Drafting A Commercial Lease Agreement
Updated: Sep 4, 2022
Commercial lease agreements are entered into by every company irrespective of the business they run. Whether it be leasing of office space, store space or even parking space, commercial lease agreements are inevitable. The common mistake often committed while drafting or reviewing a commercial lease agreement, is to think of it as a standard document. While, a commercial lease agreement, may appear as fairly simple, there are a few clauses, you should look out for:
A key commercial term/clause that could be found in almost every commercial lease or even a residential rent or lease agreement is the ‘lock-in period’. It refers to a time period during which the lessee cannot terminate the lease agreement and if due to any uncertainty or business failure the lessee does not wish to continue with the agreement, then the lessee would need to pay the rent amount for the unexpired lock-in period.
Evaluate the lock-in period for reasonableness and for hidden onerous obligations. A potential red flag would arise when the language of the clause is such that there are additional conditions that would shorten the effective period allowed for the lessee to terminate the agreement.
For example, in case of a lease agreement for a total period of 3 years if the lock-in period is set at 2 years and further, a notice period of 90 days or 3 months is also included then the lessee will only have a small window of 9 months to terminate the agreement. Therefore, in a situation of genuine uncertainty where the lessee needs to terminate the agreement, he/she would have to bear unnecessary costs that would extend to the rent amount for the unexpired lock-in period.
The lock-in period must be reasonable and not too long. It must always be compared according to the total time period of the lease agreement. Furthermore, it must be scrutinized if early-termination by the lessee would attract any liability.
The second key clause in a commercial lease agreement is the termination clause. Imagine an agreement, where you have no right to exit. It would not be a very pleasant situation, if you have no right to terminate the agreement. In a commercial lease agreement, landlords try to retain the exclusive right to terminate. Keep an eye open for such red flags.
One of the most important clauses, especially during the Covid-19 pandemic has been the force majeure clause. It suspends the performance of contractual obligations, upon the occurrence of force majeure events. In the absence of a well-drafted force majeure clause, companies take the recourse of Section 56 of the Indian Contract Act, 1872, which talks about the frustration of contracts. However, it has been well-settled, that the doctrine of frustration, does not apply to contracts in the real estate domain. Hence, it is pertinent to have a clearly drafted force majeure clause in your commercial lease agreements.
These are some of the many potential red flags which you should look out for while drafting/reviewing commercial lease agreements. If you have any queries regarding drafting of commercial lease agreements you can contact us by clicking on the button given below.
You can also refer to our YouTube video to understand drafting/reviewing of commercial lease agreements: