Important clauses in commercial lease agreements that tenants should know
07 February 2019
We look at some of the important clauses in commercial lease agreements that tenants should scrutinise, to get the best deal and avoid legal hassles at a later date
When taking a commercial space on rent, an agreement for the same needs to be carefully executed. There is usually a huge rental outgo in commercial establishments and hence, the premises to be taken on rent must be thoroughly checked. The rental agreement forms an important part of your business and the conditions therein, will impact your business and activities, as long as you are in those premises. A lease agreement is usually drafted by the landlord and thus, may contain several conditions that favour the landlord. Even if the lease agreement is being prepared by a broker, using a common template, there are some specific clauses that tenants should check for.
Try to get a competitor clause in the lease agreement. A competitor clause will prevent the landlord from leasing out space in the same building, in which you are moving, to your competitor. This can be particularly useful, if you are a retailer.
Concessions in rent
Check if the landlord is willing to give certain relaxations, like waiver of the rent for the first one or two months of the lease duration. Landlords are usually pliable, if the premises have been vacant for quite some time. Other relaxations can include sharing of renovation costs or a paint job for the premises, at the expense of the landlord.
Gross rent lease or net rent lease
There should be clarity between you and your landlord, about the components other than the rent, like property tax, maintenance charges, insurance and expenses towards common areas. In a gross rental deed, you will pay the rent and all of the other applicable expenses. In a net lease deed, you will pay only the base rent. In the case of a net lease deed, the rent will be lower but be clear about all the incidental expenses. Check out the electricity meters and see if you will get a separate bill or whether it will be combined with another tenants and if so, how will each tenant’s charges be ascertained.
At times, the tenant may need to carry out renovations or make improvements to the premises, for running the business. This will require the consent of the landlord. Try to get a clause inserted in the agreement for the landlord to give complete or partial compensation, for the renovations. This will be easier to do if the landlord is an individual, rather than a company.
Lease termination conditions
Check the conditions under which the landlord can terminate the lease, as these can often be rigid. One should also plan for circumstances where the building is sold by the landlord, while the lease tenure has not ended.
Lease renewal clause
A lease tenure of one or two years will give you the flexibility, especially if you have a small business, to move out for expansion purposes or to better location, when required. However, there must also be a clause to renew the agreement, after the first one or two years, at the same rent or a hike that is mutually agreed upon. This will insulate you from a sudden jump in rentals, in case you wish to remain in the same property. As a thumb rule, a 10 per cent annual hike in rental, is considered optimal. This can be lower or higher, depending on the supply of similar commercial spaces in that locality and your own situation. It is important to get the proposed increase in rentals in writing, in case you renew the agreement.
Security deposit and its return
There will be a fixed amount that you have to deposit with the landlord, as security. This security deposit will be a multiple of the monthly rent and is usually the equivalent of two or three months’ rent. Try and negotiate this amount. If there are many vacant commercial establishments in that locality, or if the landlord is not a corporate, there is greater scope for negotiation over this amount. Tenants should also examine the conditions pertaining to the return of the security deposit.