hat is a lease agreement?
An agreement between a lessor (or landlord) and the lessee (or tenant) that allows the lessee to use the property that is owned or managed by the lessor for a defined period is called a lease agreement. The lease agreement does not provide ownership rights to the lessee. However, the lessor may grant certain allowances to modify, change or otherwise adapt the property to suit the requirements of the lessee. Therefore, during the lease period, the lessee is responsible for the condition of the property.
What are the essential terms of a lease agreement?
Essential terms are the building blocks of a contract and form the basis of the agreement between parties. The essential terms of a lease agreement include:
- Parties – A lease must include the name, mailing address, and phone number of the lessor and the lessee.
- Property/Premises – The property or premises which are the subject of the lease should be clearly identified.
- Term – The term of the lease must be specified. It must include the commencement date, the duration of the lease, the expiry date of the lease, and if there are any option(s) to renew.
- Rental Rate – The rental rate should also be clearly stated. The lease agreement must specify the rent to be paid, rent-free periods (if any), the intervals at which rent is to be paid, whether the rent is dependent upon the lease businesses’ turnover and the way rent is to be paid.
- Escalation of Rent – The lease agreement must state how much the rent will increase on the anniversary date of the lease.
- Security Deposit – The lease agreement should verify the amount of the security deposit and the terms regarding its return.
- Permitted use – It must specify the use for which the lessee has leased the premises. Commercial leases often limit the purposes for which premises may be used.
- Exclusivity – In certain situations, a lessee would want an exclusivity clause to be included in the lease. Such a clause prevents the landlord from leasing the property to the competitors of the lessee.
- Utilities – A commercial lease will include a clause which identifies whether the lessee or the lessor will be responsible for paying the utilities. This clause must include a comprehensive list of the current operating expenses and a general provision that covers similar operating expenses.
- Improvements – A lease agreement should address what improvements or modifications can be made to the property and which party will pay for the improvements. It must also determine if the tenant is responsible for returning the property to its original condition at the end of the tenancy.
- Signage – In commercial leases, the agreement may or may not prohibit putting up signage. This clause is important since signage may affect the performance of the business.
- Assignment and subletting – The agreement may restrict the lessee to lease or sublet the space to another tenant. This is an important term because the tenant will be responsible for paying the rent even if the business fails or relocates. With an assignment or sublet clause in place, however, the lessee can find someone else to cover the rent.
- Renewal – A lease may contain provisions which give the lessee the first right of refusal to renew the lease at the end of the term. Such a clause prevents the landlord from leasing the premises to another tenant without first giving the current lessee the first right of refusal.
- Termination – A termination clause specifies the circumstances under which the lease may be terminated before its expiration and the penalties for early termination.
- Default – A commercial lease usually sets forth events which result in an automatic default under the lease terms. Filing bankruptcy or using the premises for unauthorised or illegal purposes are examples of events which trigger the default clause.
A lease may include other provisions pertaining to:
- Lessor’s right of entry
- Natural Disasters and acts of God
For a valid lease, the essential terms must be clearly included in the agreement.
What Happens if a Lease Does Not Include Essential Terms?
If the essential terms of a lease are not in the lease agreement, the lease will not exist. This means that if an essential term is invalid or void, no lease will exist between the parties. Ambiguous terms in a lease that lets the parties decide on the essential terms after the execution of the agreement is not permissible.
For a valid lease, the essential terms must be clearly included in the agreement. Clauses which allow the parties to agree on an essential clause later must be avoided under all circumstances. Moreover, clauses must not be in infringement to the applicable legislation. It could make the lease unenforceable.