What are common terms of commercial leases and are there regulatory controls on the terms of leases?
Real Estate (2nd edition)
15.1 The terms of leases are freely negotiable. However, certain covenants by the landlord and by the tenant are implied by the Registered Land Law (2018 Revision) unless otherwise expressly provided in the lease.
15.2 There are currently no legal restrictions on rent levels. Commercial lease terms will often provide for rent to be reviewed in line with the consumer price index (CPI), by a fixed percentage or by market review. Security deposits are a matter of contract and are not protected by law.
15.3 A lease term of five years is relatively common, and may include an option for the parties to renew for one or two further terms. The parties will often have regard to the stamp duty treatment of the lease when negotiating the lease term.
15.4 Unless expressly provided for in the lease, tenants of commercial premises do not have security of occupation or a right to renew at the end of the term. However, where a tenant continues to occupy premises with the consent of the landlord after the termination of the lease, the tenant will be deemed to be a tenant holding the premises on a periodic tenancy on the same conditions as those of the expired lease so far as those conditions are appropriate to a periodic tenancy.
15.5 A tenant can usually assign the lease or sublet/share occupation with the landlord’s prior consent. Change of control of a corporate tenant is usually prohibited without landlord prior consent.
15.6 A landlord generally has no residual liability under a lease after expiry or termination, or after a sale of the freehold interest. A tenant may continue to have liability depending on the terms of the lease.
15.7 Whether the landlord or tenant is responsible for insuring and repair the demised premises will depend on the nature of the lease. In leases of part of a building , for example, the tenant is usually responsible for repairing the non-structural components of its demise and the landlord responsible for insurance and maintenance of the building and common parts. It is usual for a landlord to recover its costs from each tenant through common area charges.
15.8 The landlord can generally terminate the lease if the tenant has breached a fundamental or essential term of (these terms are usually specified in the lease). The landlord must first give the tenant written notice of the breach and allow the tenant an opportunity to remedy the breach within a reasonable time, failing which the landlord can terminate the lease. The tenant has a statutory right to apply to the court under the Registered Land Law (2018 Revision) for relief against forfeiture. Lease terms usually allow a landlord to terminate the lease if the tenant is subject to an adverse solvency event.
15.9 It is not uncommon for commercial leases to contain clauses for abatement of rent or part of it in the event of damage to premises that render the premises or part of them unusable. The landlord and the tenant may have termination rights in certain circumstances following substantial damage to the premises (for example, where there is major damage following a hurricane and the landlord elects not to rebuild or reinstatement of the building is not possible).
15.10 The tenant can terminate the lease on common law contractual principles if the landlord is in breach of a fundamental or essential term of the lease. The tenant can also terminate the lease if there is an express right to break the lease. Express termination rights for a breach by the landlord are not usually specified in the lease.
The French legislation for commercial leases governs the duration, the renewal and termination of commercial leases, the fixing and review of rents, the service charges and taxes that could be reinvoiced to tenants, etc. Several of its provisions are mandatory.
The minimum term of a commercial lease is 9 years. If the term of the lease exceeds 12 years, the lease must take the form of a notarized deed and be registered at the land registry. Since the taxes for the registration of a lease with a term of more than 12 years are very important, most of commercial leases are concluded for 9 or 12 years.
If the tenant rents the premises for the first time, the parties can enter into one or several short-term leases for a total duration which cannot exceed 3 years.
Tenant's right or earlier termination:
A tenant has three yearly right to freely terminate the lease subject to a 6-month's prior notice. If the premises are let exclusively for office use or if the term of the lease is superior to 9 years, the tenant may agree to waive its break option right at the end of one or several 3-year period(s) of the lease so that the lease will have a fixed-term of 6, 9 or 12 years.
Most of commercial leases provide an annual rent indexation.
Under French law, indexation clauses and the choice of the index are strictly regulated. As a result of the provisions of the financial and monetary code on indexation clauses and their narrow interpretation by French courts, are prohibited:
- upwards only indexation clause as well as any cap or floor in the indexation of the rent, and
- indexation based on the growth of the minimum wage, on the general level of prices or salaries, or on the price of goods, products or services which is not directly related to the object of the contract or the activity of one of the parties.
The index usually chosen for office leases is the index of rents of tertiary activities (indice des loyers des activités tertiaires or ILAT) and for retail leases, the index of commercial lease index (indice des loyers commerciaux or ILC).
Rent review during the term of the lease:
Any party to a commercial can apply for a rent review:
- each time the rent has increased or decreased by more than 25% since the last fixing of the rent by the parties or by the court as a result of the indexation clause stipulated in the lease;
- every 3 years since the last fixing of the rent by the parties or by the court when evidence of a material change in the local commercial factors giving rise to a change of more than 10% of the rental value of the premises is brought.
The reviewed rent is, then, fixed in accordance with the then current rental value (valeur locative) of the leased premises in the same manner as for the fixing of the rent in the event of a renewal of the lease.
Renewal of the lease:
The aim of the French legislation for commercial leases is to grant to tenants security of tenure (propriété commerciale) so that they may ensure the continuation of their going concern and the retention of their clientele. At the end of the lease, a tenant is entitled either to renew the lease for a further nine-year term or to receive compensation if the landlord refuses to renew the lease.
In order to benefit from security of tenure, the tenant must have operated a going concern in the leased premises over the 3 years preceding the expiry date of the lease and must be registered a the commercial and companies registry for this going concern.
The lease is renewed on the same terms and conditions than the previous lease with the exception of the rent for a minimum term of 9 years.
If the landlord refuses to renew the lease, the tenant is entitled to receive compensation for eviction corresponding to the loss it suffers The amount of this compensation could be important if the non-renewal of the lease results in the loss of clientele and, thus, of the tenant's going concern.
Fixing of the rent upon the renewal of the lease:
If the parties fail to agree the new rent, the most diligent party must apply to the judge who will appoint an expert with the duty to assess the then current rental value (valeur locative) of the rented premises.
Rental values assessed by judicial experts do not correspond to market rents, since for assessing the rental value, they take into account:
- various references of rents of renewed leases for similar premises located in the vicinity of the leased premises whether these rents have been amicably agreed between the parties or fixed by the court and not exclusively references of market rents;
- the terms and conditions of the lease to be renewed: certain provisions are considered as marked-up factors whereas other are discount factors depending from whether they are favourable or not to the tenant; for example, a stipulation of an authorization for the tenant to sublet is considered as a marked-up factor increasing the rental value of the leased premises since this provision is favourable to the tenant.
Taking into account all the aforementioned criteria results "mechanically" in the assessment by the experts appointed by the courts of rental values inferior to the market rental value.
Furthermore, there are cases where the increase of the rent upon the renewal of the lease is either capped (i.e. the difference between the initial rent under the original lease and the rent at the date of renewal cannot exceed the variation of the ILC or ILAT over the duration of the lease) or spread so that the tenant does not have to bear an increase in the rent of more than 10% per year.
For these reasons, it has become usual to stipulate in commercial leases that in the event of the renewal of the lease, (i) the application of the provisions of the legislation relating to rent capping are excluded and (ii) the new rent will be fixed exclusively in accordance with market rents by departure from the legislation on commercial leases.
Sub-letting is prohibited unless the parties have agreed otherwise.
Exclusion of the right to assign a lease is null and void to the extent that it prevents the tenant from assigning the lease to a purchaser or future owner of its going concern or business undertaking. Accordingly, a clause excluding the right to assign the lease is only valid in the case of an assignment of the lease exclusively, apart from the going concern operated by the assignor in the leased premises.
The lease may, nevertheless, provide that the right of the tenant to assign the lease, even together with its going concern, is subject to prior approval of the landlord.
Costs, repairs and services charges:
Landlords can no longer recover from tenants:
- the expenses relating to major repairs mentioned in article 606 of the civil code (i.e. mainly those affecting the main walls and the ceiling vaults, the restoration of beams and the entire replacement of the roof) and fees relating to the performance of these repairs;
- the expenses relating to works performed for remedying wear and tear or for putting the leased premises in compliance with applicable regulations if they correspond to the aforementioned major repairs;
- the taxes, in particular the contribution économique territoriale, taxes and levies for which the legal debtor is the landlord or the owner of the leased premises or of the building in which these premises are located; it is, however, possible to provide that by departure from this provision, the tenant shall reimburse the landlord for the land tax (taxe foncière) and the additional taxes to the land tax (such as the tax for the collection of the refused), as well as, all taxes and levies relating to the use of the premises or of the building or to a service of which the tenant benefits directly or indirectly;
- the fees of the landlord in relation with the management of the rents of the premises or of the building subject of the lease agreement.
The landlord must, furthermore, provide to the tenant the following information and documents:
- upon the signature of the lease agreement:
- a precise and limitative inventory of the categories of service charges and taxes;
- a forecast of the works that the landlord contemplates to perform on the property in the next 3 years together with a budget forecast;
- a summary statement of the works that the landlord has performed on the property in the last 3 years;
- every year and within the course of the lease, the landlord will have to inform the tenant of any new service charges and taxes;
- every 3 years, the landlord will have to provide the tenant with a forecast of the works that it contemplates to perform within the next 3 coming years, together with a budget forecast and a recapitulative statement of the works performed in the past 3 years.
Tenant's right of preference:
The single tenant of premises for retail or craft workshop use benefits from a right of preference if the lessor contemplates to sell the leased premises. The tenant's right of preference is, however, not applicable in the event of:
- a sale of the leased premises by the landlord to someone of its family or to a co-owner of a property complex,
- a sale of the leased premises together with other commercial premises,
- a sale of the totality of the building including the leased premises and other premises, and
- a sale of various premises forming a commercial property complex including different retails and/or craft workshops.
