Know the types of commercial leasing in India, understanding various types such as gross leases, net leases, and triple net leases. Gain insights into the distinct features that influence the dynamics of business real estate transactions in the country.
Introduction:-
Commercial leasing is a significant investment that demands careful consideration. Like most other legal transactions, a business lease should not be taken lightly. As a result, when renting office space for the first time, it is vital to conduct thorough market research and to have a good understanding of the many forms of commercial leases accessible in India.
In India, commercial real estate is typically leased for a set time. The agreement expires once a certain amount of time has passed. Leases used to be eternal in ancient times. However, the situation has changed due to the current market conditions and soaring home prices. There are three types of commercial real estate leases in India. While terminologies may differ depending on the location, having a basic understanding can aid you in negotiating the best possible price.
Types Of Commercial Lease
Let us look at the different types of commercial lease for greater clarity.
- Gross Lease
Full-service Commercial Leasing in India is also known as a gross lease. It’s a lease in which the landlord pays all of the property expenditures from the tenant’s rent. Taxes, insurance, and maintenance are examples of such costs.
The landlord is responsible for the entire property so that the renter can focus on their business without having any property-related concerns. This is one of the key advantages of a gross lease, which allows it to be commonly used for multi-tenant buildings.
- Net Lease
A net lease is a commercial real estate lease in which the tenant pays for the space they occupy and for all or a portion of the common costs. These expenses are usually related to the property’s operation and maintenance, including taxes, property insurance, property management fees, and utility payments.
- Modified Gross Lease
Except for a few differences, a modified gross lease is very similar to a gross lease. Although the tenant is asked to pay the rent in one single sum, there is room for negotiation between the parties. Furthermore, expenses such as janitorial services and power are not included. A modified gross lease is more popular among renters since it is more tenant-friendly.
Important Provisions In A Commercial Lease
You should be aware of some general terms in a lease agreement or a lease deed. The term of the lease, the right to renew the lease, the rent-free period, the security deposit, the payment of lease rent, the covenants of the parties, indemnity provisions, force majeure events, the termination and consequences of the lease, and other miscellaneous clauses are usually covered by these provisions.
- Period of Adaptation
A fit-out term is a rent-free period agreed upon by the parties during which the lessee is not required to pay rent, and the time is utilised to allow the lessee to install essential equipment to use the property for its intended purpose. The fit-out phase is normally agreed upon by the parties and might last anywhere from three months to a year, depending on the parties’ requirements.
If both parties agree, the fit-out period might be prolonged. Similarly, the parties may agree on a maximum time duration for extending the fit-out term.
- Security Deposit
Security deposits are often an important part of business lease agreements. The Security Deposit is a variable factor that can be approximately about 2 to 6 months of rent. The Model Tenancy Act now limits security deposits, limiting them to a maximum of six months’ rent.
The parties might agree upon the terms and circumstances for using the security deposit. Furthermore, both parties can agree upon the process of paying the security deposit for the duration of the lease. Since the security deposit is a large sum of money retained by the lessor for an extended time, it is normally an interest-free deposit.
- Lock-in Structure
The concept of lock-in was created solely due to typical leasing practices. The essential premise is that the parties agreeing to sign a lease deed should not incur a loss if the agreement to lease or lease deed is terminated early.
Since there is no regulation governing the lock-in period, it is a contractual obligation that the parties who have agreed must follow. If the lock-in provision is violated, the parties may agree to pay the other party particular sums of money.
- The Lease Deed is Subject to Stamp Duty
On the lease deed, stamp duty is required to be paid. The stamp duty charged on leases is usually mistakenly thought to be calculated based on yearly average rent. Nevertheless, the amounts payable by the lessee to the lessor under the lease, if specified in the lease agreement, also comprise part of the amount on which the stamp duty is calculated. Typical amounts include common area maintenance fees, parking fees, etc.
The Ministry of Housing and Urban Affairs has issued the Mode Tenancy Law, but it has yet to be adopted by any state. The legislation mentioned above covers many components of a lease agreement and establishes a minimum standard that must be observed between the parties. Nonetheless, the parties retain the ability to mutually decide the lease terms while signing the commercial leasing agreement.
Conclusion:-
Due diligence for purchasing a commercial space or office unit may differ from due diligence for purchasing a plot of land. Most of the time, the commercial area is built as part of a commercial Agreement structure. In the case of a business facility, the approvals and consents required may vary from state to state.
Since the commercial space is a built-up area rather than a plot of land, the parties must acquire approvals such as the completion certificate, occupancy certificate, and no-objection certificate from the concerned authority for the fire extinguisher installation certificate for lift operation. In addition, depending on how the lessee intends to use the commercial property, the parties might require other specific permissions.
Commercial leasing can be more complex and tedious as compared to residential leasing as it involves several technical and legal peculiarities that may be hard for you to understand. If you are looking to lease out your commercial property or take one on lease, we can help. At VakilSearch, we assist you in navigating the legal landscape of your business. Check our website for more details.
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