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Essentials for Drafting a Lease Deed
T.A. Srinivasen, FCS, Associate Director Legal, HCL Technologies Limited,
Chennai.
e-mail :
srinivasenta@hcl.com
Lease transactions are very common in today's trade and commerce. A lease deed
ought to be drafted with enormous care and skill. An exhaustive checklist is set out
in this article for the preparation of a lease deed.
Organizations including corporates today go in for leasing
for meeting their spacing requirements for their business
operations and corporate offices. The Lease as a form of
transaction has gained lot of importance especially due to
the fact that Organizations need not invest huge monies in
acquiring Land and Building and block their revenues. In
turn they may conserve those funds and use effectively to
take care of their working capital and other business expenses
there by facilitating the expansion of top line and the resultant
bottom line. With Business expanding fast, more
organizations require spacing requirements at short notice
so as to expand their operations to serve their clientele.
Entering into lease transactions in big cities and towns has
thus become time sensitive and costly which requires a lot of
planning/detailing to fructify into a win-win deal to both
the lessor and the lessee. Though it may appear that a Lease
deal does not require huge cost to be funded by the lessee, in
practical terms the lessee has to incur huge costs in terms of
interiors, Cabins, Ducts and other utilities which may run
into several crores of rupees for maintaining appropriate
quality, size catering to its requirements. This is true especially
if the Lease Building comes as Bare Shell (with just the
building without any internal structures) in contrast to Plug
and Play (With all facilities). Therefore it is essential that
the lessee has to be suitably protected by providing more
detailing in the Lease Deed and also to introduce appropriate
covenants to take care of its interests since the lessee is one
who invests huge monies to make the property a usable one.
If the lessee is thrown out of the property all of a sudden, it
will be costly in terms of money and time. Therefore the
right of termination should be vested only with the lessee
during say first, three to five years barring some exceptional
circumstances as provided in the Lease Deed. If the Lease
transaction is large in terms of square feet and rentals, then
it is also necessary to protect the interests of the lessor by
introducing a minimum period of lease which is usually
termed as a lock-in-period, wherein the lessee is expected
to pay rentals of that period even it vacates the property
prematurely and hands over the vacant possession to the
lessor.
Thus a lease transaction has become more important and it is
necessary to protect the interests of both the lessor and more
particularly the lessee. With this background this comprehensive
note on the Essentials of Drafting the Lease Deed has been
prepared which will definitely help to draft a Lease Deed, both
from the point of view of the lessor and the lessee.
If the Lease Deed is properly drafted and executed then it will
not give rise to unwanted complication and litigation. So
necessary care has to be taken to prepare the Lease Deed,
keeping in mind all the factors viz. commercials, finance,
operations and legal to make it a fool proof and self containing.
Thus execution of Lease Deed calls for Due-diligence on the
part of the lessee, since the title of the property should also to
be ensured for continuous and uninterrupted usage and
enjoyment by the lessee.
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CHECK LIST FOR LEASE
1. Name of lessor, Correct Name, Fathers Name, Age and
Sex if lessor is an individual.
2. Legal entity of lessor: Company/Partnership/LLP/Sole
Owner or other as applicable.
3. Law in terms of which the lessor is registered/constituted:
Partnership/Company Law/Co-operative Society, Society
etc.
4. Country where lessor is located.
5. Registered Office Address and Business Address of lessor
(as applicable).
6. lessor represented by whom? The Correct Name, Age,
Fathers name and Designation should be mentioned.
7. Name of lessee. The Correct Name, Age and Sex if lessee
is an Individual.
8. Country where lessee is located.
9. Registered Office Address and Business address of lessee
(as applicable).
10. lessee represented by whom? The Correct Name,
Age, Fathers name and Designation should be
mentioned.
11. Place where Lease is drawn.
12. Power of the lessor/lessee to enter into an Agreement,
scrutiny of relevant documents viz. Deeds, Memorandum
and Articles of Association plus the resolution from the
Board as applicable for such Authorization.
I. LEASE TERMS
Date of Agreement
Date of Possession
Lease Tenure From To
Due Date Of Renewal
Lock-In Period (If Any)
Rent free period (if any) no. of months -
Is there any Option to Renew? Yes No
If yes means By Whom? Lessor Lessee Both
What is the increase percentage of Rent?
Due date/period of Option to Renew
Investment in Immovable Fixtures (actual/expected) Amount in Rs. ........................
Security Deposit Amount in Rs. ........................
Advance Rent Amount in Rs. ........................
Is there any other additional deposits? Yes No
Name of the Deposit
1. ........................ Amount in Rs. ........................
2. ........................ Amount in Rs. ........................
3. ........................ Amount in Rs. ........................
DETAILS OF COSTS
A. Rental Outflow per month Rs. ........................................
B. Maintenance Charges per month Rs. ........................................
C. Other property related cost per month viz Carpark Rent Maintenance other amenities Rs. ........................................
D. Total Cost per month Rs. ........................................
A detailed description, size, exact address of the Plot of Land and Building on which the Leased Premises is constructed/to be
constructed, together with its drawings containing inter-alia its schedule Location, Sketch etc.
