What are common terms of commercial leases and are there regulatory controls on the terms of leases?
There is no prescribed form of commercial property lease.
- Rent – The most common basis for rent is fixed. Increases in rent are usually determined on a market rental basis rather than by fixed increases. These reviews usually occur every 5 years. Since 28 February 2010, upward only rent reviews are unlawful in new leases.
- Transfers and Sub-Letting – Tenants are commonly allowed to transfer or sub-let their interests subject to landlord's prior consent. By law, consent cannot be unreasonably withheld whether or not the lease states that.
- Repairs– Most leases oblige the tenant to keep the premises in good repair and to pay for repair of common areas in buildings or schemes through a service charge.
- Planning and Building Regulations – Most leases require tenants to be in compliance with planning and building regulations.
- Renewal and Termination Rights – There is a legislative right to a new tenancy for business tenants in occupation for a period of at least 5 years. Tenants may renounce this right and landlords often insist upon this.
Landlords may generally terminate in the event of non-payment of rent/ breach of covenant not remedied within a specified time frame and insolvency of the tenant and/or guarantor. Tenants do not usually have any termination rights unless a specific break option is agreed. However, in the event of damage/ destruction of the premises which have not been reinstated by the landlord within a specified period, tenants often have a termination right.
- Costs – Tenants are commonly responsible for all costs of the leased property.
It is a legislative requirement for tenants to submit details of their letting to a specified regulatory authority within 30 days of stamping their letting regardless of the content of any confidentiality agreement. There are also ongoing obligations to provide further details on rent review and when a tenant ceases to have an interest in the lease.
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 by operation of law to protect tenant’s interests (eg. 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 defense that may delay the eviction procedure.
- In market standard terms, sub-leases and lease assignments are permitted without prior consent by landlord 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).
Different types of real estate
Three lease regimes apply to real estate in the Netherlands:
- residential real estate;
- commercial real estate; and
- other commercial real estate, such as offices.
The Raad voor Onroerende Zaken (Dutch Real Estate Council) has drawn up model contracts and related general provisions for these regimes (known as the “ROZ models”). Those model contracts are used in the Netherlands particularly for commercial leases. In principle, the ROZ models are landlord‐ friendly and, depending on the specific agreements made, will have to be made more balanced. The current market conditions are conducive to custom-made leases.
Commercial real estate
The commercial real estate category consists of several sectors, including retail and the hotel and catering industry. Landlord and tenant law gives the tenant of commercial real estate extensive protection that cannot be departed from to the tenant’s disadvantage. The tenancy protection is twofold and consists of mandatory lease terms and protection from termination. In principle, a lease is entered into for a period of five years and is subsequently extended by five years by operation of law. A landlord may give notice of termination of the lease at the end of a lease term only if statutory termination grounds are met, such as poor management by the tenant and urgent use by the landlord itself. If the tenant does not accept the termination, a court judgment is required. The judge may grant the tenant a contribution towards the removal and fit‐out costs. This tenancy protection does not apply in the event of a lease with a term of less than two years. If the tenant’s business is transferred, the tenant has a basic right to be substituted as the tenant by the acquiring party. In that case the landlord is bound by the contract takeover. With regard to other matters, such as repairs and liability, the parties are relatively free to make agreements at their discretion. It is not unusual for the tenant to provide security in the form of a bank guarantee or a deposit for the proper performance of its obligations. The notice period for both the tenant and the landlord is 12 months, in principle.
Other commercial real estate
The lease of other commercial real estate, such as offices, plants and surgeries, is not specifically regulated. The parties are relatively free to agree at their discretion on the lease conditions in question. Tenants are protected by law against eviction in order to protect them against overly strict termination clauses. This means that if a tenant does not accept the termination of the lease or has not terminated the lease itself, it may continue to use the leased property for a period of two months after the end of the lease. At the tenant’s request that period may be extended to 12 months, in principle. It is not possible to derogate from this provision to the tenant’s detriment.
Most of the commercial lease agreements in Norway are entered into on the basis of standard agreements. Although there are several standard agreements, they all have in common that they widely deviate from the background law in favour of the landlord. The reason for this is that the purpose of the Norwegian Tenancy Act primarily is to ensure the rights of private consumers who are renting their accommodation, giving a regulation which is not adequate for commercial leases. For commercial leases, there is contractual freedom and the parties may legally agree to deviate from most of the provisions in the Norwegian Tenancy Act. However, in order to actually deviate from the Norwegian Tenancy Act, this needs to be agreed between the parties. If nothing else is agreed, the Norwegian Tenancy Act will complement the lease agreement on provisions not included in the lease agreement.
