIGHTSTENANT’S RIGHTSThe concept of Reasonable The concept of Reasonable

NoticeNotice• Arises in Context of:Arises in Context of:

– termination of agreementtermination of agreement– change of address or banking change of address or banking

detailsdetails– exercise of optionsexercise of options– relocationrelocation– site inspections by landlordsite inspections by landlord– calculation of time periods calculation of time periods

where contract is silentwhere contract is silent– time for paymenttime for payment– default (concept of mora)default (concept of mora)

• Not relevant where notice period Not relevant where notice period expressly prescribed in leaseexpressly prescribed in lease– in such cases, follow in such cases, follow

prescribed period prescribed period strictlystrictly, , otherwise notice is otherwise notice is invalidinvalid

• Where contract is silent on notice Where contract is silent on notice period, notice has to be period, notice has to be reasonablereasonable

Nov 04Nov 04 2222

• Several Several olderolder Cashbuild contracts Cashbuild contracts are silent as to notice periodare silent as to notice period

• Reasonable notice more complex Reasonable notice more complex than Joe Soap thinksthan Joe Soap thinks

• Notice is only reasonable if:Notice is only reasonable if:– there are adequate there are adequate groundsgrounds for for

the noticethe notice– reasonable reasonable periodperiod is given is given– state what state what actionaction is to follow is to follow

after expiry of noticeafter expiry of notice– action must be action must be permissiblepermissible in in

terms of the contractterms of the contract

• Getting it right is crucial, Getting it right is crucial, otherwiseotherwise– innocent party may view innocent party may view

inadequate notice as repudiationinadequate notice as repudiation– constitutes serious form of constitutes serious form of

breachbreach– damages claimsdamages claims

TENANT’S RIGHTSTENANT’S RIGHTSThe concept of Reasonable The concept of Reasonable

NoticeNotice

Nov 04Nov 04 2323

• As for period, reasonableness As for period, reasonableness depends on proven facts of each depends on proven facts of each casecase

• This aspect causes frustration for This aspect causes frustration for clients, becauseclients, because

– facts differ from case to casefacts differ from case to case– adviser must assess the factsadviser must assess the facts– advice advice cannotcannot be be uniformuniform for all for all

casescases

• The object of giving notice is often The object of giving notice is often the determining factorthe determining factor

– to give the recipient enough time to give the recipient enough time to rearrange his affairs to rearrange his affairs reasonablyreasonably

• Capex could also be a factorCapex could also be a factor[ABI v Rond Vista Wholesalers [ABI v Rond Vista Wholesalers 2004(1) SA 535 (SCA)]2004(1) SA 535 (SCA)]

TENANT’S RIGHTSTENANT’S RIGHTSThe concept of Reasonable The concept of Reasonable

NoticeNotice

Nov 04Nov 04 2424

RATES CLEARANCES & RATES CLEARANCES & TENANT’S TENANT’S

CONSUMPTIONCONSUMPTIONSection 118(1)(b) of the Section 118(1)(b) of the

Municipal Systems ActMunicipal Systems Act

prohibits transfer of property prohibits transfer of property unless:unless:

①① valid clearance certificate is valid clearance certificate is producedproduced

②② issued by Municipality for the area in issued by Municipality for the area in which property is situatedwhich property is situated

③③ certifying that all:certifying that all:

Municipal services feeMunicipal services feeSurcharge on feesSurcharge on feesProperty rates & other municipal taxesProperty rates & other municipal taxesLeviesLeviesDutiesDuties

in connection with the property have in connection with the property have been paid for the period of been paid for the period of 2 years2 years preceding date of application.preceding date of application.

Nov 04Nov 04 2525

Is seller liable for services consumed by Is seller liable for services consumed by tenants & occupiers?tenants & occupiers?

• Yes, because the services are consumed in Yes, because the services are consumed in connection with the propertyconnection with the property

Is this liability recoverable from the Is this liability recoverable from the sellerseller??