Essentials for Drafting a Lease Deed
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II. TITLE CHECKLIST
(1) Ensure that lessor is the rightful owner and has the right,
title and interest in the Property
(2) Check if the ownership by the lessor of the Plot is free
from all encumbrances, mortgages or lien or Court
Decree;
(3) Determination of Ownership status & test of lease Rights:
Correctness of Title to the property by the landlord:
(a) Obtain Copies of Title Deed & Encumbrance
Certificates
(b) Obtain Regulatory Authorities approved Building
Plan (CMDA/NOIDA etc.) and ensure compliance
is effected.
(c) Obtain latest Municipal Tax/Water Tax/Sewerage
Charges receipt to ensure possession of the property
by the lessor.
(d) Obtain latest Electricity Charges Card/Receipt and
evaluate the applicable Tariff Rates.
(e) Are there any pending Litigations or Encumbrances
(details may be obtained), and analyse how it will
affect the stay in the Premises.
(f) Previous Lessee's Lease agreement (The previous
lessee/Realtor may be contracted if necessary to elicit
more information like litigation and other weak
points).
(g) To check whether there exists any mortgages
registered on the property and is there any
requirement to pay the rentals to any bank/financial
institution. Also cause a search report with the
Registrar of Companies to find Equitable Mortgage
if the lessor is a Company. In that case the mandates
may be obtained.
(h) Right of Termination of Lease: If the lessee is
investing heavily on the interiors and other amenities
then it would be good to reserve the right of
termination only to the lessee. The Right of
Termination will be to the lessor only when there
is default in payment of Lease Rentals of three
months or more by the lessee.
III. ASSIGNMENT PROVISION
(a) In case of Joint Owners:
Title deed, proportion of ownership and rented payments
and security deposits to whom and in what proportion
must be obtained for incorporation.
(b) In case of Minor
It is to be found whether the minor a natural guardian or
appointed by court. The Deposits and Rentals to be paid
only to the Guardian for the benefits of the Minor. Care
may be taken to execute the Lease afresh on Minor
attaining Majority and payment effected in the name of
the minor.
(c) In case of Power of Attorney Holder
Does the PoA have the requisite powers to execute a
Lease Deed and to receive rents? Rentals and Deposit
remittances should always be made in the lessors name
only.
(d) In case of Company
If there any prohibition in the Memorandum and Articles
to let out the Property on Lease? Whether there is a
resolution in place to let out the property on Lease. The
Lease Deed should be signed by the Chairman/MD/
Director or any person authorized by the Board on behalf
of the Company.
(e) In case of Partnership
It is to be ensured that none of the partners are insolvent
or receivership or claim is pending against them. The
partnership deed should not contain apparent restrictions
on letting out the subject property.
(f) In case of Sub-Lease
If the Property is being Sub-let, the current lessor must
have Authority to sub-lease the Property as provided
for in the Principal Lease Deed
(g) Is the property ready for immediate occupation and if
not when the lessee will get the vacant possession for
occupation? This has to be clearly stated in the Lease
Deed.
(h) Whether the Rental Obligations would be effective from
the date of taking possession? The exact Date of
commencement of Rental obligations with Holiday
Period as agreed upon with the lessor. The same has to
be taken into consideration.
Warranty that the lessor shall hand-over that finished
Leased Premises (as agreed) on or before the
Handing Over Date.
Representations & Warranties of the lessor to the
effect that it owns the premises with clear Legal
Title. lessor will obtain all licenses and is fully
empowered to lease the leased premises. lessor
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should also covenant that it has obtained all
regulatory approvals for construction of premises.
In case the same is not complied and the lessee is
put into problem the lessor must indemnify the
lessee.
2. Are the terms of agreement as to the Lease period is
appropriate and is the Stamp duty adequately discharged.
Date of Stamp paper
Date of Agreement
Date of possession in line with
requirement
Stamp duty and registration charges need to be verified and
decided. This will depend on the period of lease.
Who will bear Stamp duty and registration cost? Whether it is
going to be shared in the ratio of 50:50 between the lessor and
the lessee or the lessee is taking the same in full.
3(a) All Agreement signed by the Authorized officials of both
the lessor and lessee with company seal where applicable.
3(b) All typographical error/corrections/amendments are to
be initialed/signed by both the parties.
(4) In case the Property is a New Built-up property: The lessee
should seek Completions Certificate from the Regulatory
Authorities. Obtain Property Tax Assessments, Water &
Sewerage Tax Assessments and Payment Receipts made up to
date, as applicable.
5(a) Was the previous users of the property were EoU/STPI
units/SEZ.
5(b) if the place was bonded whether proper Debonding
procedures were complied before executing Lease Deed or
taking possession of the Premises.
5(c) Confirm that there are no Industrial Relations/Wage
settlement/HR issues pending/against the lessor and there is
no attachment on the subject property.
6(a) Whether Land/Building/Other infrastructure requires NoC
from the Industrial Estate Associations (Like NOIDA, SIDCO,
SIPCOT, KIADB etc.) If so obtained? Whether the Land use
is restricted and is the sanction for constructing Residential
structures or Commercial Structures or Industrial Structures?
