A commercial lease agreement (“Agreement”) is an instrument and a contract executed between the owner (“Lessor”) of an immovable property (“Property”) for lease and the entity/individual (“Lessee”) desirous to lease (acquire possession) the Property for commercial purposes. This Agreement records the terms and conditions which bind the parties to the transaction and are mutually agreed upon between them. Usually, such an Agreement is formulated by the Lessor and therefore, may stand one-sided and against the interests and protection of the Lessee. A Lessee is recommended to always peruse the terms and conditions of the Agreement prior to its execution, and must be aware of every clause and provision, and its interpretation. It is advisable that the Lessee may consult with lawyers and advocates from the real estate domain, to have a thorough interpretation and knowledge of the terms and conditions outlined in the Agreement to safeguard their interests and enjoy the possession of the Property without any demur and/or issues for the period of the term of the Agreement.

Applicable Laws

The following enactments are usually applicable on the execution and subsistence of the Agreement:

Significant Elements of the Commercial Lease Agreement

Parties: The details of the parties should be carefully incorporated in the Agreement to ensure that the concerned Lessor and Lessee form a part of the Agreement.

Property: The address, location, and description along with other necessary information including boundaries to the Property should be set forth in the Agreement precisely in order to prevent any doubt and/or confusion.

Term: The parties may decide the terms of the Agreement as per their requirements and convenience, and agree to automatic renewal upon the expiration of the term or choose to enter into discussions to renegotiate the terms and conditions set forth under the Agreement for the period of the renewed term.

Termination: The parties shall mutually decide and incorporate the provisions detailing the termination of the Agreement. Parties may agree to have the right of termination under the Agreement as per their sole discretion or upon the occurrence of a breach of terms of the Agreement, and it is recommended to have a termination clause that deals with the events which may lead to termination due to unforeseen events/circumstances, including events of force majeure.

Commercials & Usage: The parties shall mutually decide the lease rent, security deposit, maintenance charges and additional cost towards utilities, use of the Property, area of occupancy, maintenance, improvements, repair of damages, major/material damages to the Property, etc. The parties are required to have absolute clarity in the commercials and usage of the Property to ensure there is no scope for ambiguity or misinterpretation. Lessor shall rightfully receive its due monetary benefit out of the Agreement and Lessee shall rightfully enjoy the usage and possession of Property without any unrepaired damages and/or issues preventing the Lessee from conducting its permitted operations and/or from utilizing the Property as per the terms of the Agreement.

The parties are required to ensure that the requisite provisions are incorporated in the Agreement to bind the Lessor to carry out its obligations concerning the annual maintenance of the Property and to make sure that the Lessee is being provided with every major and ancillary facility as per the current industrial standards.

Inspection & Remedies: The parties may mutually decide the terms of inspection to ensure that the Lessee’s day-to-day operations are unaffected and unhindered. The parties shall ensure that suitable and material provisions are incorporated in relation to the remedies available to each of the parties.

Representations & Warranties: The Agreement shall include appropriate representations and warranties, binding on each of the parties to ensure that they perform their respective obligations in accordance with the terms and conditions of the Agreement. Authorized signatories having the capacity to sign and execute the Agreement on behalf of their respective parties, representations and warranties in relation to the accuracy of the facts inserted in the Agreement, knowledge about any pending/threatened litigation matters, the existence of legal identity of the parties under the applicable laws, etc. are some of the appropriate representations and warranties that must be incorporated in the Agreement.

Miscellaneous & Boilerplate clauses: In spite of these clauses being uniform in almost every contract, executed between various individuals and parties, they play a vital role in stabilizing the Agreement. Clauses such as a waiver, severability, force majeure, dispute resolution, applicable laws and jurisdiction, indemnity, limitation of liability, entire agreement, modifications/amendments/variations, etc. ensure that the interests and rights of the parties are protected and defined.

Current Scenario

The commercial real estate market is on its path to growing exponentially as numerous companies are deciding to resume work-from-office. The COVID – 19 disruptions had a huge impact on the market resulting in almost a hundred percent work-from-home model for employees and employers alike. The technology shift during the pandemic and the huge boost to the start-ups in India by way of government initiatives and private investments have led to heightened flexibility in online businesses which include a lot of offline businesses entering into the online domain. Due to such increased exposure to consumers, businesses have opted to lease commercial spaces regionally to increase their reach and provide efficient and swift services to such consumers.

Coworking has changed the way commercial real estate is used and performed. Coworking operators have significantly contributed to positive net absorption in key urban regions. Coworking has produced a disproportionate number of new businesses, which typically occupy space in the same building or proximity to the incubator from whence they arose. Although employment density has increased over the last two decades, coworking spaces are often twice as crowded as regular office users. Commercial real estate landlords may be the most affected by the dependency on coworking operators to survive any conceivable future economic crisis. The principal structure, as well as these coworking spaces, have received significant investments. These spaces have remained very useful and pleasing to the end user. However, these locations are frequently far from what medium-large scale offices would prefer.

Inversely, individuals and companies have observed onsetting trends and have opted to invest in commercial spaces by way of acquisition, solely or jointly, and subsequently leasing it out to the aforesaid businesses. However, the outbreak of the pandemic has alerted the lessors and lessees, alike, to invest more time in the formulation of the clause of force majeure.

Conclusion

It is pertinent to note that entering into a commercial lease agreement must be done via extreme caution and diligence. To be prepared for the unprecedented events and to have your rights and interests protected should be one of the highest priorities while entering into a commercial lease agreement, as such leases attract a plethora of lease rent and security deposit. It is constantly advised to have the lease agreements reviewed and vetted by the lawyers under the real estate domain to protect your interests and rights, as a lessor and a lessee. There are multiple certifications, insurances and NOCs involved in maintaining a commercial space, which usually falls under the ambit of the lessor, to obtain and keep it valid throughout the term of the lease, which can be observed and notified by such aforesaid lawyers.

authored by: Sreenivasa Raghavan, (Partner Real Estate)