This article has been written by Vidhya Sumra, pursuing a Diploma in Advanced Contract Drafting, Negotiation, and Dispute Resolution from LawSikho.com.
COVID-19 has disrupted practically every area of the Indian economy, including the retail sector. While businesses have slowed down, retailers are trying to find a way out of the losses that are rapidly increasing. Rent is another important factor that shops are concerned about these days. Retailers of all sizes are facing the wrath of declining demand, supply-chain interruptions, rent payment, and even mandatory closures, as social distancing becomes the new norm. Here are some of the most typical challenges affecting the retail business during times of crisis, as well as some legal considerations to keep in mind while renegotiating lease contracts.
What is a rental agreement?
A rent agreement is a legal document that contains the pre-discussed terms and conditions under which the one-party (lessee) agrees to pay the rent of the property owned by the other party (lessor). It is also known as a contract between the landlord, i.e. the property owner, and the tenant for a specific length of time.
What is a commercial lease agreement?
The concept of a commercial leasing agreement is that the property will be used for commercial purposes. The land can be utilised for an office, a building, individual retail establishments, and retailers in shopping malls or shopping centres. Usually, the retail sector relies on the commercial lease model, which works well for brands and developers.
Essential clauses in a commercial lease agreement
Every commercial lease agreement has a standard clause that makes an agreement valid and enforceable. Below are the clauses:
It is necessary that we must identify the parties in the agreement. This clause should define the parties into the agreement. In the commercial lease agreement, it is necessary that the lessee should identify his business in the agreement and not himself in his capacity.
“Mr. _____, S/o Mr. _____________, aged about ___ years, having PAN _________, presently residing at ___________, (hereinafter referred to as the “Lessor”, which expression, where the context admits, shall include its successors and assigns) of the ONE PART;
_______, a company incorporated under the Companies Act, 1956, having CIN_______ having its registered office at ___________________, represented by its ________________ (hereinafter referred to as the “Lessee”, which expression, where the context admits, shall include its successors and assigns) of the OTHER PART;”
The meaning or definition of several terms used in the agreement is explained in this clause. The definition clause must define terms that are exclusive to the agreement, and the terms that have more than one meaning or specific meaning in the agreement.
“Leased Premises” means the property situated at _________together with other facilities more fully described in Schedule A of this Agreement.
“Rent” means monthly rent of Rs.______ to be paid by the Lessee to the Lessor commencing from _______ for the use of the Leased Premises”
The lease agreement should explicitly specify the property being leased. It is important to have a full description of the property, including the location, address, and structure. It is also necessary to include information on other amenities, such as the use of elevators, common rooms, and hallways. This will ensure the property’s accuracy in order to finalise the rent price and avoid future disputes.
“All that portion of the Flat situated at A-2, Janakpuri, New Delhi 110012 admeasuring unit area of 513 sq. ft. and having super built area of 581.258 sq. feet with the designated parking area of 100 sq. feet located towards the south of the Flat, situated on Sy. Nos.70, 71, 72, 73, of South Delhi, Old Delhi Village, 9th Sector, Delhi.”
4. Grant of lease
This is also a very important clause to be added to the agreement as it transfers the right to the property. The right in the property is transferred from the lessor to the lessee, which is the main purpose of the commercial lease agreement.
It is also essential to state the purpose for which the property will be used. To discourage illegal activities on the leased premises, the clause should include precise terms about the purpose of using the leased premises, such as the details of the business and the primary motive of the business.
“The Lessor hereby leases to the Lessee, the rights and interest in the property situated at _____ together with other facilities more fully described in Schedule A hereunder and hereinafter referred to as the “Leased Premises”.
The Leased Premises shall be available for the Lessee solely for running its showroom or related activities to carrying on the business. The Lessee agrees and confirms that there shall be no unlawful activity be carried out from the Leased Premises and grant of lease is not to be construed as a grant of tenancy rights.”
The agreement should clearly state the period of the lease. Typically, a standard lease or rental agreement is for a period of 11 months. The commercial lease arrangement, on the other hand, is normally for a longer period of time, such as 4 to 5 years. This is because commercial leases require a higher level of investment than other types of leases.
“The Lessor and Lessee agree that the term of this Agreement shall be for the period of 48 (forty-eight) months, which shall commence from the Effective Date (“Term”).”
6. Security deposit
A security deposit is a payment made by the lessee to the lessor on the date of execution of the agreement or after signing the agreement. The security deposit is not used towards the payment of the rent. It is held by the landlord/lessor as “security” against any future losses that may occur during the lease term.
In most commercial lease agreements, the security deposit is equal to one year’s rent, however, negotiation is always an option. After the lessee vacates the leased premise, the lessor returns this sum to the lessee, and he may deduct it for non-payment of utility bills or any damage done to the leased premise.
“The Lessee shall pay to the Lessor, a sum of Rs. 60,00,000/- (Rupees Sixty Lakhs only) equivalent to 12 (12) months’ Rent through bank transfer, against the use of the Leased Premises on the Effective Date (“Security Deposit”).
On the expiry or the termination of this Agreement, the Lessor shall refund the Security Deposit in full to the Lessee subject to the handing over the possession of the Leased Premises by the Lessee in the condition it was handed over to the Lessee before the Term. Normal wear and tear conditions shall be applicable.”
The payment made by the lessee to the lessor for the use of the leased premises is known as rent. It is the consideration in the lease agreement. The amount of rent, mode of payment, date of payment to be made, the interest charged on the late payment can be decided solely by the lessor or jointly by the lessor and lessee. In a commercial lease agreement, the lessee may be required to pay the lessor a percentage of their profit as revenue in addition to the base rent. This is a common practice in Western countries, and it is a relatively new concept in India.
“The Lessee shall pay the Lessor monthly rent of Rs. 10,00,000/- (Rupees Ten Lakhs only) commencing from Effective Date (“Rent”) for the use of the Leased Premises. The payment of Rent by the Lessee shall be made in advance on or before the 7th day of every month (“Due Date”).
All the payments to be made by the Lessee to the Lessor shall be by way of account transfer to the current account of the Lessor as per details mentioned below:”
A lease agreement should specify what modifications or upgrades to the leased premise are permitted and who will pay for them. It should also be mentioned that if the lessee or tenant is responsible for returning the leased premise to its original state at the end of the agreement.
“The Lessee shall have the right to make improvements within the Leased Premises and make alterations, subject to applicable local laws and building regulations with prior permission from the Lessor.”
9. Duties and obligations
Another important clause in the commercial lease agreements is the duties and obligations of both parties. This clause should list down the duties and obligations of both the lessor and lessee. This should include details, as the lessee should pay rent to the lessor on time, maintaining the property, payment of utility bills, etc. This clause should also mention duties and obligations of the lessor like handing over the property on time, payment of taxes, returning security deposit on time, etc.
“Obligations of the Lessee
The Lessee shall use the Leased Premises only for the purpose of carrying on its business activities along with car parking no. ___.
The Lessee shall at its own costs and charges and with prior permission from the Lessor install furniture, fixture, fittings, electrical installations, and all other related equipment as the Lessee may think fir in connection with its business.
Obligations of the Lessor
The Lessor shall bear and pay all property taxes, water taxes, and other related taxes of the Leased Premises during the period of this Agreement.
The Lessor shall be responsible for carrying out all structural repairs including any leakages to the Leased Premises as may be required.”
The lease agreement may be terminated by either of the parties or both parties may mutually decide to terminate the agreement. This clause should explain how the termination notice would be sent as well as the grounds for terminating the agreement.
“Neither Party shall terminate this Agreement during Lock-In Period other than for the following reasons:
- For breach of any term of this Agreement by other Party;
- On the occurrence of the Event of Default (as defined in Clause___ below).
In the event, the Lessee terminates this Agreement within the Lock-In Period, the Lessee shall be liable to pay the Rent for the remaining period of the Lock-In Period and then shall be entitled to receive the Security Deposit provided that it returns the Leased Premises in its original condition.”
The commercial lease agreement should have other clauses like an extension of the lease period, competitor clause, arbitration clause, governing law, and jurisdiction. These are basic clauses and must be included in the agreement. It should be clearly specified before entering into an agreement in order to avoid any future disputes.
Legal aspects to consider while renegotiating agreements
Considering current pandemic situations and the government’s refusal to waive any portion of the rent, shops have already begun discussing rent negotiations, size negotiations, and consolidation of office space with their landlords. In such difficult circumstances, it has become critical for both landlords and lessees to survive in the industry. Furthermore, it is critical to negotiate, as the consequences of the shutdown will be disastrous for the firm. In this circumstance, the lease agreements must be revived, re-examined, and redrafted very cautiously. Property owners will have to reassess their leases, ensure that they understand their rights in these unusual times, opt for short-term arrangements such as base rent reduction, and recover the lost rentals when the economy improves.
To conclude, negotiating the commercial lease agreement is a critical phase in the current situation. To avoid future disputes in key areas like rent payment, security deposit, use of leased premises, maintenance and repair charges, it is advisable to negotiate and draft the clauses of the lease agreement carefully. The terms and conditions of the lease agreement should be carefully analysed and drafted with the consultation of lawyers so that the lease agreement should serve its purpose.
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