Whether separate monthly payment has to be made to any
Association in that locality/Industrial Area.
6(b) If it is not for Commercial Structure whether relaxation
obtained?
(7) Clause on rent must be clear that all applicable taxes from
time to time including TDS will be deducted from rentals.
(8) Obligation on the lessor to intimate lessee about the change
in Ownership, Constitution, Re-organization should be clear
and incorporated.
(9) Rent Escalation Clause the terms must be clear in regard
to escalation for Rent/Maintenance Charges/Deposit and
periodicity.
(10) Refund/Interest applicability must be clear on delay in
the refund of Deposit by the lessor and in regard to adjustability
of rent advance already made by the lessor. The lessee may
reserve the right to withhold possession of the subject premises
without payment of rent until the Rental Advance is refunded
by the lessee.
IV. FACILITIES
Always check for the detailed Specifications of the Premises:
Floors
Net leasable area
Quality of Building
Clear heights and the type of flooring
Ceiling
Tiling
Fire fighting equipments and escapes routes
Toilets
Sanctioned Power v. Proposed Usage
Lifts
Power back-up
Access/Pathways
(11) Is the Entrance Gate exclusive to lessee usage or
Specify name of other users if the gate is Common with
others.
(12) Elevator/Stair case when exclusive to lessee must be
clearly brought out in the Agreement.
(13) Norms should be followed in regard to minimum open
space requirements.
(14) Safety norms viz. Emergency Exit, Stair case Exit should
satisfy as per Regulatory/Lessee requirements
(15) Care to be taken to ensure that the height of ceiling is
appropriate to have proper AC Ducts, Concealed Lighting/
Wiring etc
(16a) It is to ensured that the building space is not more than
the sanctioned space.
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(16b) The extent of utilizable space has to be incorporated
correctly.
16(c) The idle space portion and expected period of such
idleness and idle cost estimates must be kept on record.
17. Fire safety compliance certificate from Fire Department
should be available. Exclusivity on Car/Two Wheeler Parking
Space must be clearly agreed and incorporated.
18. Correctness of area of property :
(a) Map the floors approved as per plan v. the actual floors
in the Building.
(b) Map the Total Building Sq. ft. with the total Sq. ft.
approved in the Building.
(c) Map the leased portion Building Sq. ft. with the Sq.
ft. approved in the Building Plan. Always go in
for property without deviations. In case of commercial
expediency if the same is not possible Lease out
only the approved portions and leave the unapproved
portions.
19. Infrastructures to be done by the lessor Landlord should
be properly brought in:
(a) Lift
(b) Air conditioners
(c) Lighting & fittings
(d) Genset
Locations of Genset is it in Basement/Setback Area
and ensure that the Genset space provided is not reduced
from the Built up Area or as agreed with the lessor.
(e) Electricity Board Power If the State has Tariff
concession for the designated units like Software etc.
whether appropriate approvals obtained by the lessor
from Electricity Authorities, the same need to be
incorporated.
(f) Transformer
(g) Water
Water source provided Municipal/Bore well and if there
is an exclusive tank for use by lessee.
(h) Sanitation Facilities including Water Treatment Plant if
any provided including Rain water harvesting. This has
to be clearly mentioned in the Lease Deed.
(i) Interiors & Electricals.
(j) Work Stations.
(k) Parking Both two wheeler/four wheeler.
(l) Signage Options.
(m) Other facilities with regard to safety may be listed out
for convenience in the deed.
(n) Telecommunication.
V. LEGAL FINANCIAL CHECKLIST
(20) Receipt for Security Deposit paid/obtained from the
respective persons mentioned in Lease Deed.
(21) Receipt for Advance Rent paid/obtained from the
respective persons mentioned in Lease Deed.
(22) Vendor evaluation/Market survey carried out for
evaluation of terms in regard to Rentals and Deposit. Eg. News
Paper Ads, competitors/group company rental terms in the
closest area.
(23) Lease permission from the concerned authority and
confirm that rent is payable to the person mentioned in the
agreement.
(24) Approval of concerned Electricity Board for
electrical Installation and for Genset. Confirm that there are
no arrears of Generation Tax if any applicable for Genset
power.
(25) Approval from concerned authority for elevator.
(26) Receipts/Evidence of annual discharge of liabilities by
landlord.
(27) Brokerage if any paid/to be incurred and the support
Documents for the same, for charging against revenue.
(28) If the rent is payable in advance before the completion of
Month, the appropriate accounting treatment & TDS must be
highlighted and compliance effected.
(29) Building Insurance if any taken by the Landlord must be
incorporated in the Lease.
(30) Complete list of Fixtures, Fittings, Equipments, Electricals
Provided by the Landlord duly signed off by the lessee and by
the lessor.
(31) Whether AMC is in force for any of the equipment
provided from the landlord and who will take up the annual
cost of maintenance should be properly incorporated as agreed
upon.
Essentials for Drafting a Lease Deed
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