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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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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.

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.

I. LEASE TERMS Date of Agreement Date of Possession Lease Tenure Due Date Of Renewal Lock-In Period (If Any) Rent free period (if any) If yes means no. of months Yes Lessor Lessee No Both By Whom? Is there any Option to Renew? What is the increase percentage of Rent? Due date/period of Option to Renew Investment in Immovable Fixtures (actual/expected) Security Deposit Advance Rent Is there any other additional deposits? Name of the Deposit 1. ........................ 2. ........................ 3. ........................ DETAILS OF COSTS A. Rental Outflow per month B. Maintenance Charges per month D. Total Cost per month Rs. ........................................ Rs. ........................................ Rs. ........................................ Amount in Rs. ........................ Amount in Rs. ........................ Amount in Rs. ........................ Amount in Rs. ........................ Amount in Rs. ........................ Amount in Rs. ........................ Yes No From To

C. Other property related cost per month viz Carpark Rent Maintenance other amenities 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.
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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

Essentials for Drafting a Lease Deed

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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Essentials for Drafting a Lease Deed

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(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.

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.

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.

Essentials for Drafting a Lease Deed

(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.

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