• No, Section 25(1) of the Constitution No, Section 25(1) of the Constitution prohibits arbitrary deprivation of propertyprohibits arbitrary deprivation of property

• ““deprivation” has an extended meaning -deprivation” has an extended meaning -

– not only taking awaynot only taking away– but also “any interference with but also “any interference with

the use, enjoyment or exploitation the use, enjoyment or exploitation of the property”of the property”

• Municipality therefore obliged to issue Municipality therefore obliged to issue clearance certificate where all owner clearance certificate where all owner consumed services have been paidconsumed services have been paid

[[M P Mkontwana v Nelson Mandela Metro Municipality M P Mkontwana v Nelson Mandela Metro Municipality (Unreported 30 September 2003 Eastern Cape)](Unreported 30 September 2003 Eastern Cape)]

RATES CLEARANCES & RATES CLEARANCES & TENANT’S TENANT’S

CONSUMPTIONCONSUMPTION

Nov 04Nov 04 2626

RISKS INHERENT TO RISKS INHERENT TO COMMERCIAL PROPERTY COMMERCIAL PROPERTY FROM THE LANDLORD’SFROM THE LANDLORD’S

PERSPECTIVEPERSPECTIVE• InflationInflation

– The property environment is a The property environment is a inflationary one and external forces, such inflationary one and external forces, such as food and petrol costs, labour costs, etc as food and petrol costs, labour costs, etc place upward pressure on inflation.place upward pressure on inflation.

– Failure to peg short-term escalation rates Failure to peg short-term escalation rates and to manage operating expenses will and to manage operating expenses will result in real net incomes diminishing result in real net incomes diminishing and real returns being negative.and real returns being negative.

• Sector RepresentationSector Representation

– Inflation and fewer interest rates Inflation and fewer interest rates reductions reduces disposable income.reductions reduces disposable income.

– Landlords must carefully asses their Landlords must carefully asses their tenant mix - i.e. beverages, tobacco, tenant mix - i.e. beverages, tobacco, hardware, books and periodicals and hardware, books and periodicals and footwear are the first to be affected by footwear are the first to be affected by interest rates increasesinterest rates increases

Nov 04Nov 04 2727

• Nodal obsolescenceNodal obsolescence

– The deterioration of neighbourhoods as a The deterioration of neighbourhoods as a result of age and failing infrastructures is of result of age and failing infrastructures is of particular significance in South Africa.particular significance in South Africa.

– Investors should be aware of the life cycle of Investors should be aware of the life cycle of each node in which they are represented each node in which they are represented and the potential of the node to be and the potential of the node to be rejuvenated.rejuvenated.

• Rand volatilityRand volatilityA fall in the Rand\s comparable value would A fall in the Rand\s comparable value would exacerbate inflationary and interest rate exacerbate inflationary and interest rate pressure which in turn might have a negative pressure which in turn might have a negative impact on the tenant’s ability to pay rental.impact on the tenant’s ability to pay rental.

• Vacancy managementVacancy management

– Vacancy marketing and renewal profiling Vacancy marketing and renewal profiling are important to reduce the risk of are important to reduce the risk of increasing vacancy levels.increasing vacancy levels.

– It is important to develop well-defined It is important to develop well-defined letting strategies.letting strategies.

RISKS INHERENT TO RISKS INHERENT TO COMMERCIAL PROPERTY COMMERCIAL PROPERTY FROM THE LANDLORD’SFROM THE LANDLORD’SPERSPECTIVE (cont’d)PERSPECTIVE (cont’d)

Nov 04Nov 04 2828

RISKS INHERENT TO COMMERCIAL RISKS INHERENT TO COMMERCIAL PROPERTY FROM THE PROPERTY FROM THE

LANDLORD’S PERSPECTIVE LANDLORD’S PERSPECTIVE (cont’d)(cont’d)

• Credit managementCredit management

– Credit management and default risk Credit management and default risk remains a challenge in the South African remains a challenge in the South African property sector. Sound credit management property sector. Sound credit management techniques should therefore be developed.techniques should therefore be developed.

• Changes in legislationChanges in legislation

– Impending changes in assessment rate Impending changes in assessment rate legislation could result in assessment rates legislation could result in assessment rates being determined across the board in a being determined across the board in a uniform manner based on the value of the uniform manner based on the value of the land and developments thereon.land and developments thereon.

• Changes in legal applicationChanges in legal application

– Uncertainty exists as to how municipalities Uncertainty exists as to how municipalities may recover charges and how values are may recover charges and how values are affected by neighbouring properties.affected by neighbouring properties.

– Several property sector-related cases are Several property sector-related cases are pending, many of which could create pending, many of which could create further uncertainty within the property further uncertainty within the property sector.sector.