The commercial real estate is any non-residential property used for commercial profit-making purposes. The commercial real estate includes stores, malls, office buildings, and industrial parks. Unlike residential real estate lease, commercial real estate leases have many critical issues, which if not paid attention to at the time of the signing of the lease can result in a dispute between the parties to the arrangement.
A few useful rules to remember in case of Commercial Real Estate Lease are:
- Rule-1 – Identification of Parties and Premises: This implies that the exact owner/lessor ought to be verified and identified. Generally, in commercial spaces there is an element of sub-lease in favor of the lessor as the land on which the commercial property is built is a government allotted land. Further, the location of a commercial space/premises and its measurement is a grave area of concern. The premise defined in the lease often does not match the premise that the lessee expects to receive. Thus, utmost care must be taken to ensure that there exists no ambiguity in this respect. This is most important when you are entering into a lease contract with the builder himself – in case of a mall or office building. The space you are actually supposed to get should be mentioned in the agreement in an identifiable manner;
- Rule-2 – Term, Commencement and Termination:The dates of commencement and termination of the lease needs to be unambiguously stated in the lease deed. The length of the lease is an important aspect that a lessee will generally consider for making capital investments in making the leased space operational. The date of the lease and its commencement are often the same, but sometimes the commencement date is which coincides with the completion of improvements that the lessor agreed to. Hence, if the lease date and commencement date are different then the lessee must ensure that the improvements (if any) must be finished as per his requirements before paying the rent and also make clear whether lessee’s non-rent obligations begin before the commencement date to prevent any sort of problem. Also, the implication of a lock-in period, rights during and after such period have to be clearly dealt with in lease document;
- Rule-3 – Rent, Escalation and Interest-Free Refundable Security Deposit (IFRSD): Rent payable towards usage of the premises is the first responsibility of the lessee. Therefore, the mode of payment, the rate at which it will escalate, the period after which it would escalate, due date etc. must be clearly stated in the lease document. Likewise, the amount of IFRSD, permissible adjustments, refund thereof, a penalty in case of delay in refund etc. have to be outspoken in the lease;
- Rule-4 – Charges towards Common Area Maintenance (CAM): CAM, generally is, certain percentage share of the costs of the lessor’s for maintaining, operating, replacing and repairing the components of the building (eg. lift for the building or common area electricity usage), which the lessee has to pay for. Thus, all CAM charges must be pre-determined and agreed upon by both Lessor and lessee;
- Rule-5 – Exclusions / Limited Rights: Lessee must be aware of their rights to sublease/ assign the premises. Often there are strict prohibitions on subleasing or assigning the premises unless the lessor’s consent is obtained in writing but whether it is to be granted or withheld is entirely the lessor’s prerogative. To ensure performance by the lessor, the lessee ought to ensure the guarantee of an exclusive right in the agreement;
- Rule-6 – Right to Relocate: There may be clauses that give the lessor the right to relocate the lessee to a new location within the building or locality. This affects the lessee’s business as the location is a significant factor in building the repute of a business. It is not a standard clause in India and most parties manage to remove these clauses successfully through negotiation. Knowing these issues in advance will ensure the most effective representation of the lessee’s business; For Rule 5 & 6 above, it is apt to state that the lessee must be clear about all his operational needs and must include terms that ensure his ability to carry out his business successfully and to his satisfaction. Such operational needs include parking space, the location of the premises, the environment around the premises, etc.
- Rule-7 –Registration: The lease agreement is required to register with authority by paying stamp duty and registration cost. Generally, stamp duty and registration costs in a transaction are borne by the lessee. These charges are pre-defined and governed by the local sub-registrars who evaluate them in the context of a market value assigned to their records for each region / sub-region of the city;
- Rule-8 –Right of notice: Therefore a lessee must ensure that the lease agreement has at least that much months of notice period expressly stated in the lease document that the lessee may require for shifting entire business operations.
There can be some other crucial aspects that form a governing rule for any commercial real estate lease arrangement. The usage can vary considerably in case of commercial lease depending on the specific purpose it is used and needs to be tailored keeping in mind the specific needs of the lessee.
The article is written by Mr Manoj K Singh, Founding Partner, Singh & Associates and Mr Harsimran singh, Principal Associate, Singh & Associates. Views are personal.