Business rent agreement of a property is one of the most valuable legal real estate documents that no-one can ignore. A well-written business rent agreement that is legally approved, always help to bring clarity, enforcement, and effectiveness of the agreement.
Each business rent agreement has its unique situations that can imply unique terms and conditions to be inserted in a contract. However, some crucial terms should almost always be included in agreements to protect their interests and prevent future misunderstandings.
Here is a comprehensive guide with following the major issues about understanding the Business Rent Agreement properly.
- 1 1. Name of The Parties
- 2 2. Recitals In Business
- 3 3. Payment Consideration In Business Rent Agreement
- 4 4. Security Deposit
- 5 5. Effective Date
- 6 6. Duration For Business Rent Agreement
- 7 7. Lock-In period
- 8 8. Sub-Letting Clause
- 9 9. Responsibilities in Business Rent Agreement
- 10 10. Tax Liabilities
- 11 11. Furniture & Fixture
- 12 12. Termination & Notice Period
- 13 13. Governing Law
- 14 14. Registration
1. Name of The Parties
The business rent agreement must specify the names of the two parties. One is the landlord or licensor and the other one is tenant or licensee. If the person leasing the property is not the owner of the land, find out if he has the authority to lease it. Usually, a power of attorney can suffice for the purpose.
2. Recitals In Business
Recitals include a background history of the rented property and describes the complete specifications and description of the rented property.
There is no prescribed format for drafting the recitals, but they typically contain concise statements of fact, describing key circumstances and details relevant to the establishment of the contract.
3. Payment Consideration In Business Rent Agreement
Payment consideration means money already paid or to be paid as rent or license fees. The Business Rent Agreement must specify the Rent to be paid by the Tenant to the Landlord including the security amount deposited with the Landlord.
It also needs to specify the payment mode – such as cheque, cash or internet transfer, and to whom the payment is to be made. Check about the consequence in case of a delay in payment.
4. Security Deposit
A proper clause about security deposit should be inserted in a business rent agreement stating that the security deposit will be refunded to the tenant on repossession of the property by the landlord. The purpose of having a security deposit is for the convenience of rectifying arrears in rent, damage to property, unpaid electricity or phone bills, and other miscellaneous costs that remain unpaid by the tenant.
Is there any option for adjustment security deposit – which should also be specified in the agreement. The business rent agreement should clearly state whether the security deposit is interest-free or not.
5. Effective Date
Generally, we found two or more dates in the business rental agreement such as signing date, entering the date, or premises handover date. It is important to specify which one is the actual effective date of the agreement and you need to pay the rent accordingly from that particular date.
6. Duration For Business Rent Agreement
The Business Rent Agreement must specify the duration of the period for which the Rent Agreement from the effective date will exist between the Parties. The renewal provisions of the agreement may also be included.
7. Lock-In period
The lock-in clause of a Business Rent Agreement states that a tenant cannot leave the rented property or terminate the agreement for a specified period, during which the contract is ‘locked in’.
This period is commonly referred to as a lock-in period. If the tenant leaves the rented property he/she would be required to continue to pay the rent until the lock-in period is over.
8. Sub-Letting Clause
Sub-Letting clause defines the tenant’s rights concerning transfers of the tenant’s interest in the leased premises. Generally in Business Rent Agreement Sub-letting is treated as prohibited.
In the case of properties such as a restaurant, factories, or any other property with major investment in installation costs, it is important to have a less strict sub-letting clause.
9. Responsibilities in Business Rent Agreement
The Business Rent Agreement must specify the other representation such as repair and maintenance, electricity charges, water charges, and parking charges. The proper allocation of the responsibilities and charges will bring comfort and clarity to both the parties.
10. Tax Liabilities
In the case of commercial property, tax liability may arise. The parties should allocate responsibility for payment of service taxes, property and municipal tax and water tax in the agreement.
It is advisable to specify whether TDS can be deducted from the rent amount (thereby reducing the rent amount) or whether the amount specified as rent is the amount left after the deduction of TDS.
11. Furniture & Fixture
The furniture and electrical appliances in the premises must be listed, counted and the details of the same should be added as an annexure to the agreement. The occupant should be required to ensure in the agreement that these remain in working condition and undamaged throughout his possession of the property.
12. Termination & Notice Period
It is important to specify in the agreement as to how and in what circumstances the agreement can be terminated. It is a common practice to include a clause stating that either of the parties can terminate the contract, and how the termination notice shall be served and the duration of the notice period.
The notice period is essentially the time the other party gets to make alternative arrangements or brace for the termination before it is terminated.
13. Governing Law
The governing law is the law of the jurisdiction in which the personal property is located at the time that the Personal Property Rental Agreement is entered into.
The Business Rent Agreement must specify the governing law in case any dispute arises between the parties. Both parties may mutually choose Arbitration as the mode of dispute resolution.
Section 17 of Registration Act provides leases of immovable property from year to year, or for any term exceeding one year, or reserving a yearly rent; months require compulsory Registration.
However, a lease agreement of 11 months does not require compulsory registration. In that case, you can even get it registered by Notary Public Affidavit.
Editorial Staff at NextWhatBusiness is a team of Business Consultants having years of experience in small and medium scale businesses.