NEGOTIATING A COMMERCIAL LEASE

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Real estate leases are a vital piece of any business’ costs, and there are many risks. A lease is a legal contract that should be examined closely and understood completely. The lease term could be varied from one year, ten years, or twenty years. The longer the contract term is, the more legal-binding it must be. In fact, there have been cases in which two parties have filed lawsuits against one another because their contract was not legal-consciously made. This article addresses issues that need to be taken into account even before signing a commercial lease.

Is the lessor legitimate for rent?

The most common mistake that many entrepreneurs make is not verifying the lessor’s status. In a lease, legal-related information of the two parties should be clearly stated. Attention must be particularly focused on the legality of the rental location and the owner’s background check must be carefully done. This process is extremely important in order to avoid unseen issues or fraud that could lead to possible financial damages for the lessee.

In general, lessors can be either an individual or a legal entity. If the lessor is an individual, they must be able to present the certificate of land use right, the bricks-and-mortar ownership certificate and assets attached to the land. If the lessor is a legal entity, besides the above-mentioned documents (which could be replaced by a Decision issued by the State permitting the legal entity to rent the allocated land to businesses), this legal entity needs to show their Business Registration Certificate where leasing activities are authorized.

Escalation Clause

Another tough issue in commercial leases is “escalation clause”. This clause involves the base rent increases over the term of the lease. A fixed price is often applied for a short-term leasing contract, which is usually the first lease that many entrepreneurs sign. When the business grows, entrepreneurs are likely to consider signing a longer-term contract. In that case, escalation in price is commonly used by the lessor to pay for the building cost increases or inflation. While they are very common and complete legal, lessees have to be very careful with these clauses as they can be very costly. The percentage of the increase in price over each period of time must be specified clearly and completely understood by both parties.

Besides, lessees should also consider negotiating a large period of time for renovating or remodeling the building and, this time should not be added on as a rent. When lessors singly terminate the contract, they have to compensate lessees for these renovation costs.

Deposit

Deposit clause is another issue that tenants need to watch out. This clause is an indispensable part of lease agreements in Vietnam. To protect yourself as a tenant, the contract must specify the penalty lump sum that the tenant will receive in case the landlord revokes the contract before it comes to its end. Also, it is important to define conditions in which the tenant can receive the deposit total amount.

Compensation and penalties

Penalties and damages are indispensable when drafting a contract. This clause, however, is negotiated differently in each contract, depending on the characteristics of each business activity.

In brief, when drafting and negotiating a lease, both parties should pay attention to the following points:

(i). The lessor’s status for rent

(ii). Escalation clause

(iii). Deposit

(iv). Compensation and penalties.

Depending on which role you are playing, together with other relevant factors, the contract terms should be adjusted accordingly. To get the best advice on your lease, please contact our lawyers through website: unilaw.vn or call +84912266811.