How to negotiate a commercial lease: Top 5 tips

While a commercial lease can often be a standard document, there are also ways to negotiate the best possible deal for your business. Here's our pick of the 5 best tips to negotiate a strong commercial lease

There are several factors to consider before taking a building on rent for commercial purposes. These factors must be looked at from all possible perspectives and any lacuna or ambiguity must be sorted out in the beginning itself. Since taking a premise on lease for commercial purposes means a sizable payout every month, care must be taken in executing a deal. We take a look at some of the factors:

1. Negotiation of the rent

Usually, there is scope for negotiation in rent quoted by the landlord in the Indian context. One should negotiate the amount quoted by the landlord and try to strike a good bargain. This also depends on the fact whether the landlord is a huge real estate company or an individual. There will be greater scope of negotiation with an individual rather than with a company. However, there will be greater uniformity and fewer deviations by a corporate landlord as compared to an individual. A corporate landlord may not give too much discount on the rent quoted but is likely to stick to some standards of commitment and service over the tenure of the lease. The negotiability will also depend on factors such as oversupply or paucity of commercial spaces in that area and one’s own urgency to get a place to commence business.

 

2. Which part of the rent should be negotiated

There are several components of a rent in the case of a commercial lease. There is a base rent and then there are recurring expenses like cleaning and upkeep of the place. These recurring expenses are also built into the rental agreement. One must start to negotiate the base rent first. The base rent is usually 10 times of the maintenance costs and even if the base rent is reduced by a small fraction, let’s say 10 percent, after negotiation, it results in far more saving than if there is a 50 percent cut in maintenance expenses. For example, if the base rent of a place is Rs 100 and if the maintenance cost charged by the landlord is Rs 10, then a 10 percent cut in base rent will result in savings of Rs 10 and a 50 percent reduction in maintenance cost will bring down the overall outgo by just Rs 5.

Example 1: (When Negotiation reduces Maintenance Cost by 50%)

Base Rent Maintenance Cost Total
Rent Before Negotiation Rs 5,00,000 Rs 60,000 Rs 5,60,000
Rent After Negotiation Rs 5,00,000 Rs 30,000 Rs 5,30,000

 

Example 2: (When Negotiation Reduces Base Rent by 10%)

Base Rent Maintenance Total
Rent Before Negotiation Rs 5,00,000 Rs 60,000 Rs 5,60,000
Rent After Negotiation Rs 4,50,000 Rs 60,000 Rs 5,10,000

 

3. Sub-lease clause in agreement

A sublease agreement clause in the rent agreement is very important from the point of view of both, the landlord as well as the tenant. The tenant must be clear about the future requirements from the premises and carefully look at the possibility of subletting part of the premises at any point of time during the tenure of the main lease. Usually, a landlord will not allow subletting in case there is no prior agreement for the same. Even if there is no foreseen requirement of subletting, one must get a clause inserted in the main lease agreement for the same, so long as the rent component is not increased by the landlord for insertion.

 

4. Hidden costs/taxes

The tenant should be very clear as to who will pay the taxes like property tax, water tax, etc. It should be explicitly written in the agreement. These taxes may be paid only by landlord or the tenant; or they may be split between two parties in a certain ratio. The rent agreement must also clearly mention how the increase in property tax, if any, will be borne by the two parties. There is general trend of increasing property tax by most municipal corporations in the country, sometimes even as high as 10 times. However, there are many entities that are either exempt from paying property tax or have lower tax rates. These are:

  • Dharamshala
  • Orphanages
  • Alm Houses
  • Municipal Buildings
  • Cremation Ground
  • Central and State Government Education Institutions
  • Government Hospitals
  • Horticulture/Agriculture

It is to be noted that these exemptions are not uniform and vary from state to state and even from municipalities to municipalities. One must check out the exemptions and rebates from local authorities before signing any agreement with the landlord. The system of calculation and exemptions thereupon are available on the website of the local municipal authority in most Indian cities and towns.

 

5. Expenses related to security

Security aspects have to be sound in the building or the premises being taken on rent. While some security features may exist at the time of negotiation, some others might be required after it has been taken on rent. It has to be clarified what aspects exist and what needs to be done. There may already be a security guard at the premises and who will bear the salary expenses of that guard or sets of guards needs to be clarified before the signing of the rent agreement.

 

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