Are you a start up or a small scale business without the support system of expensive lawyers on your side ?
Here is a crash course on points to take care of while signing a lease / rent agreement.
A lease / rent agreement has different forms in different regions of India and has different terms (periods) as well.
It is common for the agreements to be 3+3+3 years or 5+4 years in duration.
For the sake of simplicity , the landlord or the space provider is called “lessor” and the person or company taking up the space is called “lessee” in the agreement.
1. Rent amount
Is the rent amount with or without taxes (GST) ?
Ensure the rent mentioned is as per the discussion as sometimes during rent negotiation, these things get misunderstood by one or the other party. If GST is above the rent amount, mention it clearly in writing.
2. CAM (Common area maintenance or Maintenance charges)
Are there any other charges which increase your monthly outflow outside of rent ?
Malls / Commercial complexes / Building complexes have common services which they expect to be a part of common pool and to be paid by the occupants / lessees.
Find out how much are they and whether they are fixed or variable and do they change annually.
These expenses are usually payable monthly but adjustable annually in addition to being audit able by the lessee.
3. TDS applicability (Tax deduction at source)
Ensure that the TDS deduction is understood and mentioned clearly in the agreement as this could be a point of contention going forward.
By law, the lessee is required to deduct 10% of the rent amount and 2% on CAM charges while making the payment and depositing the same to govt monthly.
Some private owners (individuals) OR lessors object to the TDS deduction and propose that the lessee takes care of it over and above the rent amount.
4. Lock in period
Lock in period is the time period before which the lessee can not vacate the premise and if he does, the rent for the remaining lock in period needs to be paid at the time of leaving.
It is crucial to keep this as low as possible in the benefit of the lessee.
A good lock in period could be 0-6 months from the lessee’s side and full tenure from the lessor’s side.
5. Notice Period
Notice Period is the time period which is essential to be served once the lessee has expressed his desire to vacate the property “in writing”.
It is good to keep it between 1-3 months for the lessee.
6. Security deposit / refund of security deposit
Security deposit is an interest free deposit given to the lessor which acts as a security for rent payments.
This is to be returned to the lessee once the lease period is over OR the lessee decides to vacate the premises and clears the dues.
A good security deposit for the lessee’s advantage can be 1-3 months worth.
7. Cure period in case of default
This is a period where the lessee gets time to rectify a default instead of the lessor taking action of termination immediately on default.
If there is ever a default in payments, this negotiation of a cure period in the agreement can save the lessee from knee jerk reactions.
8. Interest on delayed payments
If payments are delayed from any side, it is fairly common to charge 12% interest on the pending amounts.
This clause ensures both parties honor their financial commitments in time.
9. Material breach of contract
There are certain defaults categorized as breach of contract by the lessor like a cheque dishonor.
The breach gives immediate right to the lessor to take action as per law and it’s always better to put a cure period in each situation to ensure the lessee’s safety.
10. Stamp duty
Stamp duty fee is the government fee for registration of lease agreement and it is often split
half and half between the lessor and lessee.
It is also a common practice to have the lessor pay it fully.
11. Force Majeure
What if corona virus strikes ? Do you still pay the rent during non operational period ?
These are conditions where disruption happens beyond any one’s control or by Act of God and the business stops functioning.
A good negotiation will be if such conditions are asked for by the lessee where he gets immunity if such things happen till the time they are rectified.
12. Repair & Damage clause
This refers to deduction at the time of handover of the property when it is being vacated.
It is a common practice to keep this clause broad by the lessor so as to exercise control over deductions from Security deposit.
It is often misused as well so it’s better to fix this in the beginning itself by probably mentioning “bare shell condition” to save on deduction.
13. Escalation clause
When does the rent increase ?
It is fairly common for lessors to put in a 5-15% increase in rental every year depending upon the nature of property
It is always better to negotiate an escalation of 10-15% after every 3 years and not annual as it gives more time to for a lessee’s business to settle down.
The representations above are meant for the consumption of people new to signing agreements and there is great level of technicality in each and every clause for which it is recommended that the reader takes help of a professional.
If there are any queries on topics not covered above, please feel free to add in comments and I will try to address them.
This was originally published here https://www.getinspiredtoday.in/post/how-to-sign-a-rent-agreement-layman-edition