Commercial Lease- What to keep in mind while making a commercial lease

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Commercial lease is a legally binding contract between a person/ corporation who wants to rent out their property/ space to some other person/ corporation for conducting their business in the said property. It is quite different from residential lease and is usually longer in term and more legally binding with many negotiable terms and conditions.

Drafting a commercial lease is a big responsibility and many times also has a strong impact on the success or failure of the business for which this deed is being made. There are many clauses that need to be specified clearly and should be left with no ambiguity that can lead to confusion and disputes in future. It is usually long-term in nature and cannot be broken or changed easily. It is a legally binding contract, and a good deal of money is usually at stake.


Enlisted below are the contents, terms or clauses of a commercial lease including many critical lease terms that should be addressed during the drafting of such a lease:

1.  Lessor – The person/ corporation who has a property that has to be leased out. He should be the absolute and lawful owner of the space having a clear title. He should have also have the possession of the property.

  1. The title of the Lessor to the demised premises should be clear and marketable free from all encumbrances and reasonable doubts. He should have the absolute authority to grant lease in respect of the premises.
  2. The lessor should have duly paid all the rents, rates, taxes, duties, assessments and other outgoings, Central, State or municipal assessed, charged, imposed, levied or payable in respect of the lease premises to the concerned authorities.
  3. The lessor should not have entered into any agreement for sale or transfer of the demised premises.

2.  Lessee- The person or corporation who wants to take the said premises on rent for running his business or profession. The Lessee will be entitled to use the demised premises with the fixtures and fittings (if included in the lease) for the time period for which the lease is made.

3.  Demised premises: Exact area and part of the property that is leased out in the agreement is called the demised premises. It should include all the fixtures and fittings, electrical/ plumbing installations made. Usage of common areas like gates/entrances, doorways, entrance hall, staircases, landings and passages in the demised premises for the purpose of ingress thereto needs to be clearly mentioned. Area of the exactly what space you are renting (including common areas such as hallways, rest rooms, and elevators) and how the landlord measures the area and the super area should be clearly mentioned. Responsibility of maintaining the common areas and property should be clearly stated.

4.  Length of lease: Also called the lease term, should be specified clearly with the date of commencement of lease and the date of signing the lease deed.

    1. As commercial lease is a legally binding contract, it is very important to decide the length of the lease wisely. This depends upon many factors like the nature of business of the lessee, its dependence on the location for successful operation etc. If the business can be run from anywhere for eg, an office for courier services or placement agency, then it is fine to have a short term lease. In case, the business is sensitive to the location like in case of a restaurant, salon, supermarket or a showroom, then it is better to enter a long-term lease. Although, long term lease can also increase the risk in case of business failure. Hence, a safe option is to have a shorter term lease to begin with (one or two years) and include options of renewal in the lease deed.
    2. Lessor or the owner will be willing to make more concessions and adjustments in a longer term lease.
    3. In case the lease is for a period less than or equal to  eleven months, then it needs to be notarized by the notary public.  In case the period of lease is more than 11 months, then it needs to be registered according to Section 17(1)(d) of the Registration Act that says “Registration is compulsory for leases of immovable property from year to year, or for any term exceeding one year, or reserving a yearly rent”. In case the lease deed is more than eleven months and it is not registered in the court, then it is considered to be a month to month lease and many clauses mentioned in the commercial lease deed will be considered null and void. Section 49 of the Registration Act makes it clear that a document compulsorily required to be registered if not registered, cannot be read in evidence.
    4. In India, the stamp duty on the lease deed is a specific percentage of the total rent for one year and it differs from state to state.

