1. Introduction to Commercial Letting Management

The letting of Commercial Real Estate is not just about providing a place to run a business, but also a strategic investment.  One must source and provide sufficient and adequate letting space that is perfectly located and priced within the already competitive market.

The commercial letting market differs vastly from the residential market.  It requires proper knowledge of Commercial markets, legal obligations and the understanding of tenant mixes and terminology like footage.  It also helps to have the right connections.  Commercial Brokers/Agents help to make the commercial renting process quicker, ensure that the lettable space is a good match and negotiate all aspects of the letting process.

Initial rental is determined by comparing the current market rental of similar properties (similar in size and area) and by calculating the expected Return on Investment (ROI). These calculations usually include expected building-related expenses, scheduled maintenance and enhancements or other major capital expenses.  The stream of income generated must be profitable for the lessor.  Keeping rentals in line with market rentals, makes the property more attractive for potential tenants and curbs vacancies.  The letting of Commercial property remains a risk for the investor (lessor).  The Lessor will let the property in return for a regular stream of income.

2. Definition of Commercial Letting Management

Letting Management can be defined as a responsibility on agencies to create mechanisms to promote the provision of adequate Commercial Properties and for the leasing of such properties, thus representing both the lessor and lessee.  

A lessor is an individual who owns real estate (property) that he or she leases to a lessee. In this case, Lessors own Commercial or Industrial Properties. They lease the properties to individuals or companies in return for monthly rent. As the owning party, a lessor's obligations include structural maintenance and repairs as well as non-recoverable property tax payments and any other obligations stipulated in the Lease Agreement.

A lessee is a person who leases land or property from a lessor (owner). The lessee is also known as the "tenant" and must uphold specific obligations as defined in the lease agreement. The lease is usually a written and legally binding document, and if the lessee violates its terms, he or she could be evicted.

 

Letting management is the oversight of real estate property by a third party. This entails the process of finding a willing lessee to occupy and rent available commercial space from a willing lessor, collecting the rentals, and paying over to the lessor. 

Letting Management is also about taking on all day-to-day tasks focused on the real estate/rental property in question. Property managers are involved in acquiring lessees to fill a vacancy, collecting monthly rental payments, and facilitating the required maintenance.  The managing agent is, therefore, an asset manager of sorts, as part of the responsibilities include financial management.  This is explained fully in the Learning Unit about Financial Management.

3. Purpose of Commercial Letting management

The law of rent was formulated by David Ricardo[1] around 1809 and presented in its most developed form in his magnum opus, On the Principles of Political Economy and Taxation.  This is the origin of the term Ricardian rent.  Ricardo's formulation of the law was the first clear exposition of the source and magnitude of rent and is among the most important and firmly established principles of economics.

The rent of a property, therefore, considered as the price paid for the use of the property, is naturally a monopoly price based on supply and demand factors.  It is not at all proportioned to what the lessor may have spent upon the improvement of the property or to what he/she can afford to take, but to what the lessee can afford to give. 

Leasing, also known as renting, is an agreement where a payment is made for the temporary use of a service or property owned by another for a specified period.  A gross lease is when the lessee pays a flat rental amount, and the lessor pays for all property charges regularly incurred by the ownership.  Renting can be an example of the sharing economy.

There are many possible reasons for leasing instead of buying, for example:

4. The place of Commercial Letting in the business

Understanding the place and role of Commercial Letting management in a property management business requires an understanding of the whole Property Management Value Chain. The property management value chain can be explained as a set of business-generating activities like Sales, Rentals, Sectional Title Management, Insurance, and Auctions & Valuations. Depending on the type of business-generating activity, the transaction is supported by various business support functions. From the illustration below, Commercial Letting Management is a business-generating activity, which is dependent on Debt Collecting, Maintenance, Utilities, Insurance, Trust & Accounts Management, Financial Management, and Governance functions.

Although the Commercial Letting Function does not provide a service to other functions, it nonetheless works closely with them.

Utilities

• The Letting Function provides utility accounts as received from the municipality to the Utilities Function to invoice the amounts owing by the lessee. 

Debt Collecting

• The Debt collection function facilitates the collection of property-related income and recoveries.
• Lessors are advised which defaulting lessees need to be given notice and/or be handed over to an attorney.
• Lessors are advised/requested to write off bad debt to clear old outstanding rental.

Insurance

• Potential insurance claims are reported to the lessor.  It is the lessor’s responsibility to notify the applicable insurer. 
• Claim forms may, in certain cases, be obtained and provided to the lessor.
• The insurance premiums of properties managed are paid to the insurer.

Sectional Title

• Levy amounts are paid by the Letting function from the rental income.
• The Letting function facilitates the communication between sectional title schemes and the lessees.

Sales

• Any lessor wanting to sell, or lessee wanting to buy, is referred to the Sales Function.
• Sales stock is marketed to lessees and lessors.
• The Letting function communicates the sale of a property to the lessee.

Residential Letting

• They are notified of any maintenance/repair issues requiring attention should the property be a mixed-use property.
• Transfer of funds between properties of the same lessor for various reasons, for instance, the payment of utility accounts.

This section focuses on the role of the Letting Management Function in the Property Management Business.  Other functions in the Property Management Value Chain are dealt with in other training programmes.

5. Applicable Legislation

Protection of Personal Information (POPI) Act

The POPI Act deals with how an organisation must adhere to certain regulations and protocols when managing clients’ personal information.

  

More details on the POPI Act are discussed in the Legislation Programme, but in this programme we highlight some of the requirements most applicable to the Letting function.

• As per the POPI Act, personal information may not be obtained or disclosed unless the following criteria have been met:
• A person must have a choice whether to consent or not (it must be voluntary) and the person must provide authorisation (signature or related correspondence) on the specific document to provide consent.
• Required by law, for example FICA, PPA, or Court order.
• The processing of Personal Information must be done reasonably so that it doesn’t infringe on the person’s privacy.
• The collection of Personal Information must be done for a specific and explicitly defined purpose.

What is Personal Identifiable Information?

• Sensitive Personal information – Sensitive personal information is information that can identify the data subject. This can include information such as the data subject’s: ID numbers (Individuals), Bank Account details (Individuals or Juristic e.g. companies), and Tax Numbers (Individuals or Juristic e.g. companies).
• Special Personal Information – Special personal information is defined in terms of Section 26 of the Act. Special personal information includes a data subject's race, sex, language, etc.
• Personal Information of European Citizens - The General Data Protection Regulation (GDPR) is a legal framework that sets guidelines for the collection and processing of personal information from individuals who live in the European Union (EU).

In Commercial Letting, examples of personal information collected would be:

• All applicants’ and occupiers’ names, Surnames, ID numbers, ages, and addresses
• Language, Race, and Gender
• Financial information obtained during the application and approval process, including employment details
• Account balances, etc.

In short, all the information we gather and/or process on our documents, calls, or emails should be handled only with the consent of the relevant person. If we as a company or its employees do not comply, then legal consequences will be the result. Individuals can be held responsible for the legal consequences and not solely the company.

Furthermore, the Act requires determining how long information needs to be kept and how the information will be destroyed after the required period. Remember that if there is a specific Act involved, the minimum retention period of that Act will be applicable.

To get familiar with the detail concerning your organisation’s POPI compliance, request the company POPI compliance manual from your Information Officer.

Property Practitioners Act

The Property Practitioners’ Act was published in 2020 and the regulations followed in 2021.  The president announced the Act to be fully effective from February 2022. It replaced the old and outdated Estate Agency Affairs Act 112 of 1976 (EAA Act) in its entirety. It did so to achieve three primary objectives:

1. to address slow transformation in the property sector
2. to integrate and consolidate all role-players within the property sector under one umbrella statute, and
3. to address the deficiencies in what has been a largely ineffective system of monitoring property practitioner matters and protecting consumers and their trust funds.

The Property Practitioners’ Authority is, furthermore, mandated to act as the Supervisory Body of the Property Practitioners’ profession in terms of the provisions of the Financial Intelligence Centre Act and to take all steps required to prevent, or alternatively identify and report on, money laundering and terrorist financing activities.

The Act is discussed in much more detail in the Legislation Programme, but for this programme the focus is placed on specific requirements placed on the Letting function.

Fidelity Fund Certificate (FFC)

The legal requirement for someone to be able to act as a Property Practitioner is to hold a valid Fidelity Fund Certificate (FFC), which is now valid for a period of three years, but only issued/renewed if

• An agency is registered with the Property Practitioners’ Regulatory Authority (PPRA), previously the Estate Agency Affairs Board (EAAB),
• An agency is up to date with its fee payments,
• The agency is BBBEE compliant
• The agency has a compliant tax status
• All agents are registered, and their training and Continuous Professional Development (CPD) points are up to date,
• A favourable audit report was submitted to the council, based on both the Trust Account as well as the books of the business itself – for those Property Practitioners who do receive monies in Trust.

