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Pitfalls Faced by Business While Pursuing Commercial or Regular Lease

As we all know that for any kind of business we necessarily need four things, i.e, land, labour, capital and entrepreneurship. Land comes as the first and foremost important factor of production. Place at times becomes an identity of any kind of entity. It becomes a starting point, where the production process starts or becomes a landmark where people come to seek services.

But most people are not born with the ownership or possession of such land and that is the sad reality of life. They either earn it or give rent for it until they acquire the ownership. Thus, the system of the lease is serving the purpose whereby one party (tenant) gets exclusive rights over the use of land or building for a limited time and in return, the owner of the property gets some rent or premium. This helped many people in getting supplementary income vis-a-vis it has helped the business to grow. Thus, it becomes an integral part of businesses around us.

There are various variants of leases based on their duration. If a lease is issued for a long term such as for 125 years then a higher premium and a lower annual rent are charged. However, this is different for commercial leases where a shorter term of 15 years or 10 years is issued with no premium. Also, when the lease is for above seven years then it must be registered with the Land Registry and in this case, the tenant is obliged to pay stamp duty land tax, depending on the amount of rent, premium and duration of the lease.

1. Using Generalized Documentation – Lease agreement documentation should not be done by referring to online samples. Some companies, to save time and money, copy and paste the same verbatim used in precedents. This might lead to years of disagreements, lawsuits, and exorbitant costs because a lease governs the relationship, terms and conditions, the dos and don’ts decided between the landlord and the tenant. If a lease is not properly drafted then problems could be faced from both sides. The landlord might not receive fees, the tenant might take advantage of the security of tenure, extra burden to provide facilities, etc. From the tenant’s side there could be problems of paying extra than what he/she was aware of, the landlord is not required to provide critical services.

2. Find out real property tax – The landlords at times expand the limits and definition of real property taxes and include any type of taxes that can be assessed against the property. By doing so the tenant is also at risk of bare any kind of future tax and that can extend to income tax and rent taxes.

3. Common Area Maintenance – It is essential to be aware of the common area maintenance before we sign a lease. In many cases, the landlord may ask for more money than required in the name of operating charges. But if you ask beforehand about the information on Common Area Maintenance then you can pay a fair price. Consider asking for a cap on operating charges after proper evaluation. Rewriting the CAM provision can ensure you are paying legitimate charges.

4. Service Charges – Just like repairing obligations, tenants often don’t understand the extent of service change. Even if the tenant leases a small part of a building, they could be responsible for contributing toward an extensive service charge. It is recommended that a copy of past almost five years’ service charge accounts should be reviewed. Enquire if there are any sinking funds available or any item which is likely to demand significant expenditure. Just like common area maintenance, look for all possible areas and ask for a cap on the service change.

5. Problems arising from assignment and subleases – When the landlord or tenant assigns a third party term of the contract, for example when a company A wishes its property taken on lease for six years is further given to company C for the remaining two years of the contract. This transfer of space along with the lease term is called an assignment.

A sublease occurs when a corporation that has taken space for lease then further rents the same place for lease. If there are prohibition provisions unnoticed then it can cause the lessee’s flexibility to adapt to future assignments or sublease.

These are some of the pitfalls that one must avoid ensuring the safe pursuance of their commercial lease agreement. Make sure these are checked by your lawyers, or you can also review and alter the required changes. Prior knowledge of Transfer of Property, 1882 and Indian Easements Act, 1882 is needed and you are good to go.

By Zoya Hossain