Section 19 of the Indian Contract Act, 1872 provides that in an agreement where consent to an agreement if caused by coercion, fraud or misrepresentation, such agreement is voidable at the option of the parties. The exception to the aforesaid section provides that if such consent was caused by misrepresentation or by silence, fraudulent within the meaning of Section 17, the contract is voidable, if the party whose consent was so caused had the means of discovering the truth with ordinary diligence.
Ordinary diligence or due diligence is an important step before the purchase of any kind of property i.e. either residential or commercial. Any buyer going into the market to purchase a property, looks for certain criteria to evaluate the property. This is where the role of due diligence of a property comes into play. Due diligence, in simple terms, means assessment of facts and law to highlight risk factors which in-turn helps the buyer to decide whether to purchase/ lease a property or not.
As far as real estate is concerned, due diligence plays a major role. Amongst specific issues, it can help determine liabilities and rights attached to the property, gauge whether there will be any future expenses required to be made by the buyer or if the property has been constructed with adequate approvals and consents from the relevant parties (in case of already constructed residential/ commercial property).
In the event of the leasing of commercial spaces such as malls and shopping complex, due diligence of the property may help determine whether certain actions are required to be undertaken by the parties (conditions precedent), the set of approvals that are required to be obtained by the lessor before leasing of the property. For example, leasing of a cinema theatre would require applicable permits before the structure for a theatre is completed by the developer.
Therefore the process of due diligence helps determining the representations, warranties and indemnity provision while drafting and negotiating an agreement. Due diligence or representation and warranties cannot be seen as a substitute for each other. Due diligence helps discover facts with respect to the property which can held the buyer make an informed decision, whereas the representations and warranties ensure that the facts discovered are true on execution of the agreement for purchase of property and that the facts remain to be true in the future.
Important Aspect to Check for Commercial Leases
The due diligence process for a commercial space or office unit may be different from the due diligence undertaken for purchase of a plot of land. In most cases, the commercial space may be constructed as part of a commercial structure. The approvals and consents required in case of a commercial space may differ from state to state. Since the sale in case of commercial space shall be of a built-up area instead of a plot of land, approvals such as the completion certificate, occupancy certificate, no-objection certificate from the concerned authority for installation of fire extinguishers, certificate for operation of lift, specific approvals to be obtained by the parties for example in case of a food court, specific licenses such as the liquor license may be required to be obtained by the parties. These aspects are covered in addition to the basic title verification and encumbrance check.
Important Clauses in Lease for Commercial Space
There are certain general clauses in an agreement to lease or a lease deed. These provisions usually are related to the term of the lease, right to renew the lease, rent-free period, security deposit, payment of lease rent, covenants of the parties, indemnity provisions, force majeure events, termination and consequences of termination of the lease and other miscellaneous clauses.
In case of a lease for an office-space following aspects are important:
- Fit-Out Period
Fit-out period is a rent free period agreed between the parties in which the lessee is not liable to pay the rent and the time duration is used to enable the lessee to install necessary equipment for them to use the property for the intended purpose. The fit-out period is usually decided between the parties and may extend from 3 months to 1 year depending upon the needs of the parties. The fit‑out period may be extended if the parties decide to do so. Similarly, a maximum time period for extension of fit-out period may be decided between the parties.
In case of commercial spaces, fit-out play an important role as the lessor/ developer is required to develop the basic structure and hand the same over to the lessee for them to initiate fit-outs. Parties may agree that on termination of the lease, the fit-out may be removed by the parties.
- Security Deposit
Security Deposits also form an important aspect of the lease for commercial spaces. The Security Deposit is a subject aspect which may be calculated as 2-6 months of rent. Now the Model Tenancy Act has provided a cap for security deposit for it to be maximum of 6 months of the agreed rent. The parties can agree on the terms and conditions for use of the security deposit. Further, parties may be decided on the mechanism for replenishing the security deposit for the duration of the lease. Since the security deposit is a sum of money held by the lessor for a long time, the security deposit usually are interest free deposits.
- Lock-in Structure
The concept of lock-in has solely been developed by the common practice for leasing spaces. The concept comes from the underlying fact that the parties have come together to enter into an agreement and none of the parties shall suffer a loss because of early termination of the agreement to lease or lease deed. There is no legislation governing the lock-in period, therefore it is a contractual obligation agreed between the parties. Breach of lock-in provision may result in certain sums of money, as decided by the parties, to be paid to the other party.
Usually, the lessor is locked-in during the term of the lease. The only exception to the aforesaid lock-in provision is the non-payment of rent by the lessee. For the lessee, as decided by the parties, breach of lock-in may result into payment of rent for the unexpired period of the lock-in.
- Force Majeure
Force majeure is one of the most important components of a lease deed. The provision for force majeure is firstly used to determine what events may be considered as a force majeure event. Like any other contractual obligation, consequences of force majeure event may be decided between the parties. Depending on the fact that the force majeure is curable or not, the parties may decide on provisions such as non-payment of rent since the force majeure event or in case the force majeure event is non-curable, the parties may decide to terminate the agreement.
- Use of common areas and maintenance charges
Commercial spaces in organised commercial buildings usually come with certain common spaces that may be used by all the lessees of the commercial building. For use of the common areas, the lessee is required to pay maintenance charges which are usually based on the share of the lessee in the commercial building in terms of the area leased to the lessee. Maintenance charges are payable to either the lessor (if the property is maintained by the lessor) or a third party appointed by the lessor for maintenance of the commercial building.
- Equipment and Facilities
The lessor/ developer have certain set of facilities that may be used by the lessee. These facilities may include plumbing and drainage, frisking area, air conditioning facility, electricity, fire detection, communication and security, vertical transportation, water facility etc.
- Parking Space
Since a commercial space will have employees regularly visiting the office, lease deeds for commercial spaces usually have a dedicated number of parking spots available in the common parking. The lessee may also use other parking spaces on payment of a fee, as may be decided between the parties.
- Signage Area
Signage area is a space used by the lessee to advertise their logo. The lease deeds with respect to commercial spaces also include provision for signage area. Signage area is usually a pre-fixed area to be used by the lessee.
While the Mode Tenancy Law has been issued by the Ministry of Housing and Urban Affairs, it has not yet been adopted by any state. The aforesaid draft legislation covers many aspects of a lease deed and provides a minimum standard which is required to be followed between the parties, however, the parties also have the discretion to mutually decide the terms of the lease.
Difference between a lease and license agreement
Lease and license enable transfer of certain specific rights with respect to the a property which may be transferred by the owner or right-holder of the property. Lease is defined under the Transfer of Property Act, 1882 whereas license is defined under the Easements Act, 1882.
While lease is a transfer of interest, license is a permission to undertake certain actions without any transfer of interest. Leases usually are unaffected on transfer of title of the property i.e. change in the lessor, however license usually come to an end with the change in the licensor. Under the lease, the lessee has a right to possession to the property whereas no possession rights are transferred to the licensee. Depending on the intended use of the property and the nature of rights that the owner or user of the property is intending to provide to the user, lease or license of the property can be undertaken.
While leases are covered in the aforesaid Model Tenancy Law, the draft legislation is silent on its applicability to license agreements.
Stamp Duty payable on the lease deed
Stamp duty is required to be paid on the lease deed. Usually, buyers mistake that the duty payable for leases is determined on the basis of annual average rent, however, the amounts payable by the lessee to the lessor under the lease, if they are so mentioned in the lease agreement, also form part of the amount on whose basis the stamp duty is determined. Such amounts usually include common area maintenance charges, parking charges etc.
Originally Published by Alpha Partners, January 2021
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.