The provisions of the commercial code relating to this right of preference are mandatory. The tenant cannot, therefore, waive its right of preference beforehand upon the signature of the lease.
The below summary focuses on typical occupational leases rather than lease-back arrangements or heritable building rights, which generally have substantially different terms.
Generally, German statutory lease law is rather tenant-friendly and provides for the rent being a "gross rent" including most of the service charges, repair works etc. Material deviations from that framework may be regarded as null and void under German statutory law. Therefore, "triple net" leases are not the normal case in Germany, but rather so-called "Dach & Fach" leases where the landlord bears all obligations and costs in relation to maintenance and repair of roof and building structure.
Typically, terms including the following:
Duration: Leases can be indefinite or for a fixed period. The legal maximum fixed duration for a lease is 30 years after which time period the lease is terminable within a statutory notice period (generally 3-6 months). For residential leases a fixed term without termination right for the tenant is only allowed in very limited cases. The duration of office and industrial leases will usually not be more than between 10-15 years with extension rights; however, 5 years (or even shorted) terms with extension options for the tenant giving tenants more flexibility are frequently seen as well.
Rent: There are no regulatory controls as to the amount of rent other than for the residential market. Rent is usually payable monthly in advance. In commercial leases, landlords will generally grant tenants rent-free periods (or other incentives, such as one-time payments) to cover costs of moving, fit-out works or simply to incentives the tenant to take the lease.
VAT: Generally, leasing is not subject to VAT, therefore the landlord has to opt for VAT if it wants to recover VAT that it has paid with respect to investment on the premises. With regard to residential use it is not permitted to opt for the application of VAT and the same applies to the uses by banks, insurances and certain other financial institutions (and consequentially the landlord cannot recover VAT paid on services and supplies received with regard to the real estate in such a case). Whether the landlord may opt for VAT depends on the actual use of the premises, therefore a commercial lease will typically limit the allowed type of use to such use that does not prohibit the landlord from opting for VAT.
Rent review: Other than in the residential sector, there are no regulatory controls as to when or how the rent may be increased and parties are free to determine the type and frequency of the review. However, there are certain restrictions if automatic indexation clauses are used: Generally, those may only be used if the lease has a fixed term of at least 10 years (with no early termination rights for the landlord) and if other statutory limitations for indexation are observed.
Types of rent reviews (which can also be combined) are:
- Stepped rents, when the rent is increased at agreed intervals by agreed amounts;
- Index linked rents, where the rent increases in accordance with an agreed index (such as the consumer prices index which must work upwards and downwards, though) at an agreed frequency (often annually);
- Turnover rent, where the rent is an agreed percentage of the tenant's turnover subject to agreed minimum and maximum rents. These types of review are common in retail leases; and
- Less frequently: Mark-to-market reviewed, where the rent is reviewed by reference to the rents payable in comparable properties. If the parties cannot agree what the open market rent is, it is typically determined by reference to an independent expert. Mark-to-market reviews are typically carried our every 3 or 5 years depending on the duration of the lease.
Permitted Use: The permitted use obviously depends heavily on the public law situation of the property; in addition, protection from competition with other tenants may be agreed (or waived). Leases will also usually restrict a tenant's ability to change the use of the premises. See above for VAT.
Maintenance and repair: As set out above, there are severe regulatory restrictions of what may be imposed on the tenant in terms of maintenance and repair. Typically, leases will often be evaluated as standard terms (because certain standard terms/samples are used by the landlord) where regulations are more restrictive than for individually negotiated terms.
Service charge: All operational costs listed in the so called Operational Costs Ordinance (Betriebskostenverordnung) can be recharged to tenants. However, as this legislation does not cover any all possible costs, many landlords will try to agree further cost recovery with tenants (including certain maintenance, special insurances and property management charges which must be capped).
Assignment: While assignment of the lease on the side of the landlord will automatically occur with change of title in the property, the tenant will usually not be allowed to assign the lease to a third party and being released from its obligations. Contrary to common law jurisdictions, assignment generally is not a heavily discussed topic in leases.
Subletting: Subletting by tenants is generally allowed by statutory law but is typically limited in the lease itself to avoid unwanted subtenants in the building and avoid the tenant becoming a competitor to the landlord on the leasing market. If subletting occurs, the tenant remains responsible for all obligations under the lease vis-a-vis the landlord (i.e. no releasing effect). Generally, there is no visibility on the terms of the sublease for the landlord.
Termination rights: Leases expire at the end of the term unless the tenant (or, less common, the landlord) has a contractual extension or early break option. Any lease can be terminated early for cause under statutory law (this cannot be excluded); however, the requirements for such termination are rather right (such as sever payment or other default; and relevant causes can also be agreed in the lease). Following an early termination for cause, it may prove to be cumbersome to actually vacate the premises; if the tenant does not leave voluntarily, courts need to be involved. Under certain circumstances the court may stop evacuation if there is an overarching need of the tenant for the premises (as may often be the case for residential tenants but may also be applicable for commercial tenants).
Renewal rights: Renewal rights may be contractually agreed, which is regularly the case. There are no limitations for the duration of an extension, and anything between six months and five years is within normal range.
There are no prescribed form of commercial leases and parties will be free to negotiate and agree on the terms of commercial leases. In practice, rent for commercial premises is usually divided into stages throughout the lease term whereby the rent payable would be a fixed rent which will be adjustable such that the rent may increase by a certain percentage in stages making reference to the turnover or the prevailing market rent, depending on the types of leases. There is, in general, no restrictions over the level of rent that could be charged.
Commercial leases usually contain an option to renew prior to the expiry of the initial lease term. Either party may elect to terminate the commercial lease according to its terms and conditions. Usually, the landlord will reserve a right to terminate and reenter the premises upon the lessee breaching a condition or a covenant and having failed to remedy such breach within a stipulated notice period. Anti-alienation provisions prohibiting any assignment or subletting of the premises are also usually found in commercial leases.
In terms of apportioning costs, the lessor is generally liable for structural repairs whereas the lessee is obliged to keep the property in good and tenantable condition.
- whether the form of leases is prescribed or codified in any way
- rent: the most common basis for rent e.g. fixed rent or turnover rent; how increases in rent are usually determined e.g. fixed increases or market rental increases; any restrictions on the level of rent that can be charged or on increases in rent
- transfers and sub-letting: are tenants commonly allowed to transfer or sub-let their interests?
- renewal and termination rights
- are tenants commonly responsible for all costs of the leased property ("FRI" – full repairing and insuring leases) or are there some costs which cannot be passed down by a landlord to its tenant?
Under Hungarian law the lease agreements for real property shall be in written form. Hungarian language is not a requirement for such agreements, however, for practical reasons most commercial lease agreements are in in English/German-Hungarian bilingual format. The law does not prescribe any registration of commercial leases in the Land Registry. Apart from the mandatory legal regulation on the written form, the principle of freedom of contract is generally applicable to commercial leases.
The rent is usually determined as fixed rent, with the exception of the lease of retail units, in which case the combined use of a base rent and a turnover rent is general. The rent is typically determined and calculated in EUR, while its payment might be made in EUR or in HUF, depending on the parties’ agreement. The rent is universally indexed annually either based on the yearly HICP euro zone index (MUICP) or the yearly HICP EU 28 index.
Indexation by a fixed rate annually, or restrictions on the level of indexations, although not unseen in the market, are rare. A rent discount is often awarded to the tenant as a commercial incentive.
Tenants are generally responsible for all costs (covering from 1-12 months, depending of the type of the leased premises and the lengths of the lease term) incurred in connection with the upkeep and operation of the leased property. This shall not be applicable, however, to proportionate costs of any vacant premises within the leased property or to any services which serve exclusively a limited number of tenants. Capital expenditure items are also excluded from the costs paid by the tenants.
Lease agreements generally require the provision of security by the tenant, ranging from a 3 to 6-month amount of rent and service charges, depending on the real property’s function and the parties’ agreement. The security is generally provided in the form of cash deposit, bank guarantee or mother company / third party guarantee undertaking.
Lease agreements are either concluded for a definite or an indefinite period of time. Commercial leases are typically to fixed term. Unless otherwise agreed, lease agreements with a definite term can only be terminated prior to the expiry of such term for good reason. Termination rights of the tenant are typically limited: in general, the tenant is entitled to terminate the lease if the leased premises is unfit for proper use for a longer period of time (45-60 days) and the landlord fails to remedy the defect (30-60 days from the tenant’s notification). In contrast, the landlord’s termination rights are much broader: usually the breach of a major obligation of the tenant serves as termination cause (e.g. breaching obligations concerning payment, provision / supplementation of security, taking out the prescribed insurance, or damaging the leased property), but it is generally prescribed that the landlord is obliged to provide an opportunity for the tenant to remedy the breach before terminating the lease.
Hungarian law prescribes that if the tenant keeps using the leased property after the expiration of the definite lease term and the landlord does not object to such use, then the lease continues as an indefinite lease relationship. The application of this legal regulation is often excluded in definite-term commercial lease contracts.
Lease agreements with an indefinite term can be terminated by notifying the other party in advance, in accordance with the relevant notice period specified in the given lease agreement.
