A lease of immovable property involves the
transfer of the right to enjoy, use and occupy the said property,
by the transferor (called the lessor) to the transferee (called
the lessee), for a certain period of time at a price (split
up into regular payments). The lease rentals represent the consideration
for the lease transaction. The existence of the leased asset
is an essential element of a lease transaction- the asset must
exist at the beginning of the lease, during the lease and at
the end of the lease term.
Why lease?
There is strong motivation for leasing property in India.
Among other things, even governments of certain states in India
are encouraging mixed land use in residential areas allowing
buildings earlier categorized as residential areas to convert
into commercial buildings.
Any individual or company requiring financing to purchase assets for business or professional purposes may choose to lease out.
Many MNCs setting their offices in India are looking at properties
for lease in India. But the trend in currency is leasing
out flats or service apartments for short term accommodation
when they have to move their employees for a short period of
time. The new times have ushered mixed use developments which
is proving to be highly favourable in lease.
Duration:
There is no prohibition under any statute as to the number of years a lease can be given by the lessor to the lessee. Under the Registration Act, leases of property of more than one year need to be registered. The stamp duty payable depends on the rates prevailing in the respective states.
Tenancy Agreements:
Lease Agreements is one of the two types of tenancy agreements
in India. The other is Lease and License Agreement. Rent control
laws are the property leasing laws in India
that govern Lease Agreement.
Rent:
The main area of focus in lease negotiations is the issue of base rent under-negotiated by landlords, tenants and their Real Estate representatives.
The amount of rent that can be charged is determined using a formula devised by the local executive, legislative or judicial government. For Delhi, the maximum annual rent is 10% of the cost of construction and the market price of the land. However, rents can be increased by a small part of the actual cost the landlord has incurred in improving the property. The pattern of payment of rent/lease can vary.
- Monthly Rentals: In such transactions,
a lessee is required to pay rentals every month.
- Deposit and Rentals: In this type of transaction,
the lessee is required to pay a certain amount to the lessor
as security deposit in addition to the monthly rent that he
has to pay.
- Advance Rentals: In this category, the
lessee pays rent upfront for the entire term.
- The rentals are usually quoted in per sq. ft per month.
The length of the lease has a significant impact on the rental. From the landlord's side, a longer term lease assures him/her the financial security of a regular rental stream over a number of years.
Drafting Lease Agreement:
As the Lease Agreement is crucial to property leasing
in India and sets out the business relationship of
the parties, it should be carefully drafted. The terms should
be clearly expressed to both the parties. The Lease Agreement
should list the term of lease, deposit amount and monthly rentals.
Apart from financial terms and conditions, several clauses describing
the other binding terms and conditions of the agreement are
required to be fully documented.
Commercial leasing in India includes office
rental space, corporate office space, BPO spaces, retail
space, shops and showrooms. If you own good space in
a high-quality development, leasing mall space
it to a good brand for long term is a wise investment decision.
Usually, commercial lease agreements specify a 15 per cent escalation
in real estate rental.
In residential real estate leasing, settling
into a leased accommodation is a good move. For those looking
at commercial property leasing in India, from
the tenant's side, the lease options holds these advantages:
- Flexibility: When the lease is up, you
can easily relocate to another office that is a better fit
for the needs of your business and your budget.
- Fewer responsibilities: The property manager
or landlord is the one responsible for maintenance, security,
remodeling, and other management issues.
- Negotiable rates: It may be possible to
negotiate a lower price on your lease amount.
- Small down payment: Cash-strapped small
business owners need only pay one or two months of the lease
value before moving into a leased office space.
Lease renewal:
A situation may arise that a company may need less space than what it has leased or is stuck into paying an above-market rent if demand for rentals subsequently declines.
To avoid getting locked into a five- or 10-year lease, one can consider a short-term lease with renewal options. A renewal clause in a real estate lease gives the opportunity to a tenant to decide whether or not to extend the lease once the initial lease term expires. You may, for example, negotiate a lease with renewal options, rather than opt for a fixed 10-year lease.
Sec.111 of the Transfer of Property Act presents the circumstances in which a lease could be determined. These circumstances are:
- On the expiry of the lease.
- On the happening of an event, which is a condition for expiry.
- On the happening of such event when the lessor's interest in the property terminates.
- When the lessee, expressly, yields up his interest to the lessor.
- When the lessee breaks the express condition giving the lessor the right to re-enter the property, e.g. when the lessee sets up a title injurious to the interests of the lessor or, when the lease stipulates that the lessor may re-enter the property when the lessee declares himself insolvent.
In such cases, the lessor may give the lessee notice to terminate the lease.
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