What are the things I need to know before signing a Commercial Lease Agreement?

When you decide that you’d want to open a physical store, have a work office or find a place to store your company’s inventory, you may choose to lease a property.

A commercial lease is a contract between the landlord and the business to lease a property for business purposes.  It is a complicated document because of the legal terminologies used in it. A copy of a commercial lease can be found here.  It is different from a residential lease as a commercial lease is used for the property being leased for non-residential purposes.

Before signing a commercial lease, it is important to understand the following terms of a commercial lease agreement:

1. The parties

The lease will identify the landlord and the tenant in the agreement. As a tenant, you can either take the lease in your personal name or in the company’s name. It is important to ensure the legal names of the parties are correct and that it is clear who is involved in the lease – as companies can be structured in complex ways.

Depending on whether the lease is in your name or business name, the lease agreement should include both parties:

• Name / Business name
• HK Identity card number/ Business Registration number
• Correspondence address
• Contact telephone and fax number

You should check the Land Registry to ensure that first, the ‘landlord’ is indeed the registered owner of the property and second, that the property is not mortgaged. If the property is mortgaged, you must check to ensure that the bank has agreed to rent the property out.

2. Description of the Property

In addition to the details of the parties, the lease will identify the property as well. You must ensure the property address and the total area being leased to you is correctly mentioned in the lease.

You should check whether the land is suitable for the purpose it is rented for with the Town Planning Board. For example, if you would like to open a restaurant, you should first check whether the property can be used for the intended purpose.

3. Rent

The lease agreement should specify the:

• Rental amount
• Due Date for payment (by month, by quarter or by year)
• Acceptable Payment method  (by cash, cheque etc.)
• Any fees for late-payments

In Hong Kong, generally, rentals are paid monthly and in advance by the tenant.

4. Lease Term

Generally, a lease creates a fixed-term tenancy for more than 3 years. It is important that your lease agreement clearly specifies the start date and end date of the lease.

5. Rates

Rates are one of Hong Kong’s indirect taxes levied on properties. The lease should specify whether the rates are paid by the landlord or the tenant, but generally, it is the responsibility of the tenant to pay the rates. Rates are currently charged at a 5% percentage of the annual rent of a property.

6. Property Tax

The landlord is usually responsible for paying the property tax, unless stated otherwise in the lease agreement. The property tax rate is currently at 15%, and the landlord will have to pay 15% of the annual rent as tax to the Government.

7. Deposit

The lease will specify the amount of security deposit (e.g. equivalent to 2-3 months rent) and the payment method (e.g. in cash, cheque), when and how the deposit will be returned by the landlord to the tenant.

Also, look for any terms that may allow the landlord to forfeit the security deposit in the event of termination of lease due to the tenant’s default. As a tenant, you can negotiate this clause to require the landlord to make deductions from the security deposit to the extent of loss/damage actually suffered by the landlord.

8. Insurance

Generally, landlords are not responsible for insuring the building or reinstating in case of damage or destruction. However, the landlords may require the tenants to purchase comprehensive insurance regarding third-party liability against any person or property on the premises.

9. Rent Free periods

The landlord may offer a grace period for the fitting-out of the premises. If there is a rent-free period, it should also specify who is responsible for paying expenses such as management fees and rates in that period.

10. Rent Review Clause

Mostly, a fixed amount of rent is agreed upon for the entire duration of the lease. However, a rent review clause may allow annual/periodic changes in rent by references to published indexes such as the retail price index or according to the market rate. In the lease deed, the parties must agree on the mechanism for determining the increase in rent to avoid disputes.

11. Option to Renew

At the end of the lease, an option to renew confers on the tenant a right to continue to rent the property on the original terms of the lease.

12. Termination Clause

A termination clause will usually state the restrictions and conditions that allow either party to bring an early end to the lease. A lease should specify the minimum period of notice that a party must serve to the other when terminating a lease to give sufficient time to move out of the premises. Therefore, it is important to check how much notice period is required for both the parties to terminate the lease; and the conditions under which either party may be entitled to terminate the lease.

13. Repairing Obligation

The terms of the contract determine the responsibility of the landlord and tenant with respect to repair and maintenance. Generally, the landlord is responsible for external and structural repairs and maintenance, and the tenant is responsible for internal and non-structural ones.

You should carefully inspect the condition of the rental property before signing the tenancy agreement. If you find any damage, you should formally notify the landlord, or ask them to repair the damage before handing over the property.

14. Facilities of the property

For some tenants, they may require some essential facilities in order to run a certain type of business. For example, if a prospective owner wants to run a restaurant business, they need a specifically designed space to be a kitchen, which would require a ventilator system. Hence, the tenants need to negotiate these terms to be included as part of the lease.

Other fees like management fee or air-conditioning fee are usually specified in the agreement too, but the landlord reserves the right to increase such fees.

15. Stamp Duty

Generally, stamp duty is shared between the landlord and tenant. It is payable depending on the rent and the term of the lease.

16. Signs

Check the lease agreement that it does not prohibit you from installing signs for your business.

Do I need a lawyer?

Whilst it is not a requirement to have a lawyer, it is strongly advised for you to have your lease agreement reviewed by a lawyer.

Commercial lease agreements can be complex and long. As discussed above, there are many terms and clauses that should be included in the lease. Lawyers can ensure the clauses are drafted satisfactorily, so they would have a binding legal effect on both parties and are enforceable.

Parties represented by a lawyer may have their legal interests better protected. This may help in preventing potential disputes, as the lawyers will anticipate these issues beforehand and allocate the liability of the parties accordingly in the lease.

Often a lease is drafted by a landlord or their lawyer, so the contract may be worded more favourably to the landlord. As a tenant, having a lawyer will help you negotiate for better terms and conditions in the lease, and ensure that the clauses are fair for both parties.

Additionally, commercial leases may also run longer (at least 3 years), so the landlord may require a neutral person, usually a lawyer, to act as guarantor on behalf of the tenant. This ensures that the tenant will perform all of their obligations under the lease, for example by timely payment of rent.

Key Takeaways

• a contract between the landlord and the business to lease a property for business purposes.
• The basic requirements of the lease include the parties, the subject, rent & duration, but there are other clauses that you may want to include in your lease too.
• It is advisable to consult a lawyer to understand the terms and conditions of the lease.

Bibliography

1. Estates Agents Authority, “Notes on Signing A Tenancy Agreement”:  https://www.eaa.org.hk/consumers/doc/tenancy.pdf

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