Lease agreements do not terminate automatically if the ownership of the real property subject to the lease is transferred. In such case the buyer automatically becomes the landlord of the lease under the same conditions as set forth in the lease agreement, and may not terminate such agreement, except if the tenant provided false information to the buyer in respect of the existence or the material terms of the lease (please see answer to Q11).
Lease agreements can be renewed unilaterally only in case it is explicitly agreed in the lease agreement. Tenants may require such unilateral extension right, typically for 3-5 year terms. If the lease agreement is extended, the prevailing terms (at the time of the original term expiry) are applicable.
Transfer of the lease agreement or sub-letting the leased premises are typically subject to the landlord’s prior written consent. A common exception is transferring / sub-letting to a company belonging to the tenant’s company group, with a simultaneous notification to the landlord. Commercial leases show a variety of definitions of ‘company group’ and might include safeguards and controls for the landlord ensuring that within the company group, the agreement is transferred to a company which is well-funded.
The Spanish Law on Urban Leases (Ley de Arrendamientos Urbanos) (LAU) clearly differentiates between leases for housing, the regulations of which are protective towards the tenant, and those for any other use which is non-residential (such as the leasing of business premises, retail, offices or industrial warehouses), whose regulations are based on free agreements between the parties.
In lease agreements for non-residential use, the parties may freely agree the majority of the aspects of the lease relationship. In the absence of any express agreement, the regulations of the LAU are applied. The common terms of commercial occupational leases are set out below.
Term: there is no legal maximum or minimum duration. The term shall be that agreed by the parties, with an initial period being possible subject to extensions. There are no statutory rights regarding renewal.
Rent: there are no regulatory controls as to the amount of the rent. Rent is usually payable in advance and every month. A variable rent may be agreed (established, for instance, according to the turnover of the tenant) in addition to a minimum guaranteed rent.
Rent review: there are no regulatory controls as to when or how the rent may be increased, and parties are free to determine the type and frequency of the review. There are several possible types of review (open market, linked to Consumer Price Index, stepped, etc.).
Service charges: there are no regulatory controls in the commercial context and the parties are free to agree what items are to be covered by the service charges. It can be agreed that the tenant pays all costs related to the property, such as condominium or general service charges, taxes and insurance relating to the property, and all repair, replacement and decoration costs. It is possible to agree that the tenant will be responsible for the maintenance costs of the structure of the property leased, although such agreement is not common.
User: leases usually restrict a tenant's ability to change the use of the premises.
Repairs: parties are free to agree who is responsible for each type of repair; the landlord being legally obliged to carry out any repairs which may be necessary for continuance of the corresponding use of the leased property.
Preferential acquisition right: the tenant may have a preferential acquisition right over a leased property in the case of the sale thereof. It is common for the tenant to waive such right upon executing the lease agreement. On acquiring leased premises, it is particularly important to verify the existence of such right in favour of the tenants.
Assignment and sub-leasing: unless otherwise agreed, when a business or professional activity is carried out on the leased property, the tenant may sub-lease the premises or assign the lease agreement without obtaining the landlord's consent, although the latter shall be entitled to increase the rent by 10% in the case of a partial sub-lease, and by 20% for the assignment of the agreement or total sub-lease. Most leases tend to waive this legal regime and establish other types of provisions.
Clientele compensation for the tenant: if the tenant has been carrying out business activities on the leased property over the last five years, involving sales to the public and, upon expiry of the term of the agreement, the landlord decides not to extend, despite the express request from the tenant to do so and his acceptance of the payment of market rent, the landlord may be obliged to pay the tenant a compensation. The amount of any such compensation depends on various circumstances, but it could amount to 18 months' rent. The right to such compensation may be waived by the tenant.
Registration of the lease in the Land Registry: it is possible to record the lease agreement of a property in the Land Registry, although this is not common practice as it would trigger Notarial and registration fees together with Stamp Duty.
Tenant's guarantees: It is mandatory by law for the tenant to provide an amount equal to two months' rent as security for the fulfilment of all its obligations. Such amount should be deposited by the landlord with a public entity during the term of the lease. Other types of guarantees (i.e. bank guarantee, corporate guarantee, etc.) may be agreed by the parties of the lease.
Parties are free to contractually agree most terms in a lease. If they do not do so, then in the absence of a contract, the Transfer of Property Act applies and imposes certain rights and obligations on the lessor and the lessee.
Note that State Rent Control Acts may grant certain protections to a tenant if they apply. For example, in the State of Maharashtra, if premises are let or sub-let to private limited or public limited companies having a paid up share capital of less than Rupees one crore (INR 10,000,000), then the lessee becomes entitled to all the protections of the Rent Control Act including fixing of standard rent and provisions giving the tenant relief against forfeiture (narrow categories of cases in which a landlord may recover possession of tenanted premises).
Apart from commercial leases, Agreements termed as “Leave and License Agreements” are also common in transactions relating to use of property/premises by an occupant for a fixed duration. This system has developed primarily to avoid the rigours of rent control legislation, which protected lessees/tenants from eviction, even after expiry or termination of their lease.
Common terms in leases (as also license agreements) are:
- Duration: Commencement date and term of lease. Stamp Duty on the lease increases depending on the duration. Lease may have a lock-in period during which there can be no termination (except on breach). Right of premature termination and option of extending the term to either lessor or lessee or both.
- Premises: Location and description of leased area - usually identified on a plan.
- Rent: Amount, dates for payment (usually periodically in advance), mode of payment, any rent-free period, periodic escalations.
- Security Deposit: Usually interest free.
- Taxes: Municipal taxes and increases usually borne by the lessor. Option to lessor to terminate in case of increase in taxes beyond 100% of existing taxes. Goods and Services Tax usually reimbursed by the lessee to the lessor.
- Utilities: Charges borne by the lessee.
- User: Purposes for which the premises can be used / cannot be used.
- Repairs: Structural repairs usually by the lessor. Routine repairs and maintenance of equipment like air-conditioning usually by the lessee.
- Lessee’s covenants: e.g. Not to carry out additions and structural alterations, not to assign or transfer or part with possession without previous written consent of the lessor.
- Lessor’s covenants: e.g. Assurance of quiet possession to lessee during the term so long as lessee’s obligations are performed, assurance of electric supply, permission to lessee to display signage on the exterior of the premises and entrance to the premises.
- Power of re-entry: Power of lessor to terminate the lease and take back possession in case of breach of terms of lease by the lessee, with or without requirement of the lessor having to give notice to the lessee to cure the breach.
The term of a lease of business premises has traditionally ranged from short-term up to 35 years, but recent legislative changes and market forces are resulting in shorter term leases, with the maximum term now being 15–20 years (typically including break options exercisable during the term). The structure of a typical medium- to long-term (10–25 years) commercial lease usually follows the same traditional format which, in addition to securing rent payments to the landlord, also passes the cost of maintaining, insuring and occupying the relevant property from the landlord to the tenant. This allows the landlord to enjoy the rent without deduction.
In most cases, tenants will seek to negotiate an option to break or terminate the term of the lease, i.e. after five or 10 years of the term. Any business lease granted for a term in excess of five years would typically have a provision for the periodic review of rent to the current open market rents.
Most business leases in Ireland are of a full repairing and insuring nature, whereby the tenant will be subject to extensive repairing obligations. These will be imposed directly by a repairing covenant entered into by the tenant or, in the case of a multi-let development like an office block, shopping centre or business park, indirectly through a service charge regime which will include reimbursing the landlord for repair works carried out to the structure and common areas of the relevant development.
Usually the provisions of a business lease place restrictions on a tenant’s contractual right to assign or sub-let without the landlord’s prior written consent. Under Section 66 of the Landlord and Tenant (Amendment) Act, 1980, a landlord cannot unreasonably withhold consent which will override the contractual terms of any business lease.
Sharing a business premises with companies in the same corporate group is generally a matter for negotiation between the landlord and tenant but it is commonplace for leases to have such a provision permitting such sharing of occupation, subject usually to a requirement to notify the landlord and provided that the sharing is by way of licence only.
It is less common to see provisions in a lease relating to reorganisation or change of control of the tenant. Again, these are matters for negotiation. While landlords will generally agree on request to provisions allowing sub-letting to or sharing space with a group company without consent, it is rare that a landlord will permit assignment to a group company without consent. Normally, there are no restrictions on the change of control of a tenant company included in a lease.
Commercial business leases are freely negotiated subject only to statutory provisions.
The introduction of the Commercial Leases Register now requires the particulars and terms of all leases and related documentation to be disclosed on a public register.
In 2011, the draft Landlord and Tenant Law Reform Bill was published. While not yet enacted, the Bill is worthy of note as the objective is to consolidate and modernise much of the general law of landlord and tenant under one act going forward, including landlord and tenant obligations and their enforcement, statutory rights and termination.
- Generally, the terms of commercial leases are not rigidly regulated and are freely negotiable between commercial entities. The most commonly used terms of commercial lease are as follows:Duration. Leases can be indefinite or fixed-term. In case of indefinite lease, the agreement can always be terminated at will, generally by giving a three-month advance notice. In respect of fixed term lease, there are no restrictions on the length of lease between private parties (typical length is 3 to 5 years for major real estate objects). However, in respect of publicly owned real estate, a maximum lease term is provided by law (up to 49 years depending on the specific land plot and purposes of the lease).
- Renewal rights. The tenant generally has a statutory pre-emption right to conclude a new lease upon the expiry of the initial lease term, provided that the tenant duly complied with its obligations. However, many landlords seek to exclude this pre-emption right through contractual means. Further, as a general rule, if the tenant continues to use the leased property after the expiry of the lease term without objections from the landlord, the lease is automatically renewed on the same conditions for an indefinite term. In this event, each party can terminate the lease for convenience, by giving at least three months’ notice.
