TENANT’S RIGHTS SEMINAR

Note:To view in full screen - Right mouse click and select “Full Screen” TENANT’S RIGHTS SEMINAR With special emphasis on the Municipal Rates Act and Landlords and Tenants Rights thereunder held at RANDPARK CLUB on 9 NOVEMBER 2004 presented by VAN DER HEEVER & ASSOCIATES

WHERE IS THE POWER IN THE PROPERTY GAME? The Five Forces 2. Potential Entrants Threat of new entrants Bargaining power of Customers 1. Industry Competitors Rivalry among existing retailers 4. Landowners/ Landlords Bargaining power of Landlords 5. Customers Threat of substitute property 3. Substitutes CENTRAL THEME Building competitive advantage and five forces

How can a property manager help improve the Company’s competitive advantage? • In order to build competitive advantage, the property manager can contribute in at least the following ways: - The property manager must ensure that the barriers to entry into the company’s particular industry is raised through judicious renting/letting policies;

Prevent loss of market share to the company due to the fact that competitors are resorting to alternative property arrangements, e.g. sale and leasebacks or property loan stock; • Managers must ensure that negotiations are more effective with landlords, e.g. gaining market intelligence in order to strengthen bargaining position;

What does Warren Buffet say about enduring/durable competitive advantage? The purpose of this lecture is to improve the leasing manager’s own knowledge base, in such a way as to impart and enhance competitive advantage to her/his business.

In order to describe the concept of endurable competitive advantage, Buffet likes to use the castle and moat analogy Your company (collective competitiveness) I, myself (individual, competitiveness))

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

Competitiveness • The moat around the castle is the company’s competitive advantage. • Without the moat or, should the moat run dry or become too shallow, the castle will become vulnerable to attack.

Competitiveness • The purpose today is to dredge the moat deeper and to make it wider in order to make the castle less susceptible to competition. • Bear in mind that many businesses have competitive advantage over others but the sustainability or durability of that advantage varies greatly between businesses

Competitiveness in the Property Game • A company that has to spend great sums of capital to maintain competitive advantage might not be sustainable. • The trick therefore is to negotiate leases and acquire properties in the most cost-effective way. • A property manager who rents property too expensively or pays too much for a new store development, creates question marks over the durability of the company’s competitive advantage. • A manager who generalises property deals and administration damages the moat

HOW DO WE RAISE THE BARRIERS TO ENTRY? • From a tenant’s perspective, the barriers to entry for other competitors is raised by way of the following innovations: • Superior networking with a larger and more reputable pool of landlords; • Building a solid and reliable relationship with landlords and landowners, causing them to call for less security. Smaller operators sometimes have to pay six months to a year’s rent upfront, whereas a national retailer a get away with reduced guarantees; • Emphasising property maintenance in order to enhance the usability and appeal of the company’s trading location. It is easier for competitors to access the market where a competitor’s premises are in disrepair since the new entrant can compete effectively by renting property at lower levels

PREVENTING SUBSTITUTES FROM ENTERING THE MARKET • Selecting prestige and low maintenance premises is clearly a strategy for preventing substitutes taking market share from the company; • E-commerce between landlords and tenants is taking a firm hold in the property industry in general.

HOW CAN WE USE LANDLORDS, MUNICIPALITIES AND OTHER SUPPLIERS MORE EFFECTIVELY? • Tenants have to expand E-commerce to municipalities and other suppliers such as Eskom; • On-line communication between landlord and tenants obviates rent and services disputes; • Landlords are amenable to finance tenant’s installations such as goods received and goods dispatch accesses to the premises;

HOW CAN WE USE LANDLORDS, MUNICIPALITIES AND OTHER SUPPLIERS MORE EFFECTIVELY? • The smaller retailer does not have the same clout and has to make do with whatever the landlord can offer; • From a legal perspective, a verbal discussion or gentleman’s agreement sometimes works in practice, but it is clearly more prudent to commit these undertakings to writing preferably in the lease agreement or by way of an addendum;

BRIEF OVERVIEW Legal: • Temporary use of someone else’s property • Risks of ownership remain with Landlord • Low initial & subsequent capital outlay • No borrowing considerations

BRIEF OVERVIEW Legal Accounting: • Low charges on income statement • no depreciation • interest on borrowing saved • Off-balance sheet item • Exception for Finance Leases (AC105) • tenant becomes owner eventually • option to purchase

BRIEF OVERVIEW • Lease endures for asset’s economic life • PV of rental = fair value of asset • Asset of specialised nature for tenant only

RATES ACCOUNTS • Contents of rates accounts now regulated by statute • Account must comply with Section 27(1) • Pro forma compliant account - see next slide • Could be argued that non-compliant account invalid • Receipt of account not a prerequisite • Ratepayer must enquire himself in case of non-receipt • Rates statements not compulsory