5.  Rent:

    1. A monthly rent needs to be fixed in the agreement. The period after which the rent will be revised and percentage of increase applicable at the time of revision should also be defined properly.
    2. The LESSEE shall have to pay with effect from the Lease Commencement Date, a fixed sum as monthly rent (referred to as the “Lease Rent”). Sometimes, it is also important to mention “Rent Commencement Date”e., the date from which obligation to pay lease rent shall commence .
    3. The date of monthly payment should be mentioned and terms in case of default should be stated including the time period after which the interest will be charged and the rate of interest on delayed payments. A clause should be added that in case of default of payment, the lessor will be entitled to an interest (for e.g. @ 18%) on day to day basis and he shall also have the right to terminate the lease as a result of breach of contract on part of the lessee.
    4. Mostly the deduction of TDS is done by the Lessee at the time of remittance of the rent. Further in case of any service tax or GST if applicable should be paid by the Lessee.
    5. Lessee should agree to the rent amount after checking out the rates of comparable spaces in the surrounding areas.
    6. Lessee can also negotiate for some reduction in the rent for initial months to compensate for the moving costs.
    7. Clear specification should be made in terms of “Net Lease”  and “Gross Lease”. Gross lease will include basic rent, taxes (property tax and other taxes applicable by the government authorities), maintenance charges of the demised premises and CAM (Common Area Maintenance).
    8. Determining allowable escalations in other charges related to maintenance including CAM is very important at this stage. If there will be escalations, how will they be computed? Be sure, that the percentage of CAM is calculated based on the size of the building and should not vary on how much of building is rented so that the lessee may not bear the burden of unrented part also.
    9. Lessee may ask for a cap on the CAM so it cannot increase by more than a certain negotiated percent.
    10. A clause should be added giving very clear details about the description of monthly lease rent in order to avoid any future confusion or dispute. For e.g. Such Lease Rent is subject to increase after expiry of every _______ (_______) months by ___ % of the last month’s rent paid in the manner referred herein below :
      1. Description of the Monthly Lease Rent payable
      2. for the period from _______ to _______ shall be Rs. _______.00 P.M.
      3. for the period from _______ to _______ shall be Rs. _______.00 P.M.
      4. for the period from _______ to _______ shall be Rs. _______.00 P.M.
      5. for the period from _______ to _______ shall be Rs. _______.00 P.M.
      6. for the period from _______ to _______ shall be Rs. _______.00 P.M.
      7. for the period from _______ to _______ shall be Rs. _______.00 P.M.

6.  Insurance: Lessor can demand for Insurance of the premises to be done by the lessee and the sum that needs to be insured can be mutually decided and agreed upon.

7.  Security Deposit- The Lessee has to pay the Lessor, an amount of Security Deposit that should be decided by mutual agreement. Usually it is Interest Free Refundable Security Deposit (IFRSD) which is equivalent to 2,3 or 6 months that will remain will the Lessor for the lease term and will be refunded to the Lessee on the expiry of or termination of lease after the possesion of the demised premises has been handed over the Lessor. This amount is treated as security for due observance and performance of the terms and conditions and obligations on the part of the Lessee herein. Such IFRSD should be paid to the LESSOR on or before the execution of the lease deed, the receipt of which, the LESSOR should admit and acknowledge in the deed. Upon expiry or termination of lease, the IFRSD shall be refunded to the Lessee in one lump-sum after deducting therefrom all amounts, if any, outstanding to be paid by the Lessee under the clauses mentioned in the said deed; upon vacating and delivering peaceful possession of the demised premises to the Lessor. The terms of refund should also be mentioned in the lease contract. The LESSEE on paying the IFRSD hereby reserves the right that by duly observing all the clauses in the Lease Agreement, shall peacefully hold and enjoy the Demised Premises throughout the term of the LEASE without any interruption, eviction, claim or demand by the LESSOR. In the event the LESSOR sells or transfers the Demised Premises during the terms of the Lease, the new purchaser(s), assignees(s) or transferee(s), prior to such sale or transfer shall be made aware of and bound by the terms and conditions contained in the Lease Agreement.

8.  “Force Majeure” or “Force Majeure Circumstances” shall mean acts, events, conditions or occurrences beyond the control and not arising out of the fault or negligence of the affected Party and shall include acts of God such as earthquake, lightning, tempest, fire, acts of war, riot, bombing, civil commotion, terrorist acts and agitations. If at any time during the term of the Lease, the Demised Premises or any part thereof shall be destroyed or damaged due to any Force Majeure Circumstances so as to become unfit for occupation and use due to any cause not attributable directly or indirectly to the LESSEE, then, the lease thereby created shall stand terminated and the LESSOR shall refund the unadjusted Deposits and any other amounts to the LESSEE, after deducting therefrom all amounts or other charges if any, outstanding to be paid by the LESSEE.

9.  Tenant Improvements: In case the Lessee is willing to sign a long-term lease, the Lessor will be willing to make a lot of improvements at no cost for the benefit of the Lessee. The lessee should use his bargaining power at this time.

