Commercial Leasing in India | Everything you need to know

Commercial leasing in India can seem complicated, but it doesn’t have to be. Whether you are new in the market, or a seasoned professional facing market and regulatory changes, a few common questions are sure to cross your mind.  

This guide will answer any and all questions you might have about the most fundamental aspects of commercial lease agreements, from securing your first lease to navigating lease renewals and terminations.

What is a Commercial Lease Agreement?

A commercial lease agreement is a legal contract between a landlord and a tenant outlining the terms and conditions under which a tenant occupies a commercial property and the amenities the landlord provides. This agreement covers factors such as rent, lease duration, maintenance responsibilities of the property, renewal clauses, and termination clauses. 

Leases are legally binding contracts, so it’s recommended to consult with a lawyer to ensure you understand all the terms and conditions before signing. 

Securing a Commercial Lease

The first step towards signing a commercial lease is first securing one. Securing a commercial lease requires careful preparation and planning. Here are some things to keep in mind while securing a commercial lease:

  1. Define your needs: Clearly understand the size, location, type of your business, and type of property you require.
  2. Research the market: Research current rental rates for similar properties and competing businesses in your desired location.
  3. Build a network: Having the right connections with the right people in the right places has a significant impact on determining how you secure a commercial lease. A commercial real estate broker, like the infinitely talented folks here at PropReturns, can help you find suitable properties and negotiate lease terms.

Negotiating a Commercial Lease Agreement

Once you secure your ideal commercial space, the next step is to negotiate the terms of your tenancy. Negotiating a commercial lease agreement is an important step for both parties to agree upon and secure favorable terms. 

Here are some key points that may need negotiation before you sign a commercial lease agreement:

  • Rent: Try to negotiate a rent that aligns with current market rates, your budget, and your revenue.
  • Lease term: The ideal lease term depends on your business needs. This is the most variable aspect of a lease agreement and depends on the current market status, the status of the business, the budget of the tenant, and possible competing offers from other sources. 
  • Lock-in period: This term of a commercial lease agreement dictates for exactly how long the current tenant has committed to occupying the space and not vacating in favor of a different venue for a certain period. 

While discussing this term, fair benefits and penalty clauses should be drawn up to incentivize the tenant. This term is particularly relevant when it comes to pre-leased commercial properties, where ownership of the property may switch hands but tenancy does not, because of a lock-in agreement.

  • Operating expenses: Clearly define which party is responsible for property taxes, insurance, and maintenance costs. Ideally, your operating costs should not be more than (X)% of your revenue. To know more about analyzing your operation costs vs your revenue, check out this article right here (insert relevant information when you have an internet connection) 
  • Payment for overseeing this agreement: The party responsible for paying for the commercial lease agreement can be negotiated between the landlord and tenant. In some cases, the tenant may be responsible for the cost, while in others, the expenses may be split.

Tips for Tenants to Negotiate Lease Terms

Negotiating a commercial lease agreement can be daunting for tenants in India. However, with a strategic approach and a complete understanding of key factors that influence leverage, you can secure a lease that aligns with your business needs and budget.

Here are some crucial aspects to consider when negotiating a commercial lease agreement:

  • Market Conditions: Understanding the current market conditions in your preferred location is important. Research current rental rates for comparable properties. If there is a surplus of vacant spaces in the area, you might have more leverage to negotiate rent prices and demand concessions from the landlord who may be trying to offload inventory.
  • Length of Lease Term: Landlords often prefer longer lease terms, as they offer stability and guaranteed income. You can leverage this preference by finding a common ground that not only reduces your lock-in period and commitment to the place but also does not burn a hole in the pocket when it comes to rent.
  • Creditworthiness and Business Stability: Demonstrating strong financial standing and a stable business history strengthens your negotiating position. Landlords are more likely to offer favourable terms to tenants who are perceived as reliable and less risky. Most landlords these days have the liberty and resources to conduct thorough background checks. 
  • Repair and Maintenance Responsibilities: The lease agreement should clearly outline which party is responsible for repairs and maintenance of the property. Negotiate to ensure a fair distribution of these responsibilities, considering the property’s condition and age. If the property needs crucial repairs before the tenancy is handed over, the landlord is required to make these repairs.
  • Renewal Options and Termination Clauses: Carefully review the lease agreement’s renewal options and termination clauses. Negotiate for favourable renewal terms and ensure the termination clauses provide a clear and feasible exit strategy if needed.