- Rent. Rent in commercial leases is not subject to regulatory controls. For publicly owned property, the amount of rent is established by legislation. In commercial lease, rent is usually payable on a monthly basis (rather than upfront) and usually consists of base rent (fixed monthly payment based on the leased property’s area), and variable rent (services charges and payments for utilities). Typically, the base rate is fixed in USD/EUR, but is payable in local currency (Russian Roubles) at the official exchange rate. However, considering the recent Russian currency fluctuations, many tenants seek to agree on contractual arrangements that mitigate currency risks (e.g. capped currency rate or currency adjustment clauses).
- Rent review. There is no statutory rent review. Therefore, the parties generally agree upon a procedure for periodic increase of rent, especially in long-term lease. Usually, the rent is increased annually by a pre-agreed percentage. Other ways of reviewing rent (such as rent increase based on official inflation or certain index) are possible, but less commonly employed. For some types of commercial property (such as in shopping malls), turnover based rent is often used, where the rent level is determined by reference to the revenue generated from the business operating the leased property.
- Security deposit. It is standard for Russian landlords to request a security deposit (up to three-month rent) to secure the proper performance of tenant’s obligations.
- Repair, maintenance and improvements. The parties are free to agree on different responsibilities for repairs/maintenance/improvements. As a general rule, however, the landlord is responsible for major repairs, whereas the tenant ensures only current maintenance of the leased property. In case the landlord fails to carry out necessary repairs, the tenant is entitled to terminate the lease or to seek compensation of its expenses. The tenant usually has the right to perform improvements to the leased property, which can be separable and inseparable. In contrast to inseparable improvements, separable improvements can be performed without the landlord’s consent and generally remain in the tenant’s ownership after the termination of the lease.
- Underletting (sublease). As a general rule, sublease requires the landlord’s consent.
- Termination. As a general rule, in Russia, the parties to a fixed-term lease can only terminate the lease agreement through litigation based on material breach, and not through a unilateral declaration. However, in practice most parties agree on out-of-court termination and on the specific grounds for termination, which typically include payment default, improper use of the leased property, etc. Parties to a lease concluded for an indefinite period have the right to terminate the agreement at any time by giving three months’ advance notice unless a different period is specified in the agreement.
Leases are governed by the Swiss Code of Obligations which generally favours the tenants' interests with mandatory provisions, for example relating to the maximum duration of fixed term leases and to minimum notice periods for termination. The parties may decide freely on non-mandatory provisions. For instance, they can decide on the amount of the rent, but the tenant may require a court to review it if he can prove an excessive return for the landlord.
A lease can be entered into for a fixed period of time, in which case it will automatically terminate at the end of such period, or for an indeterminate period, in which case they can be terminated by both parties with a minimum six month prior notice for the end of a quarter. Generally, commercial leases are entered into for a minimum initial period of five years, renewable for successive five year periods.
The rent may be fixed, in which case it may only be increased, or decreased as the case may be, at the end of a term, mainly based on the evolution of the average mortgage rate and on the Consumer Price Index (CPI). More commonly, commercial leases provide for an indexed rent to the CPI. Indexed rent is only possible if the duration of the lease is for a minimum five year period. Graduated rent is also possible for leases with a minimum three year period. However, graduated and indexed rents may not be combined. Finally, turnover rent is also possible, but is mostly used for tenants with activities in the hotel and food & beverage industry.
Both parties can terminate a lease of indeterminate duration for the end of a term. In case of termination by the landlord, the tenant may oppose the termination by filing with the competent court a request for an extension of the lease, up to a maximum of six years. Both parties’ interests will be taken into consideration by the court, but Swiss law and courts are generally in favour of tenants.
Leases can generally be assigned or sublet in whole or part by the tenant (who remains liable for the rent), provided the landlord cannot object for valid reasons. The landlord may impose a certain type of business occupation, in particular for retail premises.
General provisions of the Swiss Code of Obligations relating to maintenance costs provide that the tenant is only liable for small ordinary costs. Parties are free to agree on different terms in such respect. In case of leases of large commercial premises or entire buildings, triple-net leases (entire maintenance and repair duties to the tenant) may be agreed. Land tax and property liability insurance remain however at the landlord’s cost.
The common terms of commercial occupational leases are set out below. This summary is focused on occupational leases, rather than "long leases" which are granted for an upfront sum and have substantially different terms.
Normal market practice in England and Wales is for occupational leases to be granted on a "full repairing and insuring" or "FRI" basis under which the costs of insuring and repairing the premises are passed down to the tenant (ignoring void costs etc.), although there are certain areas (such as damage through risks which are uninsurable) where this principle does not always hold true.
- Rent review
- Service charge
- Renewal rights
For each of the above terms we have summarised below the key features and what, if any, regulatory controls apply.
Duration: leases must be granted for a fixed period (i.e. they cannot be indefinite). There is no legal maximum or minimum duration. In the market, retail leases are often between 5-15 years. The duration of offices and industrial leases can be up to 25 years or more, particularly if the lease is of a whole building, although the typical duration ebbs and flows in accordance with market sentiment – currently there is a trend for shorter leases giving tenants more flexibility. Tenant break rights are common in longer leases (see below).
Rent: there are no regulatory controls as to the amount of rent. Rent is usually payable in advance often every quarter; however, monthly rents are becoming common for retail leases. On the grant of a new lease, landlords will generally give tenants rent free periods (or capital sums in lieu of such periods) to cover fit out works and, in poor market conditions, as an incentive to take the lease.
Rent review: there are no regulatory controls as to when or how the rent may be increased and parties are free to determine the type and frequency of the review. There are four main types of review (see below), although they are sometimes used in combination for certain situations (e.g. the rent might comprise a base rent which increases on a stepped or index linked basis, with a turnover rent also payable). As a general principle, it is very rare for a landlord to agree a rent review mechanism which could ever result in the rent being decreased. Reviews are therefore "upwards only".
Types of rent review:
- open market, where the rent is reviewed by reference to the rents payable in comparable properties. If the parties cannot agree what the open market rent is, it is typically determined by reference to an independent expert. Open market reviews are every 3 or 5 years depending on the duration of the lease;
- stepped, when the rent is increased at agreed intervals by agreed amounts;
- index linked, where the rent increases in accordance with an agreed index (such as the consumer prices index) at an agreed frequency (often every year); and
- turnover, where the rent is an agreed percentage of the tenant's turnover subject to agreed minimum and maximum rents. These types of review are common in retail leases.
User: there are regulatory controls. Leases will also usually restrict a tenant's ability to change the use of the premises.
Repair: there are few regulatory controls regarding either party's obligations. Parties are therefore free to agree who is responsible for each type of repair. As mentioned above, the practice of FRI leases means landlords will try to ensure that the tenants are liable for all repairs, which may include those arising from inherent defects in the building. There are regulatory controls in respect of the landlord's remedies where a tenant has failed to repair; the landlord may not enter the premises to carry out repairs unless it has an express right to do so (and consequently it is normal to see such a right in a lease). The amount a landlord may recover from the tenant may also not exceed the amount by which the landlord's interest in the property has been diminished due to the disrepair unless the express right provides otherwise (again, this is therefore typically expressly addressed).
Service charge: there are no regulatory controls in the commercial context (compared to the residential context where this is heavily regulated). Parties are free to agree what items are to be covered by the charge. The practice of FRI leases means landlords will, however, try to recover all their repairing costs from their tenants. Where the lease is of part of a building the tenant will be required to pay the costs of repairing, maintaining and insuring the structure of the building in addition to cost of lighting, heating etc. the common shared areas (e.g. reception, stairwells). Where the let premises are on an estate, the landlord will also charge the tenant for similar costs in respect of the estate roads and service areas. Leases of part on an estate therefore frequently contain more than one service charge, one for the building and one for the estate. Each tenant's share of the charge is usually calculated on a pro-rata floor area basis. Tenants will seek to resist the landlord's ability to charge the tenant for the initial construction or the improvement of premises.
Assignment: this is an area of greater regulation. Landlords will generally only allow tenants to assign the whole of the let premises (and even then only with the landlord's consent, such consent not to be unreasonably withheld or delayed). If the landlord wishes to impose a condition for giving its consent (e.g. the new tenant must meet a profit test), legislation provides that the condition must be set out in the lease. If the condition is not set out in the lease, the landlord may only impose such a condition if it is reasonable to do so. A common express condition is that the tenant enters into an authorised guarantee agreement ("AGA"). Under the AGA, the tenant guarantees the new tenant's obligations. The AGA ceases if the new tenant assigns the lease. Guarantors of the tenant will also be required to enter into the AGA. The form of the AGA is prescribed by legislation.
Underletting: there are few regulatory controls. Though the parties are free to negotiate terms, landlord will often insist that tenants may not underlet if their leases are for less than 10 years. Where the lease permits underletting, it will typically set out the conditions on which the underletting must take place. For example, the underlease must be on the same terms, same rent and not give the undertenant any right to a new lease.
Termination rights: leases expire at the end of the term unless the tenant has a statutory right (see below) and/or a contractual right to a new lease. Leases also usually provide that landlords can terminate ("forfeit") the lease if the tenant breaches its obligations. Technically no court process is required but is often followed as criminal liability can result if the landlord's self-help process is followed incorrectly. The tenant may apply to the court to stop the termination. The court will usually give the tenant relief from forfeiture on condition that the breach is remedied unless the breach cannot be rectified (e.g. the tenant is insolvent) or there have been breaches in the past. Parties commonly agree contractual termination rights. In a 15 year lease, tenants will often insist on a break right in the 5th and 10th year of the lease term. Landlord break rights are less common.
