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
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.