Commercial Lease Agreement

Commercial leases are leases signed between business and the owner of a property which the business is interested in leasing. Such contracts often outline the terms and conditions under which the owner agrees to let the business occupy the property to carry out activities that are in connection with the functioning of the business. A long term commercial lease is one that is signed for a period of a year or more.

As opposed to residential leases, the format of commercial leases are non-uniform and no standard format is ever followed. As the requirements vary from business to business it is difficult to stick to one particular format.

Before the contract is drawn up, the owner and the business representative must discuss the requirements at length and lay down the terms and conditions so that future disputes are avoided. Most commercial leases allow modifications to be made in the structure of the building, and this too must be included in the contract.

Commercial leases signed for long periods of time often involve up front payment of a lump sum. This amount and any other payments made must be clearly spelled out in the contract.

Types of Commercial Lease

In India, commercial leases are usually term based – and would have a specific time limit after which the lease will expire. In old times, some leases used to be perpetual, but this is a rare practice now given steadily increasing property value and consequent increase in rent. However, apart from straight forward leases, there is another category you should know about is Master-lease/sub lease – where the lessee has the right to further lease the property to others.

• Master Lease: The original leaseholder/tenant with become the Master tenant when a sublease is created.
• Sublease: The original tenant assigns some or all of his interests in the premises to a third party. The original tenant becomes the master tenant and the new tenant becomes the subtenant. The original is not replaced and is responsible for rent and damages for the term of the lease. The only way to release him from any liability is through Novation, with the landlord’s consent, in the original lease.

However, in other countries there are various types of leases, and some of these (with or without the terminology) are slowly being adopted in India in case of specialised transactions. Go through the list if you are interested.

• Net Lease: The tenant is responsible for rent plus property taxes for the premises.
• NN or Double Net Lease: The tenant is responsible for rent plus property taxes plus insurance.
• NNN or Triple Net Lease: The tenant is responsible for rent plus they pay for their share of property taxes, insurance and operating cost.
• Gross Lease: The tenant pays the landlord one set rent amount and the landlord has to make payment for insurance, real estate taxes and maintenance expenses. These are most common in multi-tenant buildings.
• Modified Gross Lease: In addition to the rent, the tenant is responsible for janitorial services provided in their space.
• Industrial Gross Lease: In addition to the rent, the tenant is responsible for paying for their share of utilities and janitorial services.
• Full Service Lease: All services, including utilities and janitorial services, are included in the rent.
• Index Lease: The amount of rent depends on a price index such as the Consumer Price Index (CPI). This is considered neutral percentage rate, because neither the landlord nor the tenant is picking the increase rate.
• Percentage Lease: This is a percentage of gross of sales. It will vary from year to year based on the success of your business.
• Graduated Lease: The amount of rent for future years can vary depending on certain factors, like gross income or an annual percentage increase.
• Step up Lease: Rent is increased by a pre-set rate or set amount, to be paid on a set schedule.
• Straight Lease or Flat Lease: The amount of rent is fixed for the Lease Term.

What Should Be Included In A Long Term Commercial Lease?

As commercial leases involve larger amounts of money and more number of clauses, it needs more attention while drafting. Each clause must be clearly mentioned along with the consequences of breaching it. Following are some of the important clauses that should be included in a long term commercial lease-

• Term of the lease & conditions for renewal
• Rent, security deposit and charges of maintenance
• Permitted modifications that can be made to the structure of the property
• Tenant’s right to sublet
• Consequences of breaching the contract
• Notice period in case either party wishes to terminate the contract

How To Make It Legally Enforceable And Valid?

To make a long term commercial lease as legally valid, following are the requirements –

1. The contract must be carefully prepared with no loopholes that leave room for disputes in future.
2. The prepared contract must then be printed on stamp paper of recommended value.
3. Both parties, the owner and the representative of the business must place their signatures on designated places.
4. The signatures of two witnesses are also required.
5. The deed must then be notarized at a Sub-Registrar Office and the required stamp duty must be paid.