How to read a commercial lease in India

A commercial lease sets what you pay, for how long, and how you can leave. By the end of this guide you will know what the main clauses mean and what to check in each. You will also know when the law requires a lease to be registered.

This guide uses landlord for the owner and tenant for you. Many leases call them the lessor and the lessee.

Lock-in period

A lock-in period is a stretch of time at the start of the lease during which the lease cannot be ended early. If you leave during the lock-in, the lease may require you to pay rent for the rest of that period.

Check whether the lock-in binds both sides or only you. A lock-in that binds only the tenant gives the landlord more room than it gives you.

Also check when the lock-in starts. It may run from signing, from handover of the space or from the day rent starts.

Rent escalation

Escalation is a built-in increase in rent at fixed points during the lease. It is usually stated as a percentage or a fixed amount, applied at set intervals.

Here is a hypothetical example. Rent of ₹1,00,000 a month might rise to ₹1,15,000 a month from the start of the fourth year.

Check whether each increase is worked out on the original rent or on the rent after the last increase. The second method, called compounding, adds more to your total cost over a long lease.

• How often rent rises, and on which dates.
• Whether each increase is a fixed amount or a percentage.
• Whether maintenance charges rise on the same schedule or separately.
• Whether rent is reset to market rates on renewal, and how that rate is agreed.

Security deposit

A security deposit is money you pay the landlord at the start, to be returned when the lease ends. It covers unpaid rent or damage beyond normal wear and tear.

The deposit is often stated as a number of months of rent. Check whether it is interest-free and whether it goes up when rent goes up.

• How many days after handover the landlord must return it.
• What the landlord may deduct, and how deductions are shown.
• Whether interest is payable if the refund is late.
• Whether the refund and the return of keys happen on the same day.

Rent-free fit-out period

Fit-out is the work you do to make bare space usable, such as partitions, flooring, cabling and air conditioning. A rent-free fit-out period is time at the start of the lease when you do this work without paying rent.

Know what state the space is handed over in. Bare shell usually means structure and basic services only. Warm shell usually adds items such as flooring, ceilings, lighting or air conditioning.

These terms are used loosely, so ask for a written list of what the landlord will provide.

• The date the rent-free period starts, and whether it depends on handover.
• Whether maintenance charges and utility bills are payable during this period.
• What happens if building approvals or the landlord's own works delay your fit-out.
• Who owns the fit-out when you leave, and whether you must remove it.

Common area maintenance (CAM) charges

Common area maintenance charges, often shortened to CAM, pay for running the shared parts of the building. They are separate from rent and are usually billed every month.

CAM often covers cleaning, security staff, lift upkeep, power for common areas and upkeep of shared services. What is included varies from one building to the next.

• The area CAM is charged on, such as carpet area or super built-up area.
• A written list of what CAM includes and excludes.
• How and when CAM can increase.
• Whether you get a yearly statement of the actual costs.
• Whether power backup, air conditioning outside office hours and parking are charged separately.

Exit, renewal and handover

Exit clauses set out how either side can end the lease early and what notice they must give. Read them alongside the lock-in, because the two work together.

• The notice period for ending the lease after the lock-in.
• The landlord's right to end the lease if you breach it, and any time you get to put the breach right first.
• Your option to renew, the length of the renewal and how the new rent is set.
• Whether you can sublet the space (let it to someone else) or assign the lease (pass it to another business).
• Reinstatement: the condition you must return the space in, and whether you must remove your fit-out.

Registration and stamp duty

Registration means recording the lease at the sub-registrar's office, the government office that registers property documents.

Section 17(1)(d) of the Registration Act, 1908 makes registration compulsory for certain leases of immovable property (land and buildings). These are leases from year to year, leases for any term exceeding one year, and leases reserving a yearly rent.

Section 107 of the Transfer of Property Act, 1882 says these leases can be made only by a registered instrument (a registered written document).

Section 49 of the Registration Act covers documents that must be registered but are not. Such a document does not affect the property and cannot be received as evidence of the transaction, apart from limited exceptions.

This is one reason many short agreements are drafted for 11 months. Some are drafted as a leave and licence, which gives permission to use the space without creating a lease. Which one your document is, and whether it must be registered, depends on its terms and on state law.

Stamp duty is a tax paid on the lease document itself. Stamp duty rates and rules for leases differ from state to state.