Commercial Lease terms –
Commercial leasing is extremely different from residential leases. So if you are new into the commercial leasing, it is essential to do the due diligence before entering into one.
Generally, the commercial lease terms are longer than residential leases and range from nine to 12 years. In India, there are various types of commercial leases. First is the “Standard Lease” in which the tenant only pays rent, utilities and Common Area Maintenance (CAM), and the landlord pays for major repairs and the property tax. Second is the “MG and Revenue Share Lease” in which the tenant pays only a percentage of the rent, utilities, CAM, insurance and a part of the revenue while landlord pays for major repairs and property tax. The third is the “Pure Revenue Share Lease” in which the tenant pays utilities, CAM, and a certain percentage of the business revenue to the landlord.
Be it any lease; it is essential that you delve into the minutest of details and clarify everything with an expert consultant. Below are a few top points that one should take care of while finalising a commercial space:
1. Plan your budget
Conduct market research and explore the commercial leasing values in different areas on your list to arrive at an approximate budget. Use both the primary and the secondary sources to obtain comprehensive details. For instance, not only reach out to the property agents but also review the market trends in the past to get an accurate idea. Remember, ample research is essential to avoid any regrets later.
2. Check the size of the property
In commercial spaces, the rent is charged on a per sq ft basis. Therefore, check whether the rent is charged on the carpet area or on the common area of the building generally known as the super built-up area. Check all the details well and if required get the area measured. Do not trust the landlord/property owner entirely.
3. Negotiate commercial terms for more than one location
Always explore & identify more than one option as it would put you in a superior position and would give ample scope for negotiations. Having back-up options would give you an upper hand and would enable you to negotiate hard for your preferred option. This would further avoid altogether fresh & revised working on searching and identifying any new option, in case one option doesn’t work out in your favor.
4. Negotiate on the base rent
Landlords/Property Owners always ask for a higher Rent. Thus, you need to ensure that you negotiate well. Study the market trend over the years, the prevailing rentals across different locations and showcase your knowledge when meeting the landlord. This will considerably aid in negotiating the quoted price.
5. Negotiate for the longer lease term
It is always advisable to work on the benefits of committed tenancy & long term lease. Communicate with your landlord and see what benefits you can get. For instance, you can negotiate on the rent escalation, security deposits payment or lock-in period. Besides, also urge to incorporate terms such as favorable termination and subleasing clause in the agreement, especially if the business is new.
6. Negotiate on Rent-free period
If the client takes a Bare shell area or even a furnished area, the tenant would require to carry out their fit-outs/furnishing in the space or modifications to the existing furnishing. So the client expects a rent-free period for that duration. In fact, these days, irrespective of the furnishing condition, the tenant does negotiate on the rent-free period for the initial few days/months of the lease. It is a form of discount that boils down to 5-6 percent concession in the final rentals. However, other expenses, such as maintenance and utility charges remain the same.
7. Lawyers/Expert to negotiate
It is advisable to consult a legal expert or an experienced agent who can get you the best deal possible. These people have years of experience and know the latest trends in the market. Also, legal wizards can help in not only understanding various clauses of the lease agreement but can also help in incorporating some that could be extremely favorable for your business.
8. Exclusivity / No competitor clause
It is always advisable to incorporate the ‘exclusivity’ or ‘no-competitor clause’ in the agreement. This will prevent the landlord from renting the property to your direct competition. Normally, such clause needs to be covered in the LOI (Letter of Interest) itself to avoid any confusion or conflict of interest later.
It is absolutely essential to conduct due diligence before entering into the lease agreement. Any defect in the title documents of the Owner, the mortgage on the property status, any pending government approvals/permissions, etc. are certain information which needs to be known before finalising the property. The client is required to hire a legal team to carry out due diligence on the property on their behalf to prevent any unexpected consequences.
10. Lease Deed Registration
Once the property is finalised and lease agreement is discussed and agreed upon, while executing the lease deed, it becomes important for the client to register the same in the court/sub-registrar office to secure and safeguard their interests. The registered lease is acceptable under all courts and client can file case effectively in case of any untoward incident or breach happening from the Owner’s end. This ensures that the client does not face any mental or financial loss.