Qualifications / Training requirements

No person shall be entitled to practice as a property practitioner unless such person has first completed a practical training course in respect of non-principal property practitioners relevant to the industry in which such person has sat their professional designation examination, which practical training course will constitute a minimum of six modules to be completed over a maximum period of six months.

The purpose and object of such practical training will be to equip non-principal property practitioners with the necessary practical skills required in order to enable them to operate in an efficient and appropriate manner as property practitioners in the relevant industry;

provided always that notwithstanding the provisions of subregulation 33.2.1, such practical training course shall be designed primarily by the leading industry bodies regulating those areas of industry to which the activities of the various categories of property practitioners relate; provided further that such practical training courses shall be subject to the overall oversight and approval of the Authority, and that such approval shall not be unreasonably withheld or delayed by the Authority.

It shall not be a prerequisite that a person be registered with the Authority as a candidate property practitioner prior to such person being entitled to study for, sit the exams and achieve the qualifications.

Notwithstanding anything to the contrary contained in the regulations,  a property practitioner who, on the effective date, is already registered as either a non-principal or principal property practitioner, will be exempted from the requirements of the provisions of subregulation.

For a period of six months following the date upon which a person first becomes qualified and registered as a non-principal property practitioner, such person shall not in their capacity as a property practitioner

(a) enter into any mandate for the sale or purchase of any property or the letting or hiring of any property with any member of the public or

(b) conclude or cause to be concluded any agreement for the sale or purchase of any property or the letting or hiring of any property,

unless such mandate or agreement has first been reviewed and co-signed by another qualified property practitioner operating in the same industry registered with the Authority who holds a Fidelity Fund certificate issued by the Authority and who is not subject to any foregoing restriction referred to in the regulations.

No person may, without the consent of the Authority, act as a candidate estate agent for a period in excess of 180 days in aggregate.

After the expiry of such 180-day period, the candidate estate agent shall be obliged to sit for his or her professional designation examination as a non-principal property practitioner.

If such person fails to pass the professional designation examination, then on application to the Authority and on good cause shown, the Authority may permit such person to again register as a candidate estate agent for a further period of 180 days.

Mandatory Disclosures

The PPA has specific disclosure requirements which we were not used to under the EAAA.

Owner/landlord disclosure

The owner of a property must disclose all known defects of the property, even though the voetstootsprinciple still applies.

Property Practitioner disclosure

All letterheads, written communication and marketing material should now contain the declaration that the Business Property Practitioner (or individual property practitioners) is registered with the PPRA.  It should contain the Business telephone number and email address as well as stating clearly if an individual is operating as a Candidate Property Practitioner.

All contracts should, in addition to the above, also contain a declaration of the validity of the business’ and individual property practitioners’ FFC at that moment.

Code of Conduct

• All property practitioners have to comply with the Authority’s Code of Conduct and due to the importance hereof, the full code is available for download here.

Financial Intelligence Centre Act (FICA)

The FIC Act requires Accountable institutions (like Property Practitioners) to comply with the Act and report on certain transactions to the Centre.  The Act is discussed in much more detail in the Legislation Programme, but for this programme, the focus is placed on specific requirements most relevant to the Letting function.

The Main Topics covered in the FIC Act are:

• Money Laundering
• Accountable and Reporting Institutions
• "Know your client"
• Record Keeping
• Suspicious and Unusual Transactions
• The Financial Intelligence Centre

The Act requires each firm to compile a Risk Management and Compliance Programme (RMCP) document that covers all aspects of compliance of the specific firm and all of its departments.  Download the RMCP of NRE and carefully study the requirements placed on all employees, including the details of the items listed below.

• The Commercial Letting Function must collect and complete the following from prospective clients who will enter a business relationship with the firm:
• ID Document
• Proof of Address
• Completed FICA document
• A Risk-based approach is followed to determine if clients are High Risk or Low Risk to the firm.  All High-Risk clients need to be identified and approved by the Compliance Officer.  The firm is not prohibited from entering into a transaction or relationship with such a High-Risk client, but additional requirements are placed on the firm before continuing.
• Documents of all transactions should be kept for at least five years after the final transaction date of a client.  These documents may be kept electronically, subject to certain criteria.
• Ongoing due diligence checks of clients are required

Where a lessee is a group, each adult occupant will be required to provide identity documents. Where applicable, a tenant will also have to prove their source of funds, especially any cash payments or funds transfers from overseas.