Renewal rights: subject to certain regulatory conditions, tenants have statutory rights to a new lease at the market rent for a maximum term of 15 years unless this right has been excluded by agreement. A key condition is that the tenant has complied with its obligations. Landlords can ask the court not to grant the new lease on certain grounds e.g. the landlord wishes to redevelop the property. If the landlord is successful in opposing the tenant's request, the landlord will have to pay the tenant compensation. Not surprisingly, most landlords often try to exclude this statutory right, but this is a factor for the overall commercial arrangement (with tenants potentially willing to pay a higher rent for a lease with the benefit of statutory renewal rights). Tenants often also have a contractual right to a new lease. Due to changes in how stamp duty tax is calculated (see Q14.) and a growing requirement for flexibility by tenants, lease terms have become shorter (from 20-25 years to 10-15) in order to minimise the tax payable at day one and to avoid tenants being committed to space for long periods of time. As a result, tenants often require contractual renewal rights.
Although certain jurisdictions do place restrictions on commercial leases such as limiting the length of their term or prescribing certain required provisions, the terms of commercial leases are primarily established by contract rather than any federal, state or local governmental authority.
Leases must be granted for a fixed period (i.e., they cannot be indefinite). With very few exceptions, there is no legal maximum or minimum duration though it is rare for a lease to be longer than 99 years. In the market, retail leases are often between 5 and 15 years. The duration of offices and industrial leases can be up to 20 years or more.
Tenants under commercial leases do not have a statutory right to renew the term of their lease and such right is entirely determined by contract.
There are no regulations on the amount of rent charged for a commercial space and, as such, the same is determined by contract. The parties to the lease may agree to a fixed rent throughout the term of the lease or they may agree to rent increases which may be based upon a fixed percentage, tied to a referenced index of inflation such as the Consumer Price Index of the U.S. Department of Labor, or be based upon a fair market value determination (or some combination thereof). The longer the term of a lease, the more likely it is that there will be one or more adjustments of the rent based on fair market value of the property (often with a floor to prevent rent from decreasing). In some retail leases, the rent is either wholly or partly based on percentage rent which is calculated by reference to the tenant's revenue at the premises.
It is typical for there to be regulations limiting the use of a property. Leases will also usually restrict a tenant's ability to change the use of the premises.
There are few laws regarding either party's repair obligations in the commercial context. Parties are therefore free to agree who is responsible for each type of repair. Typically, the landlord is responsible for repairs to the structure and roof of the property as well as systems that serve the building at large while the tenant is responsible for repairs to its space and those systems that exclusively serve its premises.
There are no laws in the commercial context as to what expenses may be passed through to a tenant. Parties are free to agree what items are to be included in the calculation. Where the lease is part of a building, the tenant will be required to pay the costs of operating, repairing, maintaining, and insuring the structure of the building in addition to the cost of lighting, heating etc. the common areas (e.g., reception, stairwells). Each tenant's share of operating expenses is usually calculated on a pro-rata floor area basis. Tenants will resist the inclusion of expenses that are capital in nature in the calculation of its obligation to reimburse operating expenses.
There are few laws regulating a tenant's right to assign its interest in a commercial lease. Typically, a commercial lease will prohibit a tenant from assigning its interest in the lease without the landlord's consent. These restrictions would generally extend to direct or indirect transfers of ownership interests in the tenant. Further, leases will often provide a landlord with the right to cancel the lease or "recapture" the premises upon a request from a tenant to assign its interest in the lease. Assignment provisions are the subject of a great deal of negotiation and often a landlord would agree to not unreasonably withhold, condition or delay its consent with respect to a request therefor. As part of its negotiation, tenants will seek to have certain transferees pre-approved and exempt from the recapture right (e.g., transfers to affiliates or in the case of a sale or merger of the parent company). An assignor of a lease is not released from liability thereunder absent an affirmative release from the landlord. It should be noted that in the event of a bankruptcy involving a tenant, the bankruptcy court may order the assignment of a lease even where such assignment would violate some of the assignment provisions of the lease and regardless of whether the landlord has consented to such assignment.
There are few laws regulating a tenant's right to sublease its premises. Similar to the restrictions on assignment, a commercial lease will generally prohibit a tenant from subleasing its premises without the landlord's consent and also provide the landlord with a right of recapture if a request is made therefor. Just as they do in the case of assignment, landlords will often agree to not unreasonably withhold, delay or condition their consent to a tenant's request to sublease. Care should be taken by a tenant to ensure that a sublease should not expire later than the day before the expiration date of the prime lease in order to avoid the sublease from being re-characterized as an assignment of the prime lease.
Each state has laws governing the right of a landlord to terminate a lease and evict a tenant in the case of a default by the tenant of its obligations under a lease. Landlords typically have the right to terminate a commercial lease and evict a tenant through court proceedings if the tenant fails to pay rent and/or other amounts when due or in the case of other breaches by the tenant which remain uncured.
A commercial lease will also usually provide the landlord or tenant with the right to cancel the lease in the case of a material casualty to the premises or a taking of the whole or a material part of the premises by eminent domain.
Though less typical, tenants may have the right to terminate its lease early under certain circumstances or at certain times during the term of the lease. In such a case, the tenant may be required to pay a termination fee and provide ample notice to compensate the landlord for the leasing costs it incurred and allow it sufficient time to re-let the premises. Leases for space in shopping centers often contain termination rights in favor of tenants which are exercisable if occupancy at the shopping center falls below a specified threshold or if a specific tenant is no longer operating at the center.
In principle, the terms and conditions of leases can be freely negotiated by the parties. However, there are some mandatory provisions under the Civil Code, such as:
- The term of the lease cannot exceed ten (10) years, with a limit of six (6) years if the owner is a public entity or lacks legal capacity.
- A receiver, liquidator and any other officially appointed administrator cannot be a tenant of any of the properties under their administration.
The typical conditions for leases of commercial premises are as follows:
- Term: the above information must be considered;
- Rent adjustment: it is common to include an annual increase of around 3%;
- Authorization to sublet: the tenant must be authorized by the owner to sublet the units;
- Insurance: Clauses are usually included on insurance policies that cover destruction of or damage to the leased units;
- Repairs: Unless otherwise agreed, the owner is required to make the necessary repairs during the term of the lease. If the necessary repairs are urgent, the tenant must make them and the owner will reimburse them.
- Maintenance: the maintenance cost is usually assumed by the tenant, unless otherwise agreed.
- As of August 2014, when Law 30201 came into force, it is possible and advisable for the landlord to incorporate an advance acceptance clause that establishes the possibility of yielding in advance to a future eviction claim due to contract expiration or lack of payment, provided that the signatures on the contract have been authenticated by a Notary Public or Justice of the Peace.
Landlord/tenant law for commercial leases in Mexico provides for the following general terms:
- Lease agreements are governed by Civil Codes; however, parties may freely discuss and set forth terms and conditions to regulate the landlord/tenant relationship, except for specific statutory rights that cannot be waived or amended to protect tenant’s interests (i.e. rent reductions for inability to use the leased premises due to force majeure or acts of God).
- Security deposits between 1 and 3 months of rent are customary in commercial leases in order to secure tenant’s obligations under the lease agreement.
- Landlords usually require a guaranty to secure compliance with the lease agreement’s obligations, particularly timely payment of rent. The guaranty is often provided by surety bonds or corporate guaranties from tenant’s parent companies.
- Tenants have the right of first refusal in case landlord decides to convey the real property to any third parties. This right may be waived in the lease agreement and such waiver is customary in commercial leases.
- Generally, rent is fixed according to a specific amount negotiated by the parties; however, some commercial leases may adopt a variable formula to compute rent based on tenant’s turnover and other variable factors, depending on the purpose of the leased premises. Rent is also usually indexed from year to year.
- Eviction procedures generally take longer than in other jurisdictions because the landlord/tenant laws tend to protect tenant interests. In the event of default under the lease agreement, landlord has the right to initiate the eviction procedure, but tenant is entitled to raise a defence that may delay the eviction procedure.
- In market standard terms, sub-leases and lease assignments are permitted without landlord’s prior consent only with respect to tenant’s affiliates or related parties, provided that the guaranties granted are kept under the same terms. In order to sub-lease or assign a lease agreement to unrelated third parties, it is common that landlord must grant prior written consent.
- Tenants of commercial leases are usually responsible for costs related to the leased property, including full repairing and insuring costs. Furthermore, usually any refurbishing or conditioning of leased space must be paid by tenant, approved by landlord and will, at the end of the lease, benefit the landlord.
- Most Civil Codes establish a maximum term for leases depending on the use to be given to the leased premises. Commercial and industrial leases, generally, cannot exceed 20 years (this term may vary according to the state the land is located).
In Turkey, freedom of contract applies to the real property lease relationships provided imperative provisions are reserved which aim to protect the tenant. No matter the leasing is commercial or not, there is no formal requirements for execution of a lease agreement; the parties can come an agreement even verbally. On the other hand, in commercial lease agreement parties usually make the agreement in writing to avoid any misunderstanding and to have evidence.
If the real estate to be leased is a store in a shopping mall, turnover rent (and also a minimum fixed rent is paid in case the turnover rent is below it.) is more common. Otherwise parties almost always agree on a fixed rent.
