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This article has been written by Ankita, pursuing a Diploma in Business Laws for In-House Counsels from LawSikho.

Introduction

A commercial lease is a contract between two parties in which one party (the Landlord) grants another party (the Tenant) exclusive use of land or buildings for a specified period of time (the term) in exchange for rent or a premium.

A lease may be issued for any period that both parties agree to, with the exception of sub-lease agreements (which are beyond the scope of this note). In general, if a lease is issued for a longer period of time (such as 125 years), it is granted for a higher premium and a lower annual rent. Many commercial leases, on the other hand, are for up to 15 years and are usually issued with no premium paid by the tenant, but with the tenant paying an annual rent based on market rates. If the lease is for more than 7 years, it must be registered with the Land Registry, and the Tenant will be obliged to pay stamp duty land tax, depending on the amount of premium, rent, and length of the lease.

A commercial lease governs the relationship between the Landlord and the Tenant, and it is important that it is properly written for both parties. Many companies perceive a lease to be a paperwork exercise and want to save money by using online precedents. However, all businesses need a location to work from, and a commercial lease governs the occupation by stating what each party can and cannot do, and is a necessary document for the business’s activity. Failure to properly handle the lease will lead to years of disagreements, lawsuits, and exorbitant costs. From the viewpoint of the landlord, if the lease is not properly drafted, it can result in a variety of issues, including but not limited to:

  • rent fees that are incorrect;
  • not being able to recover service fees;
  • the Tenant benefits unwittingly from security of tenure, which makes it very difficult to evict the Tenant from the premises and gives the Tenant the unconditional right to a new lease at the expiration of the current lease;
  • or onerous responsibilities to the occupant to provide facilities.

All of the above, as well as a slew of other possible problems, will make it more difficult for property owners to secure mortgage financing or sell their homes because banks and buyers don’t want to inherit faulty leases. If the lease is not properly drafted from the tenant’s viewpoint, it can result in issues such as, but not limited to:

  • not being given the rights that the Landlord requires (such as access to the property);
  • being forced to pay extra fees you were not aware of;
  • being liable for repairs to the house, even if it is in poor condition at the time the Lease is signed;
  • The Landlord is not required to provide critical services;
  • The Lease cannot be transferred to a third party;
  • break clauses with onerous conditions that make it impossible to break the lease early; no cover for deposits paid to the landlord;
  • Stamp duty is paid incorrectly or not at all when it is due, resulting in fines or the lease not being recorded at the Land Registry, rendering the lease’s legal title invalid.

Here is a list of 9 areas where we need to pay attention while obtaining commercial lease

Space

It’s crucial to figure out just how much room is included in the rental. Talk about how to use the hallways and restrooms, as well as how to use the allowed exits, elevators, and other popular areas. It’s also crucial to clarify whether your rental expense was calculated using rental square footage or available square footage. Since common areas such as toilets, hallways, lobbies, and elevators are not included in usable square footage, it is often less than rentable square footage. If you have a good understanding of the space that makes up the rental, you will be able to decide whether the quoted rental price is fair and, if necessary, you will be able to negotiate. It also establishes a clear definition of what uses are allowed from the start.

Lease

The duration of a lease is referred to as its “term.” It specifies the start and end dates of the contract, as well as whether or not there are any specific renewal options. Landlords are more flexible in negotiating leases with longer lease terms, particularly on rent, as a general rule. However, it’s important to keep the company’s needs in mind; a longer lease means less flexibility in adapting to change as the company expands. Furthermore, if the market rate of rent falls, committing to a long lease period in advance could result in the business paying above market rent for the leased premises. It’s sometimes better to commit to a shorter contract with several renewal options rather than a longer term, such as a four-year lease with two three-year renewal options rather than a straight ten-year lease term.

Rent

Rent is, of course, a major consideration for any lessee, and it can be the deciding factor in whether or not to lease a room. Since a fixed rent for the full duration of a commercial lease is uncommon, pay careful attention to what the lease says about rent escalations or rises. If a lease does not allow for increases of a certain dollar sum, make sure you understand how and when any escalations will be calculated. The Consumer Price Index (CPI), which fluctuates with market conditions, is one popular method for determining rises. If the landlord insists on CPI-based escalations, it might be possible to negotiate a limit on that level, ensuring that at the very least, the maximum potential rent to be paid is known.

Dispute Resolution

Pay attention to the terms of the contract when it comes to dispute resolution. Costs of litigation can easily spiral out of control, particularly for a small business with limited resources. Mediation and arbitration are two options for formal court cases, and provisions involving them are fairly common in commercial contracts and leases. Mediation entails the involvement of a neutral third party who serves as a facilitator between the two parties in order to discuss their differences, but not as a decision-maker. Arbitration, like mediation, requires the use of a neutral third party; but, unlike mediation, an arbitrator will make a decision about the dispute, which the parties will agree to be binding or non-binding.

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Legal Compliance

Commercial spaces are subject to a slew of federal, state, and local laws and regulations. Typically, a landlord is in charge of ensuring that the entire property is in compliance with the law; however, it’s critical to consider the expectations for the individual leased space. Ask the landlord to explain the conditions if the lease is unclear on who is responsible for ensuring the room complies with relevant laws.

Repairing

Keep an eye out for contract conditions requiring the premises to be restored to their original state at the end of the lease. Instead, talk to the landlord about carving out usual wear and tear, harm that was not caused by you or was outside your control, and any changes that the landlord has previously approved. Also, pay attention to who is in charge of maintaining and repairing the plumbing, heating, and ventilation systems.

Termination

Any commercial tenant should be aware of the procedures for terminating a lease early as well as the conditions for terminating a lease prior to any automatic renewal taking place. If the lease doesn’t specify a right to cancel, consider securing a right to terminate early in exchange for the payment of a fixed amount of liquidated damages to the landlord to give yourself a way out. You don’t want to be stuck relying on a court to decide damages to the landlord if the business isn’t as good as anticipated, the business is sold, or market conditions actually demand a shift. It’s also important to pay careful attention to and adhere to notice provisions at the end of the lease period. For example, a lease can state that the tenant must give the landlord written notice of its intent not to renew sixty days prior to the end of the lease term. The lease should require the term to automatically renew if notice is not given sixty days in advance. Keep a close eye on particular requirements to avoid being caught in an awkward situation.

Security

Make sure it’s obvious what can be deducted from the security deposit and what can’t. Despite the fact that there are laws prohibiting certain acts involving security deposits, you should make sure that the lease sets out the expectations and conditions for its return.

Assignment And Subleases

The right of a landlord or tenant to assign the terms of a contract to a third party is referred to as assignment. For example, XYZ Corporation leases space from Big Landlord for five years. If XYZ Corporation wishes to rent its property to ABC Corporation for the remaining three years of the contract, the transfer of the space, along with all of the lease terms, is known as an assignment. A sublease is what happens when XYZ Corporation just wants to let ABC Corporation rent the room for the third year of the lease, similar to an assignment. Any prospective lessee should pay careful attention to whether a commercial lease may be transferred or subleased to another tenant, as a provision prohibiting assignment or sublease can restrict a lessee’s flexibility to adapt to future market conditions. Landlords are more likely to allow assignment or sublease if they are given advance notice of any proposed lease transfer, have the opportunity to accept it, and the original lessee remains liable for any unpaid rent or harm.

Conclusion

The above list is by no means exhaustive; there are many other clauses in commercial leases that are worth negotiating, such as subordination and non-disturbance clauses, as well as indemnities. Furthermore, some types of leases (for example, retail leases) will have additional problems that are unique to them. As a result, it is often advisable for tenants to seek legal advice before signing a contract.


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