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Negotiating commercial leases – what are the key considerations?


A commercial lease agreement is entered into when one is renting out property for the purpose of use as an office or shop. Unlike a residential lease, a commercial lease tends to cost many times more than a residential lease (electricity, water and charges of any other amenities are also higher) and is made for a longer duration, often lasting 5 years (can be less as well) or more, vis-a-vis an average of 11 months as is the case of residential lease.

A lease agreement must be tailored keeping in mind the specific needs of the tenant. Most importantly, all economic risks must be identified and allocated on the parties – otherwise there is a risk of disputes arising. Here is a basic list of issues for commercial tenants to ensure an effective commercial lease deed. 

Rent and type of lease

Tenant may be responsible for payment of rent as well as additional economic burdens pertaining to the property, such as:

  • Property tax
  • Insurance
  • Taxes
  • Janitorial services

Rent payments could also be dependent on percentage of sales (as is often the case for food chains and restaurants), or they could escalate based on certain factors (called a step-up lease).

Apart from ordinary 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. Under this arrangement, the landlord enters into a lease with a tenant (master lease), who is entitled to sub-lease the premises to another user. The original tenant is responsible for rent and damages for the term of the 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.
Payment mechanics of rent

The rent forms a basic element of the lease agreement and must be clearly discussed by the tenant and the landlord. The mode of payment, the rate at which it will increase, due date etc. must be clearly stated in the agreement. A monthly due date for rent payment should be fixed – which is usually 4th or 5th of every month – but the parties are free to determine any date.
The grace period before a penalty is charged must be subject to negotiation. The penalty amount must also be discussed. Further, the tenant must carefully review the method in application for the rent increase during the term of the lease agreement. They should ensure that the increases must be based on the Consumer Price Index or a fixed percentage. It can also be a fixed amount of money – considering that a percentage increase leads to compounding related rapid increase during later period of the lease.
Security deposit
Usually a significant sum is taken as security – and this has to be specifically dealt with in the agreement. It should be clarified whether there will be any interest on the deposit – in India, usually the deposit is interest free. The manner and time of refund of security deposit must be specified – often it is specified that the deposit will be returned immediately at the time of handing over possession.
Insurance Matters

Insurance is usually not dealt with in Indian lease contracts, but in high value leases and properties this can be very important. The party which is responsible for bearing the financial burden of the insurance must also be specified.
Business/Operational Needs of the Tenant
The tenant must be clear about all his operational needs and must include terms that ensure his ability to carry out his business successfully and to his satisfaction. Such operational needs include parking space, location of the premises, environment around the premises, etc.
Damage or Destruction of Premises
In case of damage/destruction of premise, many leases contain a very pro-landlord provision leaving the tenant to adjust with the repairs being made which may not be to his liking or requirement or he may not know how long the repairs will take. This will adversely affect his business in all respects. Hence there should be a time limit set by the tenant wherein the landlord must complete all repairs.
Identify Party and Premises

Due care must be taken to correctly identify the parties to the agreement along with the premises that is the subject matter of lease agreement.  The space the tenant leases is known as ‘premises’ and it becomes important for both the tenant and the landlord to clearly define the precise square footage of the premises. The premise defined in the lease often does not match the premise that the tenant expects to receive. Thus extra care must be taken to ensure that there exists no ambiguity in this respect. This is most important when you are entering into a lease contract with the builder himself – in case of a mall or office building. The space you are actually supposed to get should be mentioned in the agreement in an identifiable manner.


The term of the lease is the time period during which the tenant has exclusive possession and obligation to pay rent for the premises. The dates of commencement and termination of the lease needs to be unambiguously mentioned in the lease deed. The tenant’s needs must be known in advance to determine the length of the lease. Sometimes tenant make capital investments in making the leased space operational (think: setting up manufacturing units/ office fixtures/ interior decoration of substantial value) – and it makes sense only if the lease is sufficiently long term. This should be addressed in the agreement, and if the owner of the property wants to terminate the lease prematurely leading to losses – such losses should be calculated and recovered under the agreement by the tenant.
Sometimes, the tenant may contemplate relocation in case its needs change, so the clauses should be scrutinized carefully to ensure there is no lock-in on the tenant, and that he can vacate with a reasonable notice (e.g. 1 month or 3 months).
Premature termination

Landlords ask for a right to prematurely terminate a tenant’s lease, by way of notice and in case of breach. However, this is a very sensitive issue for the tenant, as this can lead to huge losses and relocation costs. In commercial leases, one may negotiate for a long notice (6 months or 1 year notice period is common for commercial leases), and if possible entirely exclude such a possibility during the term.
Many landlords are comfortable with this arrangement – or in incorporating a lock-in where the landlord cannot terminate the lease.

Commencement date
The date of lease and its commencement are often the same, but sometimes the commencement date coincides with the completion of improvements that the landlord agreed to. Hence, if the lease date and commencement date are different then the tenant must ensure that the improvements (if any) must be finished as per his requirements before paying the rent and also make clear whether tenant’s non-rent obligations begin before the commencement date to prevent any sort of problem.