The parties can freely determine the rent type and the amount, however the regulation set a limit for the increase rate. Under Code of Obligations, rent indexation clauses will be valid if the indexation does not exceed the increase in the previous year’s producer price index.
Unless the parties have agreed otherwise, the tenant cannot, partially or as a whole, transfer or provide the leased property, or assign the lease agreement to third parties without the consent of the landlord.
In general, there is no restriction on the length of lease terms. Leases can be made for definite or indefinite periods. However, the duration of the term affects the stamp duty to be paid by parties, the right to evict the tenant and unilateral termination of the lease. Lease contracts for a definite term are automatically renewed based on the same terms, unless the tenant notifies the landlord 15 days before the lease termination date that it will move out the premises. The landlord has a limited number of grounds to evict a tenant, unless the tenant violates the lease agreement. However, in the case of a lease contract whose initial lease period has expired and been renewed for ten continuous years, the landlord can decline to renew the lease agreement with a three-month notice to the tenant before the expiry date of the renewed lease term.
Landlords are required to pay any taxes relating to the real estate, and in case of a residency, provide the obligatory insurance (Earthquake Insurance), to bear any ancillary costs relating to the leased property (repair etc.). On the other hand, the tenant is required to pay lease amount, the monthly common expenses and environment tax.
In terms of explanations made above, please note that application of some articles (such as restriction on rent increase rate) related to the commercial leases are suspended until 01.07.2020.
Another issue needs to be mentioned is that with a Presidential Decree dated September 12, 2018, on the Amendment of Decree No. 32 on the Protection of the Value of the Turkish Lira, having real estate sale or lease agreements (besides some other types of agreements) in any foreign currency or indexed to any foreign currency has been prohibited for 2 years. Furthermore, existing lease agreements had to be converted to TRY until October 13, 2018. The relevant communique issued based on the Presidential Decree states that if parties of an existing lease agreement cannot mutually agree on the lease amount in TRY, the Turkish Central Bank's effective foreign currency exchange rates on January 2, 2018 ($ 1 = TRY 3.7776 TL and € 1 EUR = TRY 4.5525) shall apply and the TRY amount calculated based on these rates shall be updated by application of the monthly consumer price index rate (as determined by the Turkish Statistical Institute) from January 2, 2018, until the date of determining the new lease amount in TRY.
The commercial lease agreements are regulated, mainly, by Italian Law no. 392/1978 (the Tenancy Law) and, residually, by the Italian Civil Code.
The Tenancy Law’s provisions have mandatory nature, the parties may usually depart from them only whenever the departure is in favor of the tenant and, as consequence, any departure aimed at procuring an advantage to the landlord and at weakening the tenant’s rights set forth by the Tenancy Law may be challenged and declared null and void.
Effective November 12, 2014, the Italian commercial lease market underwent profound deregulation. As a result, parties can now depart from the provisions set out in the Tenancy Law in favor of either the landlord or the tenant, provided that the commercial lease agreement provides for an annual rent higher than €250,000.00, and the leased property has not been declared of historical interest by a local administrative order. As a result of this deregulation, although certain rules established by the Italian Civil Code still apply, the Italian commercial lease agreements market is deemed to be in line with international market standards.
Here below is a brief overview of the main provisions of the Tenancy Law, being noted that they may be departed from in favour of the landlord only whenever the requirements above are met:
a) Term: Minimum initial term is equal to six years (or nine years, for hotel-use property). At the expiry of the first period of six (or nine) years, the lease is automatically renewed for an additional period of six (or nine) years, and so on at the following expiries, unless one of the parties notifies the other party of its intention not to renew the contract at the relevant expiry date, by way of a 12-month prior notice. At the expiration of the first period of six (or nine) years, the landlord is entitled to prevent the automatic renewal of the lease agreement exclusively on the basis of reasons set forth by the Tenancy Law; this restriction does not apply at the expiration of the subsequent terms.
b) Rent and adjustment: The rent is freely negotiable by the parties. It is generally a fixed amount, but could be provided for a minimum guaranteed amount, plus a variable portion based on some economics (usually, the tenant’s revenues within the leased premises). On the contrary, the rent adjustment is disciplined by the Tenancy Law and is adjusted on a yearly basis according to ISTAT index variations. The adjustment can be equal to 100 percent of the variation ascertained by ISTAT index only in case of leases whose initial term is longer than the minimum term of six (or nine) years.
c) Security deposit: It is up to three monthly rent instalments. Should the parties agree upon the delivery by the tenant to the landlord of a (insurance/bank) guarantee, such collateral does not have to comply with the above three-month limit. The delivery of a guarantee may be provided either in lieu of or in addition to the payment by the tenant to the landlord of the security deposit.
d) Withdrawal: The landlord is not entitled to early withdrawal from the lease agreement (the landlord may just prevent the automatic renewal of the lease at the relevant expiry dates). The tenant is entitled to withdraw from the contract: (i) should a tenant’s withdrawal right be expressly set forth under the lease agreement, and/or (ii) upon occurrence of the so-called “serious reasons” (“gravi motivi”). In such latter case (“serious reasons”), the tenant is entitled to withdraw at any moment from the lease upon occurrence of the “serious reasons” and subject to a six-month prior notice. The Tenancy Law does not specify events or requirements falling in the “serious reasons” definition; these are supplemented by Italian case law which states that the “serious reasons” would occur in presence of events or circumstances that:
- Are unforeseeable and unexpected at the time of execution of the lease
- Are independent from tenant’s will
- Do not fall in the normal entrepreneurial risk of the tenant
- Cause the maintenance of the lease to be excessively burdensome for the tenant if compared to the benefits of the tenant arising from using the leased premises.
e) Sub-lease and assignment of contract: Under the Tenancy Law the tenant is entitled to sublease the leased promises or to assign the lease agreement whenever the sublease or assignment takes place in the context (and as item) of the assignment or lease of the tenant’s going concern.
In addition to the above, should the activity of the tenant involve dealings with the general public of users and consumers (contatti con il pubblico degli utenti e dei consumatori), such as in the case of retail activity, the following mandatory provisions of the Tenancy Law shall further apply:
f) Goodwill Loss: In case of lease termination by the landlord (landlord’s fault or landlord’s denial to the lease renewal), the tenant is entitled to a goodwill loss indemnity corresponding to 18 (or 21, for hotel-use property) times the amount of the monthly rent. The amount of the goodwill indemnity is doubled in the event the real estate unit is leased to another tenant carrying out thereunder the same activity of the previous one. The tenant is not entitled to any goodwill indemnity in case the lease termination depends on the tenant (tenant’s fault or withdrawal, etc.).
g) Pre-emption rights: Should the landlord intend to sell the leased premises (through “asset deal structure”) during the lease or to re-lease it at the expiration of the lease, the tenant is entitled to a pre-emption right, respectively, to purchase the leased premises or to lease it at the same terms and conditions offered by a third party prospect purchaser or tenant (as the case may be). The tenant loses its pre-emption right to purchase the leased premises, should the landlord transfer the whole real estate complex of which the premises is part; also, the tenant loses its pre-emption right over the new lease in the event of termination of the previous agreement because of its own breach or withdrawal. Based on the sale object and structure, the tenant’s pre-emption is excluded and should not apply (e.g., the landlord intends to transfer within the same transaction and to the same purchaser the entire building - so-called “en bloc” sale - and the tenant is leasing just a portion thereof).
The notion of “the protected tenancy” is part of the legislation of Cyprus. When the property which is the subject of a tenancy is in certain areas as specified by the council of Ministers, the Tenancy Tribunal Act applies. In order for the Act to be applicable the property must have been built before 31/12/1999. For the Act to apply, the property must be used as residence or as shop. Furthermore, for the Act to apply the tenancy period must be longer than 6 months. The increase of the rent, the right to evict and several other issues are formulated by the Act in such cases.
For all tenancies other than protected tenancies, the terms of the tenancy agreement govern the tenancy
It is standard practice to include in the tenancy agreement the names of the parties, the amount of the rent and the frequency of payments, the period of the tenancy, the rights and obligations of the tenant and the rights and obligations of the landlord, the payment of the guarantee deposit, the responsibility for the payment of utilities and other charges arising out of the possession of the property, the obligation to effect repairs, the right to modify the property, a prohibition on subletting, the permitted use of the property, the rights of termination etc
Subletting the property is permissible if not expressly prohibited in the agreement.
If the right to renew is included in the tenancy agreement, a provision is usually made as to the amount of increase of rent. If the tenancy is a protected tenancy, the increase cannot be higher than 14% every 2 years.
Termination of the tenancy is possible upon expiry of the tenancy or when one of the parties commits a serious breach which is of the essence of the agreement. In protected tenancies the right of the landlord to evict is limited in specific situations. When the rent is overdue for 21 days after a notice to pay is served, the landlord can start eviction proceedings. If the tenant pays within 14 days from the service of the eviction proceedings to him the eviction process stops. Other breaches by the tenant can justify eviction, for example when the tenant causes nuisance or causes damages or sublets when this is expressly prohibited or uses the property for illegal purposes. If the landlord wishes to use the property to reside in it or for his/her immediate family to reside in it, eviction may possible under certain circumstances and conditions. The same if the landlord is going to demolish the building or carry out major construction works at the property.
The Act on Land and Building Leases is a key statute controlling leases both for land and for buildings. One of the purposes of the Act is to provide stability in the lease, and to protect tenants. The Act includes some compulsory provisions. If the terms and conditions of the lease agreed upon by the lessor and lessee are contrary to such compulsory provisions, then the lease terms would be void. The Act should be carefully reviewed when the lease contract is prepared.