SANDTON / MOKOPANE MUNICIPALITY RATES ACCOUNT / TAX INVOICE

TENANTS & OCCUPIERS LIABILITY FOR RATES • Tenants’ liability is regulated: • by contract, i.e. lease agreement; and • by statute, i.e. Section 28 of MPR Act • Lease may explicitly place rates burden on tenant or it may be silent - Landlord remains liable • Lease arrangement re Rates has no bearing on MPR Act • MPR Act therefore trumps the lease provisions • If rates are unpaid by owner • municipality may recover amount from tenant / occupier • irrespective of contrary contract

TENANT’S RIGHTSThe concept of Reasonable Notice • Arises in Context of: • termination of agreement • change of address or banking details • exercise of options • relocation • site inspections by landlord • calculation of time periods where contract is silent • time for payment • default (concept of mora) • Not relevant where notice period expressly prescribed in lease • in such cases, follow prescribed period strictly, otherwise notice is invalid • Where contract is silent on notice period, notice has to be reasonable

TENANT’S RIGHTSThe concept of Reasonable Notice • Several older Cashbuild contracts are silent as to notice period • Reasonable notice more complex than Joe Soap thinks • Notice is only reasonable if: • there are adequate grounds for the notice • reasonable period is given • state what action is to follow after expiry of notice • action must be permissible in terms of the contract • Getting it right is crucial, otherwise • innocent party may view inadequate notice as repudiation • constitutes serious form of breach • damages claims

TENANT’S RIGHTSThe concept of Reasonable Notice • As for period, reasonableness depends on proven facts of each case • This aspect causes frustration for clients, because • facts differ from case to case • adviser must assess the facts • advice cannot be uniform for all cases • The object of giving notice is often the determining factor • to give the recipient enough time to rearrange his affairs reasonably • Capex could also be a factor [ABI v Rond Vista Wholesalers 2004(1) SA 535 (SCA)]

RATES CLEARANCES & TENANT’S CONSUMPTION Section 118(1)(b) of the Municipal Systems Act prohibits transfer of property unless: • valid clearance certificate is produced • issued by Municipality for the area in which property is situated • certifying that all: • Municipal services fee • Surcharge on fees • Property rates & other municipal taxes • Levies • Duties in connection with the property have been paid for the period of 2 years preceding date of application.

RATES CLEARANCES & TENANT’S CONSUMPTION Is seller liable for services consumed by tenants & occupiers? • Yes, because the services are consumed in connection with the property Is this liability recoverable from the seller? • No, Section 25(1) of the Constitution prohibits arbitrary deprivation of property • “deprivation” has an extended meaning - • not only taking away • but also “any interference with the use, enjoyment or exploitation of the property” • Municipality therefore obliged to issue clearance certificate where all owner consumed services have been paid [M P Mkontwana v Nelson Mandela Metro Municipality (Unreported 30 September 2003 Eastern Cape)]

RISKS INHERENT TO COMMERCIAL PROPERTY FROM THE LANDLORD’SPERSPECTIVE • Inflation • The property environment is a inflationary one and external forces, such as food and petrol costs, labour costs, etc place upward pressure on inflation. • Failure to peg short-term escalation rates and to manage operating expenses will result in real net incomes diminishing and real returns being negative. • Sector Representation • Inflation and fewer interest rates reductions reduces disposable income. • Landlords must carefully asses their tenant mix - i.e. beverages, tobacco, hardware, books and periodicals and footwear are the first to be affected by interest rates increases

RISKS INHERENT TO COMMERCIAL PROPERTY FROM THE LANDLORD’SPERSPECTIVE (cont’d) • Nodal obsolescence • The deterioration of neighbourhoods as a result of age and failing infrastructures is of particular significance in South Africa. • Investors should be aware of the life cycle of each node in which they are represented and the potential of the node to be rejuvenated. • Rand volatility A fall in the Rand\s comparable value would exacerbate inflationary and interest rate pressure which in turn might have a negative impact on the tenant’s ability to pay rental. • Vacancy management • Vacancy marketing and renewal profiling are important to reduce the risk of increasing vacancy levels. • It is important to develop well-defined letting strategies.

RISKS INHERENT TO COMMERCIAL PROPERTY FROM THE LANDLORD’S PERSPECTIVE (cont’d) • Credit management • Credit management and default risk remains a challenge in the South African property sector. Sound credit management techniques should therefore be developed. • Changes in legislation • Impending changes in assessment rate legislation could result in assessment rates being determined across the board in a uniform manner based on the value of the land and developments thereon. • Changes in legal application • Uncertainty exists as to how municipalities may recover charges and how values are affected by neighbouring properties. • Several property sector-related cases are pending, many of which could create further uncertainty within the property sector.

TENANT’S RIGHTS SEMINAR