The main goal is to assist in the identification of the proceeds of unlawful activities, to combat money laundering, and fight the financing of terrorist and related activities.  As soon as the FICA document is completed and a “high risk” factor established, it should be reported to the designated reporting officer within the agency.  Any suspicious transactions should also be reported.

If a reporting entity suspects or has reasonable grounds to suspect that funds are the proceeds of criminal activities, or are related to terrorist financing, it shall as soon as possible (but no later than 3 days thereafter) report promptly, its suspicions to the Financial Intelligence Unit (FIU).  A suspicious transaction is a transaction that causes a reporting entity to have a feeling of apprehension or mistrust about the transaction considering its unusual nature or circumstances, or the person or group of persons involved in the transaction.

Consumer Protection Act (CPA)

The purpose of the Consumer Protection Act is to provide better and all-round protection to consumers and effective safeguards against different types of exploitation such as defective goods, deficient services, and unfair trade practices. 

Commercial property owners who lease out their properties must ensure that they are fully informed of the provisions of the Consumer Protection Act 68 of 2008 (the “Act”) as it places onerous requirements on “suppliers” regarding the management of lease agreements for the purposes of protecting “consumers”.

A “consumer” (as defined in the Act) includes tenants of commercial properties such as small or medium sized businesses and individuals who are party to residential lease agreements. It does not include a juristic person whose asset value or annual turnover, at the time of entering into the (transaction) lease agreement, equals or exceeds R2 000 000.00 (two million rand).

A “supplier” (as defined in the Act) is a person who markets any goods or services. As a result, landlords are considered suppliers and the Act specifically includes landlords who let premises as part of their ordinary business operations within this definition. Therefore, both landlords and tenants are subject to the provisions of the Act, save for the exclusions set out herein above.

The definitions contained in the CPA clearly indicate that landlords, rental agents and ‘buy-to-let’ investors are to be regarded as suppliers, while tenants are viewed as being consumers, for the purposes of the Act. The result is that both landlords and tenants are subject to the full rigours of the CPA. The CPA relates specifically to the conduct of landlords who let out premises as part and parcel of their ordinary business operations - as opposed to ‘once-off’ lease arrangements and other private situations.

Note that any lease agreement conducted with legal entities or with juristic entities where their annual turnover exceeds R2 000 000.00 (two million rand) does not fall under the conditions of the CPA.  It is therefore important to include this in the vetting process to determine if the lease is exempted from the CPA and to ensure that prospective tenants are advised properly of any provisions contained in the lease agreement.

Provisions contained in the lease agreement to be pointed out:

• Provisions that limit the risk of the landlord; and/or
• provisions which constitute an assumption of risk by the tenant; or
• the provision of an indemnity by the tenant; or
• any acknowledgement of fact by the tenant

Any provision in a lease agreement which purports to limit and/or exempt the landlord from liability for any loss attributable to the gross negligence of the landlord and/or which requires the tenant to assume liability for such loss is not permitted.

The CPA sets a limit to the duration of fixed-term agreements to the maximum of two years, unless the landlord can establish a “demonstrable financial benefit” to the tenant for the conclusion of a lease for a period exceeding two years.

The Act prohibits certain specific contractual provisions and declares others to be unfair, unreasonable, or unjust and obliges landlords to bring certain provisions of lease agreements to the tenant’s attention.

Sections 48 to 52 of the Act deal with unfair, unreasonable, and unjust contract terms. Sections 48 and 49 inter alia prohibit suppliers i.e., landlords from entering into agreements on terms that are unfair, unreasonable or unjust, including terms that require consumers i.e. tenants to waive any rights or assume any obligations, waive any liability of the landlord or which impose as a condition of entering into a transaction terms that are unfair, unreasonable or unjust, and prohibits agreements that are excessively one-sided in favour of the landlord.

Landlords, brokers or agents representing landlords, must ensure that when entering into lease agreements, any term which may fall within the categories mentioned in Section 48 – 51 are not drafted on any unreasonable terms and are, prior to and at the time of entering into the agreement explained to the tenant, with the tenant signing a declaration that such terms were brought to its attention.  Failure to comply with the provisions of the CPA in respect of leases may result in the entire lease agreement being declared null, void and unenforceable.

Failure to comply with any compliance notice requiring the rectification of any prohibited conduct may, furthermore, result in the imposition of a fine equal to 10% of annual turnover or R1 million, whichever amount is greater, or to imprisonment for up to one year or to both a fine and imprisonment.

Please find attached the Consumer Protection Act 68 of 2008 (the “Act”) as well as an article published related to Section 14 by the EAAB.