10.  Subleases and Assignments: The Lessee may also ask for the right to sublease or assignment of space to another tenant in case he is unable to use the entire space or wants to move out early so that the lease does not get terminated earlier than the agreed term. In case the Lessee wants to sell his business after it has reached a good value and the location of the business is very crucial part of this sale, then it is very important that he should have the facility to assign the lease to another party otherwise, it can kill this sale. Still one must understand that the Lessor can still get the right to reject the assignment if the assigned Lease Rent is not financially acceptable.

11.  Specifications for the signage boards including the place of display should be decided carefully.

12.  In case the maintenance of the premises is done by a third party, the lessee might have to enter into a separate agreement with them and the details can be mentioned in the lease deed.

13.  Guarantee- Usually Lessor will ask for personal guarantee at the time of signing the lease. The good part is that these guarantees are negotiable. The lessee can negotiate the guarantee for only a portion of the demised premises or for a period of 3 months or 6 months after early termination of the lease rather than the entire remaining lease term.

14.  Responsibilities of the Lessee have to be clarified:

  1. Payment of rent as per the agreement on the day and the manner agreed. The mode of payment, cheque/ RTGS/NEFT in the specified bank account, branch details and IFSC code should be mentioned.
  2. Payment of the electricity bills for the electricity consumed for lighting the demised premises and for the operation of the air conditioners/ chillers, fans, computers and electrical appliances in the demised premises. Also regular payments by the Lessee for gas, internet, telephone bills etc. should be made.
  3. Permission for making any alterations or structural changes– For making any structural alterations into or upon the demised premises or for making any alterations or additions to the external appearance or any part of the demised premises, the lessee should take a prior permission in writing from the Lessor. In case of any change without permission, the clause of penalty or other charges/ damages should be mentioned.
  4. Usage of the demised premises should be very clear. The purpose for the lease of the demised premises should be lawful, well defined and strictly adhered to by the lessee. In case of change in the usage, the lessor should be informed and permission should be taken from him in writing.
  5. Terms related to the environmental issues like effluence of waste, noise control during the working hours and after working hours. Avoidance of any kind of nuisance or annoyance that can interfere with the comfort of the lessor or other lessees or the neighbors. No objectionable activity should take place in the demised premises.
  6. Storage of legal articles only. Lessee should make the commitment of not placing, keeping or allowing to keep any offensive or illegal, dangerous or highly inflammable or explosive material that can adversely affect or destroy the demised pr surrounding premises.
  7. Not to sublet, transfer, assign or part with the possession of the demised premises or any part thereof in case the sub lease is not provided for in the deed.
  8. Permission for lessor or his agents in the premises in order to check the premises or maintain it for repairs, alterations, improvements.
  9. Handing over of the demised premises– Terms of peaceful hand over of the possession at the end of the lease period or the sooner determination should be laid down clearly. The demised premises should be handed over with the fixtures and fittings and in the same condition as was at the time of commencement of the lease with exceptions of fair wear and tear, damage by fire, acts of God, riots or other civil unrest, war, enemy action and/ or other cause not within the control of the lessee. In case of breakage of any fixture or fitting, it should be replaced by equal or better substitutes.
  10. Lessee should not be allowed to keep goods/ articles or anything else in the common areas, entrances, staircases, doorways, passages or lifts.

15.  Responsibilities of the Lessor:

Peaceful and absolute possession of the demised premises by the lessee without any interruption, disturbance, claim of demand by the lessor when the lessee is paying the rent and other electrical/ maintenance bills on the due dates and is observing all covenants, conditions or stipulations contained in the deed.