Remember to carefully negotiate your terms. It is important to know that the landlord is at liberty to refuse a particular tenant based on some unfulfilled terms or some other foreseeable favourable terms with a different tenant at the end of the lease term.

Termination of a Commercial Lease

Sometimes things fall apart and leases need to be terminated. Whatever the reason may be, lease termination clauses outline the conditions under which a tenant or landlord can terminate a commercial lease agreement before the lease term ends. 

These clauses are crucial to understanding, as they specify the notice period required, any associated fees, and the steps involved in terminating the lease. Terminating a commercial lease should follow the guidelines outlined in the agreement to the teeth. It’s important to provide written notice to the landlord within the stipulated time frame to avoid penalties.

Here’s a breakdown of some key points to consider regarding lease termination clauses in India:

  • Notice Period: The lease agreement will typically determine a notice period that both parties must adhere to if they intend to terminate the lease before the term is over. This period can vary but usually falls between one to three months for tenants and two to three months for landlords. This gives both parties some to find accommodation or tenants, respectively, before the tenant has to vacate the space completely.
  • Termination Clauses: These clauses may specify reasons for which either party can terminate the lease without penalty. These reasons might include breaches of the agreement and insolvency.
  • Early Termination Fees: In some cases, the lease agreement might impose a penalty fee for early termination. This fee is often calculated as a percentage of the remaining rent or a flat fee that is to be paid upfront upon vacating the premises.

Here are some tips to fully understand the terms of commercial lease termination: 

  • Review the Lease Agreement Carefully: Before signing the lease agreement, thoroughly examine the terms of termination. Ensure you understand the notice period requirements, potential fees, and valid reasons for termination.
  • Provide Written Notice: If you intend to terminate the lease, provide written notice to the other party following the stipulated notice period in the agreement. Make sure that this notice period is served well in advance, firstly to cover all legal bases, and secondly, just as common courtesy.
  • Consult a Lawyer: If you have any doubts regarding the termination clauses or the process, consulting with a lawyer is recommended. They can advise you on your rights and obligations under the lease agreement.

By understanding lease termination clauses and following proper procedures, you can ensure a smoother exit process when vacating a commercial property in India. Early termination of a commercial lease is possible, but it depends on the terms outlined in the agreement. Some leases may allow for early termination with a penalty fee, as mentioned before.

Key Takeaways for Successful Commercial Leasing 

Commercial leasing can be a smooth and rewarding experience for tenants with the right knowledge and approach. By understanding the core elements of commercial lease agreements, navigating lease negotiations strategically, and considering potential termination scenarios, you can secure a lease that supports your business growth.

Here’s a quick recap of key takeaways to ensure successful commercial leasing in India:

  • Grasp the fundamentals of commercial lease agreements: Familiarize yourself with common clauses covering rent, lease terms, maintenance responsibilities, and termination procedures.
  • Negotiate strategically: Leverage market conditions, your business strength, and the lease terms themselves to secure favourable lease agreements.
  • Plan for potential lease termination: Understand termination clauses and plan your exit strategy if necessary.
  • Seek expert guidance: Partner with a reputable commercial real estate broker such as the famously talented folks here at PropReturns, lawyers and accountants to ensure you make informed decisions throughout the leasing process.

PropReturns is here to simplify your commercial leasing journey in India. Visit our website to browse through a comprehensive selection of commercial properties, including office spaces across the country. We are committed to providing you with the tools and resources you need to find the perfect commercial space and negotiate a lease agreement that propels your business forward.