Commercial lease agreements are the backbone of any business that requires a physical location, whether it’s an office, a retail store, or a manufacturing unit. According to a report by Knight Frank, over 80% of office spaces in major Indian cities are leased rather than owned, indicating a strong reliance on commercial lease agreements.
A commercial lease agreement is a legally binding contract that outlines the terms and conditions between a landlord and a tenant. This agreement occurs intending to operate a business in another place. The lease requires the lessee to give the landlord’s property in return for monthly payments for a predetermined amount of time. In any case, if either party disregards the terms of the agreement, there will be repercussions for both the lessor and the lessee.
Types of Commercial Lease Agreements
Commercial property lease agreements come in various forms, each tailored to specific needs and circumstances.
Full Service or Gross Lease
In a full-service or gross lease, the tenant pays a fixed rent, and the landlord covers all operating expenses, including maintenance, insurance, and property taxes. This type of lease is ideal for businesses that prefer predictable monthly expenses.
Net Lease
A net lease requires the tenant to pay a base rent plus a share of the property’s operating expenses. There are three subtypes:
- Single Net Lease: Tenant pays rent and property taxes under a single net lease.
- Double Net Lease: Renter is responsible for insurance, property taxes, and rent.
- Triple Net Lease: Renter covers insurance, upkeep, property taxes, and rent. Lease agreements for commercial property typically look like this.
Modified Gross Lease
A modified gross lease is a compromise between gross and net leases. The tenant and landlord split the operating expenses, which can benefit businesses looking for flexibility in cost-sharing.
Percentage Lease
Tenants that have percentage leases pay both a basic rent and a portion of their gross sales. This kind of lease is frequently utilized in retail settings where the landlord gains from the tenant’s prosperity.
Essential Elements of a Commercial Lease Agreement
Definitions
Section 105 of The Transfer of Property Act, of 1882 defines a “lease” as the transfer of a right to enjoy immovable property for a certain or predetermined period by the transferee to the transferor. The price paid or agreed to be paid is taken into consideration while making the transfer.
Term
The following terms are typically seen in commercial leases:
Lessee and Lessor
The person who transfers property is referred to as the lessor or transferor, and the person who receives it is referred to as the lessee or transferee, by section 105 of the Transferor of Property Act, 1882.
Base Rent
Tenants are required to pay the landlord a certain fee each month for the use of the office space. Base rent is fixed on a square foot per year basis and is nearly fixed.
Extra Rent
Tenants are required to pay additional fees to their landlord to cover other costs such as building maintenance, after-house service, and percentage rent.
Usage Clause
Specifying the activities for the lessee or tenant is permitted to engage usage clauses are used. These provisions restrict the landlord’s or property owner’s responsibility and guard the asset against harm.
No Rent
Abated rent, another name for no rent, is the amount of rent that is given to the tenant by the landlord for free for a particular month, generally at the start or end of a lease. Turnkey
“Turnkey,” refers to a facility that is ready for occupation. A turnkey property can save time and frustration if you are pressed for time and have limited opportunities to select new office space, accept terms and conditions, and relocate into the new region. Every fixture, wiring, flooring, and design element, such as paint and carpet, is already present in a turnkey home.
Usable Square Foot
This is the square foot that is directly and exclusively utilized by the tenant. This includes any closets, storage areas, and private restrooms that the tenant has access to!
Square Foot Available for Rent
The usable square feet of the office space plus a proportion of any shared area or space are added to determine the rentable office space. Common areas, toilets, lobbies, shares, and corridors are commonly included in these communal spaces.
Security Deposit
Tenants pay the landlord a security deposit amount before the start of a lease agreement. The security money is retained by the landlord as “security” against any future losses that may arise during the lease period; it is not used to rent.
Property Use and Occupancy Details
The property being leased should be fully described in the lease. It is crucial to ascertain the precise area you are renting, taking into account the building’s construction, amenities, elevators, and passageways, among other things.
Improvements
A lease should specify what can be improved upon, who will foot the bill, and if the lessee or renter is in charge of returning the property to its pre-lease state after the rental period.
Property Damage
Who is responsible for wear and tear on the leased property during the tenancy is a topic covered by one or more clauses in the majority of commercial leases. Tenants are required to maintain the space in the same state that they were given and that the lessee was required to maintain during the term of the lease.
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Necessity Of Commercial Lease Agreement For Lessee & Lessor
One sort of legal document that exists between the landlord and tenant is a business lease agreement. For lessees, the agreement ensures a secure place to operate their business. For lessors, it guarantees a steady income stream and outlines the responsibilities of the tenant, protecting their investment.
When the property is leased for a longer duration—between 1 and 5 years or even longer—a business lease agreement is typically required. In these situations, a lease agreement is crucial to preserving the connection between the landlord and the renter and establishes the terms that tie them legally.
The Necessary Clauses Under The Commercial Lease Agreement
Rival Provisions
The landlord is prohibited by a competition clause from leasing or selling the identical space in the building where you want to move.
Rent concessions
Verify if the landlord has decided to grant any exemption for the same property. In a similar vein, the landlord may grant a rent exemption for one to two months before the start of the lease.
The cost of the renovations from the landlord’s end is another rebate or comfort.
Renovation Costs
Renovation or improvement costs are another form of concession that landlords might offer. This clause should outline who is responsible for the costs associated with renovating the leased space to suit the tenant’s business needs.
Rent Payment Terms
This clause specifies the rent amount, due dates, and acceptable payment methods. It should also include details on late fees and the process for handling missed payments.
Subletting and Assignment
This clause outlines the conditions under which the tenant can sublet the space or assign the lease to another party. It often requires the landlord’s written consent to ensure that the new tenant meets certain standards and the property use remains consistent with the original agreement.
Insurance Clause
Both the tenant and the landlord should carry appropriate insurance coverage. This clause should specify the types and amounts of insurance required, such as property insurance, liability insurance, and business interruption insurance.
Default and Termination
This clause details the actions that constitute a default by either party and the remedies available. It should also outline the process for terminating the lease, including notice periods and any penalties for early termination.
Improvements and Alterations
If the tenant intends to make improvements or alterations to the property, this clause specifies the approval process and who will bear the costs. It also addresses whether the tenant must restore the property to its original condition at the end of the lease term.
Property Damage
This clause outlines the procedures for handling property damage, including responsibilities for repairs and maintenance. It also addresses the steps to take if the property becomes uninhabitable, such as rent abatement or lease termination.
Tips To Generate Commercial Lease Agreement
Creating a commercial lease agreement involves balancing various factors. Here are some tips:
- Consult a Legal Professional: Always have a lawyer review the lease to ensure it meets legal standards and protects your interests.
- Use a Lease Agreement Template: A commercial property lease agreement template can serve as a starting point, but customize it to suit your specific needs.
- Negotiate Terms: This can include rent adjustments, maintenance responsibilities, and lease duration.
- Consider Future Growth: Ensure the lease allows for future expansion or changes in your business needs.
Conclusion
As we got to know, understanding the intricacies of a commercial lease agreement is essential for both tenants and landlords. This lease agreement makes the livelihood along with the business perspective more smooth and convenient. Remember, going beyond the fine print and understanding the full scope of the lease will protect your interests and contribute to a successful business relationship.
On that note, LegalJini can be your perfect partner in curating the best commercial lease agreement. The experts, with years of experience, can help you with the terms and conditions in drafting a commercial lease agreement that works for both the lessor and the lessee.
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