Commercial real estate leasing in India: Overview

Have you ever pondered upon what critical lease deed provisions a lessee should be aware of? In this article, we shall detail commercial real estate leasing and explain how it works in the Indian spectrum.  Leasing refers to a legal arrangement in which the owner of a property permits another party with the right to use and hold possession of that property in exchange for a fee and is subject to certain terms and conditions. Leasing of commercial property authorizes the use of the property for businesses, offices, retail spaces, and other commercial reasons.

Unlike residential leases, corporate leases may be more difficult to understand due to their numerous terms and conditions. Commercial real estate in India can be rented out by individuals, businesses, sole proprietorships, etc.

Contractual lease provisions are negotiable in India. In the absence of a contract, the Transfer of Property Act 1882 specifies specific rights and obligations that govern the landlord-tenant relationship. Since usually the landlord drafts lease agreements, they frequently include clauses that benefit them. However, a proper firm lease agreement must also protect the lessee’s rights. Before signing a lease deed during the lease negotiation process, you must thoroughly analyze and, more importantly, fully comprehend the document. King Stubb & Kasiva is one of India’s biggest law firms, with offices in 8 cities around the country, with a few of the best commercial real estate Lawyers in India, specifically for Special Economic Zones (“SEZs”).

In this article, we will have a look at the Types of leasing structures in India, and the important details of a Lease deed.

Types of Commercial real estate leasing Structures in India

There are two types of Leasing Structuring in India. They are:

Operating Lease

Under an operational lease, the lessee retains legal ownership of the property. The owner only grants further authority to use their property for commercial real estate in India for a set time. After the initial lease period expires, parties may opt to extend the lease, allowing the lessee to continue utilizing the property, or may choose to terminate the agreement. However, the true owner is the one who owns everything.

Financing Lease

Throughout the period of leasing commercial property financially, the owner retains ownership of the property. The tenant party, on the other hand, has the option to purchase the aforementioned property by paying the residual price at the end of the lease. This payment is often set at 10% of the property’s value or less. This type of lease is comparable to a loan. The renter will continue to pay the lease fee and, eventually, the residual amount, and will become the property’s owner.

Important Details of a Commercial Lease Deed

Preliminary Documentation

Before finalizing the deal paperwork, the parties execute preliminary agreements such as term sheets, memorandums of understanding, and letters of intent. This is especially important in SEZs since they are developed, and state-aided. These preliminary agreements often offer a statement of the business understanding, rights, and obligations of both parties and may require the payment of a minimal amount as an advance on the purchase price, which can be offset against the ultimate purchase price due under the conveyance deed. Such early agreements typically include a legally binding exclusivity restriction. However, parties frequently agree that the remaining provisions of preliminary agreements are not legally binding.

Term of Lease

The lease term should be discussed with the lessee’s renewal possibilities in mind. The lessee should have the option to renew the lease. Due to the stamp duty that must be paid on lease agreements, the majority of leases in India do not have an automatic renewal option. Thus, there is a requirement for commercial real estate lawyers in India. If the lease instrument has a provision for automatic renewal for two years after the first three-year term expires, the stamp duty is calculated for a period of 3+2 years. This is one of the reasons why Indian leases include a provision requiring the lessee to execute a new lease document if the lease duration is to be extended.

Security Deposits

Security deposits are commonly used in commercial real estate agreements in India. The Security Deposit might range between 2-6 months’ rent. Security deposits are limited to the equivalent of 6 months’ rent under the Model Tenancy Act, 2021. The parties can reach an agreement on the criteria and conditions for utilizing the security deposit. Furthermore, both parties can agree on the type of security deposit payment to be made for the life of the lease. Since it is a large sum of money that the landlord will keep for an extended period, the security deposit is frequently a non-interest-bearing deposit.

Stamp Duty and Registration

Annual real estate leases, leases of 1 year or more under Section 17 of the Registration Act, 1908. Furthermore, Section 107 of the Transfer of Property Act, of 1882, specifies that only a registered document may be used for leasing a commercial property from year to year, for a duration longer than 1 year. Savings on stamp duty are one of the reasons why home leases are typically lasting 11 months. The lease agreement is registered so that it can be used as evidence in court if there is a dispute concerning the mutually agreed-upon terms and circumstances governing the property.

Conclusion

Due diligence requirements for leasing a commercial or office building may differ from those for buying a piece of land. The commercial sector is typically developed as part of a commercial structure. The authorizations and consents needed for a commercial facility differ from state to state. Because the commercial space is a built-up area rather than a piece of land, the parties must obtain permission from the appropriate jurisdictional authorities for the fire extinguisher installation certificate for lift operation, completion certificate, occupancy certificate, and no-objection certificate.

The parties may additionally require further authorizations depending on the lessee’s anticipated use of the commercial property. Commercial real estate lawyers in India are required to understand such authorizations better, and King Stubb & Kasiva can provide such lawyers very effectively and efficiently.

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