The new municipal financial year started on 1 July, and for commercial property owners that makes this month a working month, not an administrative one.
Commercial leases have a habit of sitting untouched in a drawer until something forces them open. A rates increase is one of those things. The new municipal charges are now in effect, and most commercial leases make provision for rates to be recovered from the tenant or adjusted with them, but that provision only does its work when it is applied correctly and timeously.
The risk is rarely dramatic. It is that an owner absorbs an increase they were entitled to recover, notices twelve months later, and finds the window for a clean recovery has closed. Below is what we suggest checking while the increase is still fresh.
Start with the kind of lease you are holding
Before looking at the numbers, confirm what the lease promises. A gross lease, where the rental is inclusive and the owner carries the municipal charges, behaves very differently from a net lease where rates and other outgoings are recovered from the tenant on top of the base rental. Many portfolios contain both, sometimes in the same building, because they were signed in different years by different hands.
This single distinction determines whether the increase is yours to carry or yours to pass on, so it is worth confirming lease by lease rather than assuming the portfolio is consistent.
Read the recovery clause on its own terms
Where a lease does allow recovery, the wording governs everything that follows. Look for how the recoverable amount is defined, whether it is the full municipal charge or an increase measured against a base year, and whether the clause covers rates alone or extends to other municipal charges. Where a base year is used, confirm which year the lease names, because that is a common point of disagreement later.
If the wording is ambiguous, it is far better to resolve that now, in a calm conversation with the tenant, rather than during a dispute when positions have already hardened.
Check the timing and the notice you owe
Recovery clauses frequently carry a notice requirement, a period within which the owner must inform the tenant of the adjustment, and sometimes a requirement to supply supporting documentation such as the municipal account. Missing a notice period does not always extinguish the right to recover, but it does complicate it, and it hands the tenant a reasonable objection.
Diarise the dates now while the increase is in front of you. This is the least glamorous part of the exercise and the part most likely to protect you.
Apportionment in multi-tenant buildings
Where a building carries several tenants, the increase has to be divided, and the lease usually sets out the basis for that division, often by lettable area. Two things go wrong here more than anything else. The first is that the apportionment is calculated on outdated floor areas after a reconfiguration of lettable space. The second is that vacant space is absorbed into the occupied tenants’ share rather than carried by the owner, which is both incorrect and the kind of error that damages a tenant relationship when discovered.
Recalculate from up-to-date lettable areas, and keep the calculation in a form you would be comfortable showing a tenant.
Keep the paper trail
Whatever you recover, keep the municipal account, the calculation, and the notice you sent, filed together. Rates recoveries are among the most commonly queried line items on a commercial account, and a clear file turns a potential dispute into a short conversation. It also makes the following year straightforward, because the working is already there.
The wider point
A rates increase is a reminder that a lease is a live document rather than a filed one. The owners who come through these cycles most comfortably are the ones who treat the start of the municipal year as a scheduled review, checking the recovery mechanism, confirming the lease areas, sending the notices, and keeping the tenant informed as they go. It takes an afternoon, and it prevents most of what would otherwise arrive as a surprise.
If you hold commercial property and you are not certain how the new charges should flow through your leases, we are happy to work through them with you. We manage commercial portfolios across Cape Town and this is routine work for our team.
