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Feb 22 2010

Rera's commercial lease form unlikely to cover market demands

A standard form commercial lease issued by the Real Estate Regulation Agency (Rera) may not be detailed enough to cover the unique demands of the majority of commercial landlords and tenants, says a legal analyst. "Commercial leases tend to be more technical and this often requires a unique document tailored to the specific property with a number of specialised terms," Brent Baldwin, an associate with Hadef and Partners, told Emirates Business.

According to him, some common clauses that tenants are requesting in the current market include rent freeze, right to terminate lease early based on market conditions and rent-free periods. The law firm is handling a number of landlord-tenant disputes.

"Many of these have generally (but not solely) arisen as a result of market conditions. However, landlords are taking a pragmatic view offering 'rent holidays' in order to keep the tenant in the premises," said Baldwin.

Is Rera providing a common commercial lease agreement to landlords, or are they allowed to draft their own?

We are aware there have been discussions in the past about developing a suite of standard form property documentation, but such discussions have generally related to property sale and purchase agreements rather than commercial leases. Although there is a commonly used standard form residential lease, this is not compulsory. Commercial leases tend to be more technical, and this often requires a unique document tailored to the specific property with a number of specialised terms. A Rera -issued standard form commercial lease may not be detailed enough to cover the demands of the majority of commercial landlords and tenants.

The more common situation (especially in the case of a landlord that owns a number of commercial properties) is for the landlord to have its own specialised commercial lease that has been prepared based on advice of the landlord's property consultants, lawyers and valuers, and which is tailored to the landlord's specific needs. Landlords and tenants generally negotiate the terms of such a lease with external advice.

Good advice is necessary, because unlike many contracts that may only last for a relatively short period, a commercial lease can run for many years and this increases the potential for differences of opinion.

Taking appropriate advice before a lease is signed will help identify potential future problems and help give peace of mind to the concerned parties.

Can tenants seek changes in Rera contracts or drafted contracts?

The ability for the tenant to negotiate changes to a lease is really dependent upon how keen the landlord is to secure that tenant. For example, if the lease is of a particularly high value, the tenant is an "anchor tenant", the lease is for a very long term or this particular tenant is important to the landlord for other reasons this can have an impact on the tenant's ability to negotiate more favourable lease terms.

In addition, if there is a surplus of commercial space in the market (as we are seeing currently), landlords may be more willing to negotiate as it can be easy for a tenant to rent different premises.

There is also nothing to prevent changes being negotiated to the lease during the term of the lease, provided both parties consent and record the amendment in writing. Obviously, it is more difficult to do this once the lease has been signed, but if circumstances have changed, there are situations where the parties will agree to this. For example, the parties may negotiate lease extensions, additional carparks or office space and other provisions.

Are landlords actually looking to enter long-term deals with certain specific clauses? What are these new clauses?

Landlords generally prefer tenants to accept their standard form lease without amendment, but if a change is requested, in our experience, the landlord will generally at least consider it. Some common clauses tenants are requesting in the current market include rent freezes, rights to terminate leases early based on market conditions and rent-free periods.

Are you handling any landlord-tenant disputes? What is the major reason for that?

We are handling a number of landlord-tenant disputes and many of these have generally (but not solely) arisen as a result of market conditions. Some tenants for example, who have signed leases at the height of the market with high-rental and long-lease terms are finding it difficult to meet their obligations, usually because their business has suffered during the economic downturn.

We have found some landlords are taking a pragmatic view of these situations and agreeing to variations to the lease in order to keep the tenant in the premises, for example by "rent holidays" (possibly with a chance to recoup that rent when business picks up), more flexibility regarding assignment of leases or letting tenants out of a lease early on agreed terms.

We have also found some landlords consider it better to accept a temporary reduction in income as opposed to being left with empty premises because the tenant has become bankrupt or otherwise ceased trading.

Naturally the Rents Committee remains the final option for dealing with any disputes but where the problem stems from the current market conditions we have found that a flexible approach can result in a "win-win" solution.

Other disputes have arisen because of differences over lease, misleading representations in order to convince a tenant to sign a lease or failure by a landlord to supply the premises or the surrounding area to the required standard.

By Parag Deulgaonkar

© Emirates Business 24/7 2010

© Copyright Zawya. All Rights Reserved.


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