(1) Contract Type of Land Lease
The general rule of the term of the land lease is that the lease period should be equal to, or longer than, 30 years. If the lease period is agreed to be shorter than 30 years, the lease period is deemed to be 30 years, unless exemptions apply. The land lease is generally renewed upon the end of the lease period as long as a tenant holds a building on the land, unless there are justifiable grounds for the lessor’s objection to the renewal. The lessor may not freely terminate the lease, nor will the lease terminate even by the passage of the lease period.
However, if the lease is recognized as a fixed-term land lease, or a fixed-term land lease for business purposes, the renewal mechanism, described above, does not apply. Under these types of contracts, the parties may agree that a lessee does not have a right to demand that a lessor purchase the premises on the land, which right is provided under the Act on Land and Building Leases. A fixed-term land lease should be entered into in written form, and the lease period needs to be equal to, or more than, 50 years. A fixed-term land lease for business purposes, on the other hand, is required to be made by a notarial deed, and is only applicable to cases where the lessee’s objective in the lease is to own buildings used solely for business. The duration of the fixed-term land lease for business purposes should be at least 10 years (but no longer than 30 years) or at least 30 years (but no longer than 50 years).
(2) Contract Type of Building Lease
As a general rule, upon the lapse of the term of a lease, a building lease will be renewed with conditions identical to those of the existing contract . The lessor may not terminate the lease unless it has justifiable grounds for giving a termination notice to the tenant.
However, if the lease falls under a fixed-term building lease specified under the Act on Land and Building Leases, the renewal mechanism described above does not apply. Such lease will be terminated with notification given during the period from one year to six months prior to the expiration of the lease period. A fixed-term building lease needs to be executed in writing, and the lessor is required to explain in a separate form to a tenant the fact that the lease will not be renewed. One of the characteristics in a fixed-term building lease is that the lease party may agree to exclude a statutory right by which they demand to increase or decrease the amount of building rent under the circumstances where the existing rent becomes unreasonable due to economic fluctuations, etc.
(3) Common Terms
In addition to the basic terms in the lease, such as rent, common service charges, and deposits, Japanese lease agreements typically include, among others, allocation of costs and responsibilities regarding repair of the building, the manner in which the amount of rent is amended, termination events, the manner of vacation, and other similar items.
Common terms the parties agree on in the lease agreement:
- The law provides that registration with the competent land office is required when the lease term of real estate exceeds three years.
- The law also states that the lease term may not exceed 30 years, however, the law allows a 30-year extension
- It is a common practice for the parties to agree on who is responsible for the registration fees (if applicable) and relevant expenses.
- Fixed rate or fluctuating rate
- Revisit and agreement on the rental for if the term is extended
- Late-payment / non-payment interest rate
Sub-lease/ Assignment of Rights
- Whether the lessor consents to a sub-lease / assignment of rights.
These provisions usually require the lessee to carry out maintenance and allow the lessor’s personnel to conduct an inspection upon termination of the lease
- Whether termination for convenience is allowed
- How much prior notice is required for the case of termination for convenience and breach of agreement
- Termination due to the breach of agreement
Dispute Resolution / governing law
- Stipulating means and ways for the parties to resolve a dispute.
Leases of business premises are regulated by Presidential Decree 34/1995 (as amended) which applies in parallel with the provisions of the Civil Code. They fall within two categories: (a) leases pertaining to certain commercial activities protected by law; and (b) leases pertaining to certain protected professions.
Also, the emergence of sharing economy has sprung regulation for the lease of a property through a digital platform for a certain period of time, less than a year. Airbnb hosts are required to enter the AADE registry, submit a short-term residence declaration for each tenant, enroll in the short-term residential property data system, inform the Deposits and Loans Fund for income attributable to unknown beneficiaries as well as provide information on tenants and duration of stay.
(a) Length of term
Under the new regime, agreements concluded after its enactment are of an at least three-year term, even if the parties have contractually agreed a shorter term.
(b) Rent - rent increases
The most common basis for rent is a fixed monthly rent. In the absence of a contractual agreement on rent increases, the landlord may claim a readjustment after the lapse of two years from the execution of the contract and this is determined as a percentage per annum not lower than 6% of the “objective” value of the premises, 4% for the open spaces of the premises, and in those areas of the country where the objective system is not applied, it is calculated on the basis of its market value. In the case of a dispute arising between the parties on the readjustment price, the special Settlement of Rent Readjustment Commissions are competent.
(c) Tenant’s right to sell or sub-lease
A tenant does not have the right to sell the property. Unless otherwise agreed by the parties, in principle, the assignment of use or sub-lease in whole or in part, of leased premises to a third party is not allowed. Moreover, under certain conditions, tenants may sublet property or grant use of a leased property to a partnership or limited liability company of which they are part (the tenant’s participation in the company being of at least 35%).
Insurance of the leased property is not obligatory. In most cases, the landlord insures his property and pays the premium.
(e)(i) Change of control of the tenant
The change of the shareholding structure of the tenant does not have any impact on the lease (either commercial or not) agreement, unless otherwise stipulated in the agreement.
(e)(ii) Transfer of lease as a result of a corporate restructuring (e.g. merger)
The merger of either the landlord or the tenant company with a third-party results in the succession (by operation of law) of the company resulting from the merger to the lease agreement; such agreement shall continue unaltered in all other respects.
Unless otherwise agreed by the parties, the landlord is obliged to maintain the leased property fit for its intended and agreed use. The landlord is therefore burdened with the costs and expenses of repairs pertaining to the property’s basic functions.
The parties are free to negotiate the rental price for the property, and no restrictions apply. Rent for office space is usually determined as a fixed amount. The rent for commercial space is usually a combination of a fixed amount and turnover rent. Sometimes the rental price may be subjected to annual adjustment based on commonly used price indexes (like LIBOR and others).
In addition to the lease prise, usually in the commercial leases a management fee is due separately (or explicitly included in the lease prise; determined as a fixed price per 1 sq.m.).
Commercial leases are executed either for a fixed term or with a clause, stipulating repetitive renewal unless one of the parties sends a termination notice within the specified time limits. Representative of the lessor who have only managing functions, can represent the lessor and sign a lease contract for a period no longer than 3 years. For longer lease contracts these representatives need an additional authorization.
The law generally allows the subletting of real estate without the consent of the lessor (the lessee is responsible for any damage caused by the subtenant). However, usually the parties agree on subletting with the lessor's consent.
The costs associated with the ordinary use and depreciation of the real estate are payable by the lessee. All other material costs and damages of the property are to be borne by the lessor, unless they have been intentionally caused by the lessee. If the lessor refuses to undertake the necessary reparations, the lessee is entitled to undertake them and to receive a compensation from the lessor.
As a rule, the terms and conditions of the leases shall be those agreed between the parties, except for certain requirements or rights established by law.
For commercial urban leases, ruled by Federal Law # 8.245/1991 (the Lease Act), the following are usual terms:
- Activities: The lease agreement usually establishes the activity that will be developed in the premises and Lessee’s obligation to obey local zoning rulings as well as any applicable building or condominium bylaws. Lessee must obtain all the licenses and permits to perform its business activities in the leased property (commonly issued by the municipality). Lessee is also frequently required to contract insurance for any business activities to be developed in the premises.
- Term: There is no minimum or maximum length imposed by law. Parties are free to agree, accordingly. Market practice is of five years for commercial leases. However, built to suit agreements usually have longer terms. The Lease Act also establishes that in case lessor is a married individual and the lease is for ten years or more, the spouse must jointly execute the contract. In case Lessor does not oppose to lessee remaining in the property after expiration of the lease term, the agreement will be considered automatically monthly renewed for an undetermined period and both parties may terminate the lease upon thirty days prior notice.
- Guarantees: The guarantees permitted by Article 37 of Lease Act are: (i) bank guarantee; (ii) guarantee by a creditworthy individual or a legal entity; (iii) chattel mortgage of investment fund quotas; or (iv) bank account deposit. Double guarantees are prohibited. Guarantees must be in force during the entire term of the agreement, until the property is returned to Lessor, under penalty of termination.
- Maintenance and Improvements: Lessee must maintain the property and its equipment as received, except for wear and tear. Unless otherwise established in the lease agreement, improvements made by Lessee that intend to maintain or avoid deterioration of the property - even if without Lessor's approval - and those authorized improvements that increase or facilitate the use of the asset should be indemnified and entail Lessee’s right to retain the possession of the leased property until the payment of the indemnification due. Authorized optional improvements – that are made for mere pleasure, but do not increase the regular use of the property, even if they are agreeable or expensive - are not reimbursable, but Lessee may remove them if this does not damage the property. Moreover, the lease agreements commonly restrict lessee’s right to modify or improve the premises without lessor’s consent. Interior improvements are usually permitted to adequate the premises do lessee’s activities, but lessor may require that the premises be restored to their original condition, upon lease termination.
- Transfer and Subleases: As per the Lease Act, subleases require written consent of the lessor and its rent cannot exceed the rent paid under the original lease agreement. Sublease rights may be prohibited or restricted by the lease agreement. In case of assignment/transfers, the lease guarantee must remain in force or be replaced by a new guarantee.
- Rent: Market practice is that the fixed rent is monetarily readjusted once a year in accordance to a certain index established by the parties in the lease agreement. It is also common to set a variable rent according to the turnover of the lessee’s business – in specific cases as shopping centers and hotels. After three years of lease, lessee or lessor may judicially require a rent revision in order to update the rent to market practice.
