In the Indian real estate market, a variety of commercial lease agreements are used to meet business requirements.
Common Leasing Terms
Before we look into various types of commercial leases prevalent in India, let’s have a look at common terms used in the real estate industry.
1. Lease Duration
In the Indian real estate market, commercial leases typically span a duration ranging from 1 to 10 years, although longer-term leases can be negotiated for enhanced stability and assurance.
2. Rent Amount and Escalation
Your lease agreement should explicitly state the monthly or annual rent amount. It’s customary for Indian commercial leases to incorporate an annual rent escalation (increase) clause, usually linked to prevailing market rates or inflation.
3. Security Deposit
Landlords frequently require tenants to furnish a security deposit, typically equivalent to several months’ rent. This deposit is refundable upon lease termination, contingent upon specific conditions.
4. Lock-in Period
In commercial leasing, there is a provision for ending the lease agreements before the original tenure, with conditions regarding due notice and other terms. A lease agreement can also specify the minimum duration of lease, called the lock-in period, prior to which the tenant may not vacate the property. Even if the tenant wants to vacate the property before the end of the lease agreement, the tenant is obligated to pay the rental equivalent to the lock-in period.
4. Maintenance Charges
Some Indian commercial leases may encompass provisions obligating the tenant to cover maintenance and common area charges, while others might incorporate these within the base rent.
Types of Commercial Lease Agreements in India
Let’s explore the common types of commercial lease agreements in India, each tailored to meet specific needs.
1. Gross Lease:
It is the simplest form of a lease arrangement. The tenant pays a fixed rent and the landlord takes care of the operating expenses. A gross lease agreement places the responsibility for operating expenses, including property taxes, insurance, maintenance, and utilities, on the landlord. Tenants pay a fixed rent amount. This type of lease is often found in retail spaces and select office leases, providing tenants with cost predictability.
2. Net Lease:
Net leases require tenants to pay a base rent along with specific operating expenses.
Single Net Lease (N Lease): Tenants pay the base rent plus property taxes.
Double Net Lease (NN Lease): Tenants pay base rent, property taxes, and insurance.
Triple Net Lease (NNN Lease): Tenants pay base rent, property taxes, insurance, maintenance, and sometimes structural repairs. Triple net leases are prevalent in commercial real estate, especially for long-term leases with single tenants.
3. Percentage Lease
Commonly used for leasing in retail spaces, the percentage lease involves tenants paying a base rent along with a percentage of their gross sales. This arrangement is common in shopping malls, where tenant success correlates directly with foot traffic. This ensures that the risk on the tenant is limited and the owner also shares the benefits of the success.
4. Ground Lease
In a ground lease, tenants lease only the land from the landlord and usually construct their own building. These leases are often long-term, with durations extending up to 99 years. At the lease term’s conclusion, the land and any improvements typically revert to the landlord.
5. Short-Term Lease
Short-term leases, generally lasting a year or less, offer flexibility to both tenants and landlords. They suit businesses with uncertain or evolving space requirements.
6. Long-Term Lease
Long-term leases can span several years or even decades, providing stability to tenants and landlords alike. These are prevalent in office and industrial real estate.
7. Renewable Lease
Renewable leases include an option for tenants to extend the lease for an additional term after the initial period expires. This choice provides security and continuity.
8. Co-Working Lease:
Co-working lease agreements are tailored to businesses seeking flexible office space on a short-term basis. They often encompass shared amenities and services.
9. Built-to-Suit Lease:
In a built-to-suit lease, the landlord constructs a building to meet the specific requirements of the tenant, commonly seen in the industrial and manufacturing sectors.
10. Triple-Net (NNN) Lease with Caps: – This variation of the triple-net lease introduces caps or limits on certain expenses, such as property tax increases, to provide tenants with cost predictability.
In the Indian real estate market, it is imperative for both tenants and landlords to meticulously scrutinize and negotiate the terms of the lease agreement. Factors such as lease type, rent structure, duration, and responsibilities for operating expenses should be carefully considered.