Expenses and Common Area Maintenance (CAM)

Review the expenses the landlord asks you to pay for diligently and make sure that they are reasonable, and related to building’s operations and consistent with the lease agreement.
Certain costs, like the landlord’s staff’s salaries, capitalized expenses (including major repairs), taxes on income and costs related to landlord’s violation of any governmental regulations are not the tenant’s responsibility and should not be allowed to creep into the agreement.
Common area maintenance (CAM) charges are also and important of concern to tenants. These are certain percentage share of the costs of the landlord’s for maintaining, operating, replacing and repairing the components of the building (for example, lift for the building or common area electricity usage), which the tenant may have to pay (depending on negotiation). These charges can be very high in case the office is in a posh building or a mall. All CAM charges must be pre-determined and agreed upon by both the tenant and the landlord.

Repairs and Maintenance of Premises

Often the tenant is only responsible for keeping the premises in good condition and the landlord is responsible for most if not all maintenance and repair obligations.
However, in some cases these obligations may be evenly divided between the landlord and tenant. If so, it is needed to specify clearly which party is responsible for what repairs and maintenance. It is a good idea to put a cap on the expenditure the tenant must incur for such repairs.
Clause for furniture and fixtures

If a piece of furniture is no longer working or becomes unfit to use as a result of everyday wear and tear, then the landlord is required to replace or repair the item. The landlord cannot charge the tenant or withhold the deposit for items which are unusable due to everyday wear and tear.  A specific clause should be entered into the agreement for this purpose. However, if an occupant would damage a piece of furniture or equipment through improper use or carelessness then the landlord is allowed to charge the tenant for the damage or withhold all or part of the deposit up to the amount of loss.
These fixtures (such as furniture and electrical appliances) in the premises must be listed, counted and the details of the same should be added as an annexure to the agreement. The occupant should be required to ensure in the agreement that these remain in working condition and undamaged throughout his possession of the property. The wear and tear clause must apply to these items as well.
Wear and tear clause

Certain features of the property are bound to deteriorate with time, for example: the paint coating etc. and the occupant should not be held responsible for such normal wear and tear. The agreement should contain a wear and tear clause stating that the occupant will return the property in the condition in which he received it, subject to normal wear and tear, as long as the same was not caused by any direct act or negligence. Charges for ordinary wear and tear should not be deducted from the security deposit.
Exclusivity rights

Another significant factor that tenants must not overlook is to obtain exclusive rights to sell goods or provide services. For instance, you may want to operate the only movie theatre in a mall, as two such theatres may lead to loss of business. For this reason, you may want to prevent the landlord from leasing out his other properties located nearby (and through the landlord, prevent other tenants from leasing out to sub-tenants) or in the same building to anyone carrying on a competing business.
Often there are strict prohibitions on subleasing or assigning the premises unless the landlord’s consent is obtained but whether it is to be granted or withheld is entirely the landlord’s prerogative. Many safeguards can be introduced in the lease deed in relation to this to prevent the landlord to use this power against the tenant. These may include creditworthiness or financial strength of the proposed assignee or demonstrating that the proposed tenant does not violate any exclusives that the landlord has set. Further, the tenant may also add a provision in the agreement setting a time bar on the landlord to give consent and any delay will waiver the landlord’s right to object.

Non Use or Misuse of Property

In case of commercial properties, in the event of non-use for more than 6 months of the premises can give a right to the landlord to terminate the tenancy. Some state and central laws also provide for such rights. For example, under the Public Premises Act, premises leased or rented by public or governmental bodies. In case of any misuse or lack of use, or even use which is not covered by the lease agreement, the government body may be able to evict the tenant on basis of this Act.

There are some things that a landlord must ensure – such as the construction of the premises being in compliance with municipal regulations and building bye-laws, their permissibility for commercial use, authorisations for electricity, water, etc.
Manner of use by tenant

The provisions in many leases call for tenant’s compliance with ‘all applicable laws’ during the term of the lease may seem innocuous at first. What could be unreasonable about a requirement to comply with the law? Such a clause in the agreement may make the tenant responsible for matters that are already not in compliance at the commencement of the lease term. This could be fault of a previous tenant or the landlord, and the new tenant should be made to suffer the consequences. This should be specifically addressed in the agreement. In such situations the tenant may either agree to comply with all applicable laws relating only to the tenant’s use or business at the premises during the term or they could obtain a representation and a warranty from the landlord that premises are in compliance with all applicable laws as of the commencement date. Taking such a representation is a good idea in any case.

Relocation Rights
If the first draft comes from a landlord, especially mall owners and major developers, there may be clauses that give the landlord the right to relocate the tenant to a new location within the building or locality. This affects the tenant’s business as location is a significant factor in building the repute of a business. It is not a standard clause in India and most parties manage to remove these clauses successfully through negotiation.
Thus the above mentioned are certain issues that the tenant must keep in mind before entering into a commercial lease agreement and ensure that his best interests are realised to be able to expand his business. Knowing these issues in advance will ensure the most effective representation of the tenant’s business.
Dispute resolution clause

This clause refers to the court which will have authority to resolve the dispute, in case there arises any dispute between the landlord and the tenant. Normally, it is the court which has jurisdiction over the city in which the property is located, or the court which has jurisdiction in the city where the landlord resides. A clause to submit the dispute to arbitration through this clause is possible, and in most cases will be very desirable, especially agreements involving significant money.

Some licenses you might need if you are hiring an office for your business, which are discussed in the other modules of this course are:

  1. Trade license
  2. Shops and Establishment License
  3. Professional tax registrations and labour licenses for your employees

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