The rent is usually specified as a yearly, fixed rent. For retail leases turnover rent is widely used, often in combination with a fixed minimum rent. The fixed rent, or fixed minimum rent, will normally be subject to a yearly adjustment in accordance with any changes in the retail price index published by Statistics Norway. The tenant is normally not entitled to withhold rent to secure any claim that the tenant has or may get against the landlord as a result of any defect or delay. The parties may not deviate from section 4-1 in the Norwegian Tenancy Act, which states that the rent may not be unreasonable compared to the level of rent which is normally obtained when concluding an agreement concerning similar properties on similar terms. This provision does not lead to many conflicts, as professional parties will normally reach into an agreement on, or close to, market terms.
The tenant is normally not entitled to sublease the leased property without a prior written consent of the landlord. Such consent may not be withheld without just cause. Further, the tenant is not entitled to transfer the lease agreement without consent of the landlord, and consent may be withheld at the unfettered discretion of the landlord. Transfer of no less than 50 % of the shares or partnership interests in the tenant will normally be considered as a transfer of the lease agreement, meaning that such transfers needs to be approved by the landlord prior to the transaction.
Commercial leases are usually entered into for a fixed term, with no right of either party to terminate the agreement during the lease, except in case of material breach of contract. Unless otherwise is agreed, the tenant has no right of renewal of the lease. It is normal to agree on a fixed term, with an option for the tenant to extend the lease for one or more periods. Usually the terms and conditions of the lease agreement is agreed to apply for the extended period, either with a continuous regulation of the rent based on the changes in the retail price index, or with the rent being adjusted to market rent.
On a regular basis the tenants pay their proportionate share of the common costs related to the property, such as electricity for heating and illumination etc., municipal charges, cleaning and waste disposal, inspection, servicing and maintenance of technical installations such as lifts, cooling plant, ventilation plant etc., security and reception services etc. The landlord does normally cover the costs related to insurance, external building maintenance and replacement of technical installations. Property tax, has traditionally been covered by the landlord. Over the last years, property tax has been introduced in several municipalities in Norway. As a consequence of this, more and more landlords do now collect the costs from the property tax from the tenant, as part of the common costs. In triple net agreements, or for lease agreements with only one tenant on a property, the tenant will usually cover a larger part of the costs related to the property, both the running costs and costs related to maintenance, repairing and renewal.
Commercial leases may be triple net, meaning the tenant is responsible for paying the building's property taxes, building insurance and the cost of any maintenance, although the property owners usually pays property taxes.
An incentive for the tenant in the form of a cash amount for fit-out is common on the Romanian market. Lease agreements have one or more break options in favour of the tenant; however the property owner also has the option to break the lease for reasons such as late payments and recurring minor infringements by the tenant.
Usually, the tenant may prematurely break the lease by paying the remainder of the rent up to the first break option/end of the lease.
The terms of the lease agreement usually prohibit subletting.
Aside from maximum duration (i.e. 49 years) and several mandatory clauses as provided by the Romanian Civil Code, there is no regulatory control on lease terms and there are no rent controls on the Romanian market.
Form of Leases
Forms of commercial property leases are not codified or prescribed in any way; lease provisions of privately owned corporate real estate are generally freely negotiable.
Specific regulatory rules and limitations apply to lease of publicly owned (state and municipal) property.
Rent levels of private commercial real estate are not regulated and are fully negotiable. Until recently, it was common to fix rent in USD payable in the local currency – Russian Roubles. The recent economic turbulence has, however, resulted in a more flexible and tenant-friendly position on the part of landlords towards rent levels. Now, the majority of commercial property leases are fixed in Roubles with the possibility of annual review.
The most common rent basis is fixed rent with a capped annual indexation. Turnover rent is used for high quality retail property. Rent for quality commercial real estate generally consists of the following three components:
- Base rent - fixed, that is, the landlord's remuneration.
- Operating expenses (OPEX) – usually fixed, such as:
- Property management;
- Lift and machinery maintenance;
- Cleaning of common areas;
- Visitor reception services;
- Utilities consumed by the tenant - variable, according to meter readings, e.g., electricity, heating, water and gas.
Transfers and sub-letting
Unless otherwise stipulated in the lease, the tenant may generally, given the landlord’s prior consent:
- Sublet the property (liability toward the landlord under the lease remains with the initial tenant). The duration of a sublease may not exceed that of the head lease.
