Things to look out for in a lease deed

Here’s the first of a two-part se­ries on draft­ing a lease deed which is fair to both the les­sor and lessee

HT Estates - - Front Page - Su­nil Tyagi

Leas­ing of prop­erty is con­sid­ered a mode of trans­fer of im­mov­able prop­erty un­der law. This is an at­trac­tive source of in­come for the owner. How­ever, our courts are over­flow­ing with land­lord-ten­ant dis­putes. Most have their roots in lease deeds that were not well-drafted. Dis­putes are also more likely to arise when lease deeds are loaded in favour of the les­sor (land­lord) or the lessee (ten­ant). This ar­ti­cle dis­cusses the is­sues and ar­eas that par­ties must keep in mind while ne­go­ti­at­ing the terms of the lease deed. Once fi­nalised, clauses for the same may be in­cor­po­rated ac­cord­ingly in the lease deed so as to make these en­force­able.

Term: The date of com­mence­ment of the lease term and the du­ra­tion of the lease term should be set out in the lease deed. If the par­ties have pro­vided the du­ra­tion of lease term in the lease deed, it will come to an end on ameni­ties and fa­cil­i­ties around the prop­erty, etc. Some par­ties avail the ser­vices of an of­fi­cial val­uer or an agency with ex­per­tise in the mat­ter to de­ter­mine the proper rent. Also, the time­lines of pay­ment and mode of pay­ment (for ex­am­ple, real time gross set­tle­ment, cash, or cheque) should be clear. Lately, pay­ment of rent on a monthly min­i­mum guar­an­teed rent and rev­enue-shar­ing ba­sis is be­com­ing in­creas­ingly pop­u­lar in leas­ing of com­mer­cial prop­er­ties. Terms of such transactions should be care­fully drafted.

Se­cu­rity de­posit: In most transactions, the les­sor de­mands an in­ter­est-free re­fund­able se­cu­rity de­posit from the lessee. The se­cu­rity de­posit acts as a buf­fer for the les­sor in the event the lessee de­faults or breaches terms of the lease. For ex­am­ple, if the lessee is un­able to pay rent for any par­tic­u­lar month, the les­sor can ad­just the un­paid rent from the se­cu­rity de­posit. If the lessee has dam­aged the prop­erty in any man­ner, the les­sor can deduct from the se­cu­rity de­posit the money he spent on re­pairs. The se­cu­rity de­posit is re­funded to the lessee at the time of ex­piry or ter­mi­na­tion of the lease.

Es­ca­la­tion: If the lease deed is be­ing ex­e­cuted for a long du­ra­tion, clauses on in­crease in monthly rent by a spe­cific per­cent­age are in­cluded to fac­tor in rise in rentals. A les­sor may also in­cor­po­rate a clause on in­crease in the se­cu­rity de­posit af­ter ev­ery few years of the term, pro­por­tion­ate to es­ca­la­tion in rent.

Sub­let­ting: If the les­sor wants to en­sure that the lessee should not fur­ther sub­let the prop­erty, an ex­press pro­hi­bi­tion to this ef­fect may be pro­vided in the lease deed.

Taxes: In the case of a com­mer­cial prop­erty, the lease deed should lay down obli­ga­tion of pay­ment of ser­vice tax on rent­ing of im­mov­able prop­erty for com­mer­cial pur­poses and spec­ify who is to bear the li­a­bil­ity.

Grounds of breach: The par­ties may clearly enu­mer­ate which acts of each of them will amount to a breach of the lease deed, lead­ing to ear­lier ter­mi­na­tion. From the per­spec­tive of a les­sor, in­stances of breach by the lessee may in­clude de­layed pay­ment or non-pay­ment of rent and util­ity bills, us­ing the premises in a man­ner which vi­o­lates the per­mis­si­ble us­age, caus­ing ob­struc­tion or cre­at­ing hin­drance to other oc­cu­pants of the build­ing, dam­ag­ing the premises, etc. From the per­spec­tive of a lessee, in­stances of breach made by the les­sor may in­clude the lat­ter’s in­ter­fer­ence with for­mer’s peace­ful en­joy­ment of the premises, les­sor fail­ing to re­pair/rec­tify ma­jor struc­tural dam­age in the prop­erty, in­ter­rup­tion of the lessee’s oc­cu­pa­tion of prop­erty due to de­fect in the les­sor’s ti­tle of own­er­ship in the prop­erty, etc. Some lease transactions also in­volve a lock-in pe­riod dur­ing which the lessee is not en­ti­tled to ter­mi­nate the lease. Once the lock-in pe­riod ends, the lessee may ter­mi­nate the lease af­ter is­su­ing a notice in ad­vance to the les­sor.

THINKSTOCK

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