16.  Termination:

  1. Right to Terminate:- Subject to whatsoever has been stated in the clauses of the lease deed, if the LESSEE fails to pay the Lease Rent for a predefined period, for example consecutive two months or violates any of the terms stated in the lease deed and does not remedy such breach within a stipulated number of days of receiving written notice / intimation in that behalf from the LESSOR, the LESSOR shall be entitled to terminate the Lease executed on         expiry of such notice period and as a result of that the said Lease shall automatically    come to end and the Lessor shall become entitled to take the possession back from the Lessee on “as it was where it was basis” without giving any prior intimation to   the Lessee and the said action of Lessor shall be binding to the Lessee and the Lessee shall not claim for any rights or damages against the Lessor for any of its belongings, goods, movables, furniture, fixture, interior, business loss etc. Further the Lessor     shall also be entitled for and entitled to claim for the due amounts / arrears with 18% interest from the Lessee.
  2. Further the Lessor shall become entitled to sale / dispose off all or any of the belongings, goods, movables, furniture, fixture, interior of the Lessee remain in the said property in custody of the Lessor to recover the out-standings towards the agreed amounts payable by the Lessee under the said agreement.
  3. Lock-in-Period: A specified time period can be added in lease agreement as LOCK IN PERIOD for securing both the Lessor and the Lessee. The lock in period can be fixed for an initial number of months from the Lease Commencement Date. The purpose of doing so is that the LESSEE will continue to pay the Lease Rent for lock in period months (can be any number e.g. 12, 24 or 36) continuously and without any interruption. It is specifically agreed by the LESSEE that if the Lease is terminated by the LESSEE during the initial period of said number of months or the LESSEE commits any default in observance of the terms and conditions on its part, on account of which the LESSORS shall terminate this Lease during the lock in period, and then the LESSEE shall without prejudice to the other rights and remedies available to the LESSOR, be liable to pay lease rent for the balance period out of total specified months.
  4. It is important to include the notice period of a specific number of months by which the Lessee shall have the right to terminate the Lease any time after an initial lock in period from the Lease Commencement Date, by giving a written notice of the specified number  months in advance to the LESSORS of its intention to terminate. If this Lease is cancelled or terminated by the LESSEE during the initial lock in period or if the LESSEE commits any default in observance and performance of the terms and conditions mentioned in this Deed on its part, on account of which, the LESSORS shall terminate the Lease, the LESSEE shall be liable to pay lease rent for the balance period out of total specified months to the LESSORS. This will be without prejudice to other rights of the LESSORS.
  5. In the event of expiry or termination of the Lease and the Lessee continuing to occupy the Demised Premises beyond expiry or termination of the Lease Period and in the absence of any dispute, the LESSEE shall pay to the LESSORS the Lease Rent of that period plus interest (for e.g. @ 1% ) per month on the said Lease Rent.

17.  Consequences of Termination:

  1. Handing over of possession:- The LESSEE shall upon expiry of the Lease or upon sooner termination/determination of this Lease , deliver vacant and peaceful possession of the Demised Premises to the LESSORS.
  2. Restoration of Demised Premises:- The LESSEE shall restore the Demised Premises nearly to the same condition in which they were taken, repairing at its own cost any damage that may be caused by any act or default by the LESSEE, its servants, agents or visitors. However, normal wear and tear and any improvements/interior decoration work done with the knowledge or consent of the LESSORS shall be excepted.

18.  The Lease is for a fixed period of a specified number of years. And the LESSOR at its sole discretion may renew the same for any further period, subject to fresh terms and conditions mutually agreed upon between the LESSOR and the LESSEE.

19.  The Lease Agreement should be executed in duplicate and the Lessee shall retain the Duplicate and the Lessor shall retain the Original Lease Agreement. Both counterparts shall constitute one and the same Lease Agreement. Stamp Duty payable on this Lease Agreement and registration charges can borne equally by both or one of the LESSOR and the LESSEE.

20.  That it has been agreed by the Lessee that in no circumstances the Lessee shall reduce or intimate the Lessor to reduce the lease rent of the said premises and further it is immaterial and irrelevant for the Lessor and / or for any of the terms & conditions of the said lease deed that whether the Lessee doing loss and / or the market going through recession or whatsoever. Meaning thereby the Lessee shall continue paying the lease rent during the entire lease period as agreed hereinabove without any reduction / revision in it. And further the Lessee shall in no event shall reduce / intimate the lessor to reduce the area of said premise, meaning thereby the Lessee shall use / occupy the said premises in whole during the entire lease period and if any of such action is taken by lessee, the same shall not be accepted by the Lessor.

21.  In case of any dispute or difference arising between the Parties hereto in any of the matters under this Lease Agreement or interpretation or implementation of any of the terms and conditions herein, the provision of resolving the should be mentioned in the deed. Most popular and faster method of resolving issues is through arbitration under the Arbitration and Conciliation Act, 1996. Any such arbitration shall be conducted by a three member arbitral tribunal with each of the parties appointing their respective arbitrators and the two arbitrators so appointed shall appoint the presiding arbitrator. The venue of the arbitration should be decided. The parties shall pay the cost of arbitration as may be directed by the Arbitrators in their Award.

“This article was published as part of coursework for the NUJS MA in Business Laws course.”


Photo by Pacific Austin on Unsplash

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