- Assign/ transfer the lease to a new tenant (liability toward the landlord under the lease passes to the new tenant).
- Mortgage lease rights as collateral.
- Contribute lease rights to a subsidiary company's authorised capital.
A lease contract may contain an upfront landlord’s consent to transfers and subletting.
Renewal and termination
The duration of a private commercial real estate lease is not limited and generally varies from 5 to 15 years.
There are statutory maximum lease terms for publicly-owned land established in Russia, e.g., for agricultural land (49 years), for construction of a building (10 years).
If contractually agreed, on expiry of the lease, a tenant that has duly fulfilled its obligations, enjoys the right of first refusal (all other things being equal) to extend the lease for a new term. The tenant must provide the landlord with a written notice of its intention to extend the lease by the deadline set in the lease or, in its absence, within a reasonable time prior to the lease's expiry.
Unless agreed otherwise, a court may terminate a lease early at the landlord's demand when a tenant uses the property in serious violation or commits repeated violations of the lease and the permitted use of the premises, causes a serious deterioration in the property's condition, fails (more than twice in consecutive months) to pay the rent within the time stated in the lease, etc.
Unless agreed otherwise, a court may terminate a lease early at the tenant's demand when the landlord creates obstacles to the quiet possession and use of the property, undisclosed inherent defects in the property are discovered, etc.
The parties may contractually agree other conditions for early termination of a property lease, including early termination without a cause, but with reasonable prior notice. Depending on the parties’ agreement, early termination of a lease may take place either through a court or out of court (by written notice).
Unless agreed otherwise in the lease, the property landlord is usually responsible for extensive or major repairs to the leased property. The landlord must:
- Maintain the property in working order.
- Cover expenses related to the upkeep of the property.
Unless agreed otherwise, tenants are by default responsible for routine repairs, refurbishments and fit-out of the premises.
Full repairing and insuring leases (FRI) are not common in Russia, although legally possible.
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.
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.
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.
Commercial lease agreements contain some peculiarities and requirements that must be complied with and without which the tenant's position may be weakened when trying to invest in a real property to develop its economic activities. Therefore, in order to avoid or mitigate the risk of having the lease agreement challenged in Court (provided that there is no inspection body to this effect) or, if applicable, under arbitration, there are some common clauses and conditions that the parties must adopt in the agreements for their own protection. Accordingly, the main points of attention when preparing a lease agreement for commercial purposes are:
- Written contract: although the Law does not establish a format for lease agreements (they may be verbal or written), considering the commercial purpose and possibility of future renewal, it is important that the agreement be written and executed for a fixed term.
- Rent: a fixed monthly amount is usually set forth (depending on the parties' negotiations and the activity developed in the leased property, it is also possible to establish a variable rent, based on the tenant's profits, for example), subject to monetary adjustment after a term (minimum) of 12 months and revision of the amount in the event of judicial renewal or upon common agreement by the parties. Should it be impossible to reach an agreement, the parties may, after 3 years as of the last adjustment in connection with the monthly lease, file a claim before the courts for the judicial revision). There is no limit for the rent amount agreed. The parties are autonomous to do business and the amount must reflect the conditions and place of the property and the activity to be developed therein.
- Assignment and subleasing: pursuant to Law, assignment and subleasing, in full or in part, depend on the prior written consent of the landlord, unless the parties otherwise expressly set forth in the lease agreement. In this specific aspect, lease agreements usually replicate the restrictions imposed by Law.
- Renovation and termination: regarding the commercial leases, the law grants tenants the right to file a compulsory renewal of the lease agreement, provided that 3 requirements are complied with: (i) the agreement is made in writing and with a fixed term, (ii) the lease provides a minimum term (uninterrupted term) of 5 years, and for this calculation the term renewals by way of amendments may be considered, and (iii) the tenant develops the same commercial activity in the property for a minimum and uninterrupted term of 3 years. Should all requirements be complied with, the lease renewal action must be filed within 6 to 12 months before the term of the agreement; otherwise tenant loses its right to compulsorily renew the lease.
As to termination events, this will depend on what has been provided for in the lease agreement. In any case, law determines that the lack of rent payment and an expropriation of the property are cases that may result in termination of the agreement. Likewise, the law provides specific events in which the landlord may oppose the compulsory renewal of the lease, such as, for instance, the need to carry out works in the property by determination of public authorities and that imply radical transformation therein; or in case the landlord starts using the property for himself or for the installation of a business with a goodwill that exists for more than one year, provided that the majority capital of such company is held by that tenant, his spouse, ascendant or descendant.