- Charges and Taxes: Lessee is customarily liable for all the expenses related to the property, such as condominium charges, water, sewage, gas and electricity bills, etc. The Real Estate Property Tax (IPTU) and others taxes and fees related to the property may be charged from the lessee if expressly provided in the lease agreement. Utilities are frequently hired individually by each lessee. In case the utilities are hired by the condominium in which the leased property is located or the contract encompasses more than one property, it is habitual that the related costs are shared either in accordance to the proportion of the occupied area or consumption of the related utilities. Lessor is primarily responsible for the real estate insurance, but this obligation can be contractually transferred to the lessee. Lessor is liable for the payment of the income tax on the rent value.
- Early Termination: The Lease Act grants lessee the right to terminate the lease anytime without cause, as long as the relevant penalty is paid. The penalty is proportionally reduced according to the time the lease remained in force (not applicable to built to suit or sale with leaseback agreements). The lease agreement may be terminated by mutual agreement of the parties, or: (i) in case of contractual or legal breaches (including the non-payment of rent and related charges); (ii) by Lessor, in case of lack of guarantee to Lessee’s obligations; (iii) by Lessor, in case the government determines the urgent need for works, which cannot be completed with the Lessee occupying the premises or in case the Lessee refuses to authorize the mentioned works; (iv) by the buyer of the property in the ninety days that follow the sale of the property if there is no “cláusula de vigência” (please see hereunder – “). Note that in the event of a contractual breach or if an eviction lawsuit is filed by lessor based on outstanding rent amounts, lessee will be granted the right to remedy the default, including by depositing values in court. In case lessee uses the property as a religious space or develops school, health, hospital or elderly home care activities, duly authorized by the government, in the real estate, there shall be certain restrictions for lessor to terminate the lease.
- Turnover of the Property further to Termination: Lessee must return the property at the end of the lease term as received, except for wear and tear.
- Renewal Rights: Lessee has right to renew commercial leases as long as (i) the agreement has been executed in writing with a fixed term; (ii) the lease has been in force for at least five years (pursuant to one or more agreements); (iii) the property has been used for the same activity during the three years prior to the renewal; and (iv) lessee files a lawsuit in the period between one year and six months prior to the lease contractual term. Lessor shall not be obliged to renew the lease in case: (i) the government requires the property for demolition or works that will enhance the value of the property; or (ii) lessor recovers the property for its personal use, or the use of companies in which lessor or a close family member is a controller (except in shopping centers as mentioned hereunder).
- Registration and Execution Formalities: The contract shall be executed by the lessee and lessor in the presence of two Brazilian resident witnesses, who shall sign the instrument as so. In case of guarantees rendered by a legal entity or individual, it is common that guarantor intervenes in the agreement. It is strongly advisable that the lessee registers the lease agreement at the relevant Real Estate Registry so to assure enforceability of: (i) the right of first refusal before third parties; and (ii) the contract in case of sale to third parties ("cláusula de vigência", please see hereunder). If the agreement is to be registered, fees will apply.
- Lessee Protection – Right of First Refusal and “Cláusula de Vigência”: In case of intended property sale or assignment, lessor shall notify lessee granting lessee the right to acquire the property in the same conditions as a third party offeror within thirty days from notice. This right does not apply in cases of loss of property, judicial sale, exchange, donation, pay in of capital stock, split off, mergers and spin in operations, secured fiduciary sales or guarantee executions. The registration of the contract with right of first refusal clause also grants lessee the possibility of, in case the right is not granted, opting between claiming damages or cancelling the transaction depositing the purchase price in court for its acquisition. If the lease agreement is not registered at the competent real estate registry office and the right of first refusal is not granted, lessee may only claim damages against the lessor, but may not request cancellation of the transaction with the third party buyer. In addition, lessor and lessee may agree to maintain the lease in force in case of a transfer of the property to a third party. Such clause (“cláusula de vigência”) must be express in the agreement and shall be registered at the real estate registry office so to be enforceable in case of title transfer.
- Shopping Center Agreements: The Lease Act establishes that shopping centers leases have certain contractual flexibility to establish clauses that commonly would be considered null and void for regular leases. In this sense: (i) key money may be charged; (ii) Lessee's right to renewal may be waived; (iii) Lessor cannot claim the use of the property for itself, family nor companies in which it is a controller further to one year of the lease term. In addition, lessor may not charge lessee for: (i) works and/or change of equipment that affect the common areas or require a new occupancy certificate for the building; (ii) expenses not included in the shopping budget, if not urgent or due to force majeure; nor (iii) utilities, employee related expenses or equipment maintenance of the condominium.
- Built to Suit: The Lease Act also grants some flexibility to built to suit agreements. It (i) authorizes the waiver to rent review rights; and (ii) establishes that the penalty for early no-fault termination by Lessee may be of up to a value equivalent to the entire rent that should be paid if the lease remained in force.
Parking spaces, publicity spaces and billboards, condo/apart-hotels, properties of the Governments, rural leases,“ground-lease” (a typical arrangement for occupation, development and use of the real property) and free lease (“comodato”) are expressly excluded from the scope of the Lease Act.
Swedish lease law prevents property owners from enforcing any contract terms that are less favourable to the tenant compared to the minimum requirements set forth under statutory law. Such terms are non-enforceable, meaning the legally stipulated terms will apply where contract provisions fail to comply with the minimum requirements. Swedish lease law prescribes such minimum requirements on e.g. rent calculation formulas, form and service of termination, termination notice periods, automatic prolongation periods etc.
Swedish law imposes no restrictions on the form of a lease contract, it may be concluded orally or in writing. The vast majority of leases are however agreed in written form. For commercial premises, a rather simple standard contract template form, based on what is generally considered to be market standard provisions, is often used for the main part of the contract, adapted to individual commercial terms where necessary. Specific regulations are normally included in separate appendices.
For office and industrial premises a fixed annual rent is most commonly applied. For retail premises and restaurants, turnover rent is often used, especially in the larger cities. The parties may freely agree on the rent level for commercial premises. If the lease term is less than three years, the rent must however be a fixed amount. For leases exceeding three years, a variable rent may be agreed upon but it must be calculable on basis of the lease contract in order to be valid. Normally, the annual rent is also linked to changes in the consumer price index.
A tenant is not entitled to sublet the premises without the landlord’s consent. In certain cases, approval may instead be sought and obtained from the Regional Rent and Tenancy Tribunal, when the landlord’s consent is denied. In principle, a tenant is not entitled to transfer a lease without the landlord’s approval. An assignment may however be effected irrespective of the landlord’s disapproval if the assignment is made as part of a transfer of the business operation conducted within the leased premises. Approval by the Regional Rent and Tenancy Tribunal is required.
The term of the lease may be fixed or indefinite. If the lease period is indefinite, the party wishing to terminate the lease must give written notice at least nine months in advance. If the lease term is fixed, it may be terminated upon the expiration of the lease term with nine months prior notice (shorter notice periods are allowed if the fixed term is less than nine months). The parties are however free to agree on a longer notice period. Irrespective of the above, the parties are free to agree on an immediate termination of the lease at any time. Normally the parties agree on an automatic prolongation term in the lease contract. A prolongation clause will apply at the end of the lease period without any prior notice from any of the parties.
If a lease is terminated, the tenant has a principle right to prolongation. If the landlord refuses to prolong the lease on market terms, the tenant has a principle right to indemnification from the landlord, unless the landlord can present certain legally prescribed reasons for not prolonging the lease. Damages to be paid by a landlord under these provisions may reach substantial amounts. The tenant’s right to compensation can under certain circumstances be voluntarily surrendered, which is not uncommon for parties to agree upon in connection with the conclusion of a new lease. Approval by the Regional Rent and Tenancy Tribunal is often required for such an arrangement to be valid.
The parties are in principle free to agree on the allocation of liability for maintenance, repairs and insurance etc. Commercial tenants are typically liable for most of the operating expenses pertaining to the leased premises. Such costs may also include expenses related to maintenance of common areas/facilities, real estate tax and unforeseen costs, often allocated between the tenants on the property. The landlord typically bears the responsibility for structural maintenance/repairs.
Generally, the terms and conditions of a lease agreement under Indonesian law can be freely negotiated between the parties. The typical provisions of leases for commercial premises are as follows:
a) Period of lease. Parties typically regulate the lease commencement, expiry and any extension terms of the lease agreement.
b) Rent payment and adjustment. The formulae for the rent are typically determined in accordance with the area and size. Rent adjustments are often determined periodically.
c) Service or maintenance charge. Agreements typically set out the coverage of the service and maintenance to be carried out by the lessor, and the service and maintenance fee to be paid by the lessee.
d) Insurance. Insurance over the building is typically borne by the lessor, although some lease agreements require that items within the leased premises be insured by the lessee. The agreement may also prohibit the lessee to conduct activities that could increase insurance premiums for the lessor.
e) Alteration to property. Lease agreements commonly specify the types of alterations or modifications that the lessee can make to the property.
f) Defects. Lease agreements often regulate what constitutes a defect to be assumed by the lessor, the lessor’s liability period, and the amount the lessee may claim.
g) Assignment and sub-lease. Clauses typically provide that any assignment or subletting of the lease would require approval from the lessor or, at a minimum, notification to the lessor by the lessee.
h) Surrender of property/yield-up. Clauses governing the surrender or yield-up of the leased property upon termination of the lease are almost always included.