- Expenses and charges: tenants are usually liable for taxes and consumption expenses (water, energy, sewage etc.) related to the property, as well as for the cost of maintenance and conservation (painting, locks, water faucets, insurance, among others). However, landlord is responsible for bearing the cost and expenses related to the property’s structure and safety.
- Effectiveness clause: such clause expressly provides that the lease will remain in force in case the property is sold to a third party. If the agreement does not encompass this clause, in the event the property is sold during the lease term (after having observed tenant’s right of first refusal), buyer is not obliged to perform the lease agreement and may even unilaterally terminate the agreement, case in which tenant will have 90 days to vacate the property. Nevertheless, if the lease agreement (i) provides such clause referred to as “effectiveness clause”, and (ii) it is registered in the real estate record, the third party who bought the property must comply with the agreement until its final term (being also subject to the rules that assure tenant the right to file a compulsory lease renewal action).
- Licenses: in the commercial leases, both the landlord (in the capacity of owner) and tenant are responsible for obtaining and maintaining certain licenses that regulate the occupation and development of activities in those properties. Accordingly, it is very important to check how the obligations for obtaining and maintaining the licenses have been ascribed.
As a rule, construction licenses and those issued by the Fire Department are incumbent upon the owner, since they certify the real property’s conditions for a regular occupation, while the licenses for use and operation (also referred to as “ALUF”) are incumbent upon the tenant, since they strictly entail the permission for activities that will be developed in that property. Furthermore, in order for the tenant to obtain the ALUF, the owner must previously obtain the construction license and those issued by the Fire Department.
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 (i.e., 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 thereto.
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.
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
- Termination rights
- 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.
The Bulgarian law does not prescribe an obligatory form of the lease contact, but parties almost always execute it in writing. In order to guarantee his/her/its rights in case of transfer of ownership the lessee should enter the lease contact into the Land register. In case of transfer of ownership and if the lease contract is duly entered into the Land register, its terms and conditions will be binding for the acquirer.
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 on the basis of commonly used price indexes (like LIBOR and others).
Unless stipulated otherwise, the law generally allows for subletting real estate without the consent of the lessor (the lessee is responsible for any damage caused by the subtenant). However, parties often agree otherwise.
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. Agents of the lessor who are authorized only for managing the property, can represent the lessor and sign a lease contract for a period no longer than 3 years. For longer lease contracts these representatives will need additional authorization.
The costs associated with the ordinary use and depreciation of the real estate are payable by the lessee. However, 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.
There is a specific, and partially mandatory, legislation for commercial leases, which is codified in the French commercial code and is known as the ‘commercial leases statute’. It imposes notably a minimum duration for the lease to the landlord of nine years, the tenant remaining in contrast entitled to terminate the lease at the end of each triennial period unless the parties agree, under certain conditions, for the contrary.
The parties can freely negotiate the initial rent. It is generally a fixed rent, with a turnover-based complementary part for retail premises, notably in commercial centres.
The parties often provide that the rent (or as the case may the fixed part of the rent) will be indexed on an annual basis. However, under French law, an index is only valid if it is directly related to the object of the contract or the activity of one of the parties. The French Statistical Institute (INSEE) has created specific indexes which are deemed to be in relation with rental contracts for commercial and office premises (namely the commercial lease index (ILC) and the tertiary activities rent index (ILAT)).
Clauses which prevent indexation to go both ways are prohibited and may render null and void the whole indexation mechanism. Considering a recent bunch of strict court decisions in that respect, it tends to become common advice to avoid, more generally, any clauses which tend to control and frame the indexation of the rent when negotiating the leases.
In addition, if the lease provides that the rent is subject to indexation, the commercial leases statute allows each party to apply for a rent review for each time that, by reason of such indexation, the rent is increased or decreased by more than 25%.
Sub-letting and assignment of the lease:
Sub-letting is not allowed unless the parties have agreed otherwise, which is really a matter of negotiation depending on the commercial situation of the asset.
As regards the assignment of the lease, a tenant can always assign its lease to the purchaser of its business, under the commercial lease statute.
Renewal and termination rights:
A commercial lease may only be terminated or renewed by way of a formal notice of termination/renewal sent for or after the expiry date of the lease. In the event that no notice is served by either party for the expiry date of the lease, the lease is tacitly pursued until such notice is delivered.
If the landlord does not want to renew the lease when expired, it must pay the tenant compensation for the cost involved by the lease’s termination. This compensation may go as far as the price of the tenant’s business, notably for retail premises, if it is considered that the tenant shall lose its clientele in the process and has often the effect of forcing the landlord to allow the renewal.
The lease is renewed on the same terms and conditions as the previous lease for a term of nine years. The new rent is agreed between the parties or determined by the court on the basis of the rules provided in the commercial leases statute and/or the contract, depending on various conditions. It is commonly known that the rent amounts fixed by the court do not reflect the true market value of the premises and may even prove a lot lower. For retail premises, various rent-capping mechanisms based on the variation of the ILC may also apply and lower over again the rent amount upon renewal.
Costs, repairs and services charges:
Since a recent reform of the commercial lease statute enacted in 2014, the distribution of the charges and taxes under the lease may no longer result in the repayment, by the tenant, to the landlord of (i) the repairs and works pertaining to the structure of the building, (ii) taxes that are not involved by the specific use of the building or a service that is directly or indirectly beneficial to the tenant, (iv) management fees linked to the management of the rents and (v) for premises located in a real estate complex: service charges, taxes and other related fees that should be borne by other tenants or that are linked to vacant premises.
All other costs under the lease can be borne by the tenant. For sake of clarity, the landlord is under the statutory obligation to draw up a precise and exhaustive inventory of all expenses and taxes related to the lease.
It is commonly provided that tenants are responsible for all costs of the leased property except for those previously mentioned with exceptions depending on the quality of the asset and the negotiation power of the tenant.
The common terms of commercial occupational leases are set out below. This summary focuses on occupational leases rather than leaseback arrangements or ground leases (e.g. heritable building rights), which generally have substantially different terms.
German statutory law is very tenant-friendly and provides for the rent being a "gross rent" including most of the service charges, repair works etc. Therefore any material deviations from that framework may be regarded as null and void under German statutory laws. Therefore, there will normally not be a full repair lease in place but certain parts of the cost for the property remain with the owner. The following are the main parameters for a lease:
- Permitted Use
- Rent review/indexation, usually by CPI , usually no market review
- Service charge
- Termination rights
- Renewal rights
- Rental security
- Obligation to operate
For each of the above terms we have summarised below the key features and what, if any, regulatory controls apply.
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 not be more than between 10-15 years with extension rights, however, generally, there will be a shorter fixed term of 5 years with extension options for the tenant, sometimes even shorter leases giving tenants more flexibility.
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 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.
VAT: Generally, leasing is not subject to VAT, therefore the landlord has to opt for VAT if he wants to recover VAT he has paid with respect to investment on the premises. Residential use is not subject to VAT and the same applies to banks, insurances, certain financial institutions, in which case the landlord may not opt for VAT (and consequentially cannot recover it). The question whether the landlord may opt for VAT depends on the final use of the premises, therefore a use will generally be agreed in commercial leases, which 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 – those may only be used if the lease has a term of at least 10 years (with termination rights only for the tenant) and if the indexation does not interfere with other rent review mechanisms.
Types of rent reviews are:
- Rarely: 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 which must work upwards and downwards, though) at an agreed frequency (sometimes 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.
Permitted Use: There are regulatory controls. Leases will also usually restrict a tenant's ability to change the use of the premises. See above for VAT.
Repair: As set out above, there are regulatory restrictions of what may be imposed on the tenant in terms of repair. Generally, lease terms will be evaluated as standard terms where regulations are more restrictive than for individually negotiated terms.
Service charge: There are statutory service charges which may be recovered from the tenant as well as a few others (including certain maintenance and insurances and property management charges which must be capped).
Assignment: While assignment on the lease on the side of the landlord will automatically occur with change of title, the tenant will usually not be allowed to assign the lease to a third party with being released from its obligations. Contrary to common law jurisdictions, assignment generally is not a wide topic in leases.
Underletting: There are few regulatory controls. Underletting means that the landlord remains responsible for all obligations under the lease. 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 has a (mostly) contractual right to a new lease. Leases also usually provide that landlords can terminate the lease for cause if the tenant breaches its obligations. To evacuate a tenant, a court process will be required following termination. Under certain circumstances the court may stop evacuation if there is an overarching need of the tenant for the premises (often the case for residential tenants but may also be applicable for commercial tenants). Furthermore break rights may be agreed.
Renewal rights: Renewal rights may be contractually agreed, which is regularly the case. For residential leases there are only restrictive rights to terminate such lease.
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 are 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 re-enter 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.
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.