Long-term lease versus short-term 'leave and licence' — a guide to renting out your commercial property
Investors in real estate, especially in commercial property, are always concerned about rentals. But there are a number of other factors they should look into.
To start with, they have to decide the period for which the property must be let out — a shorter term of three-five years or a longer duration of 20 years. "Most tenants prefer a short term lease. But some, such as banks, prefer longer duration terms," a real estate consultant says.
Determining the lease period is important, as this decides the legal protection you get. If the property is leased for up to five years, the agreement is termed as a 'leave and licence'.
Property experts say in case the tenant does not vacate the premises after the expiry of the term, he must pay you double the actual rent for any extra period. Also, you can approach the court and get an eviction order. Since the tenant is not protected by the Rent Control Act, he cannot contest the order. If he does not cooperate, you can approach the police and get the possession of your property within six months.
However, if the agreement period exceeds five years, it is termed as a 'lease'. In this case, the tenant is protected under the Rent Control Act. And, if he/she does not hand over the premises at the end of the term period, your only option is to seek a legal recourse. "You may face problems in getting back the property under a lease agreement. Legal proceedings are time-consuming and not feasible.
The stamp duty payable for registering your agreement would also be different in both circumstances. For instance, for a leave and licence agreement, it would depend on the sum of the annual rent and deposit.
The maximum duty payable will not exceed `50,000. In case of a lease agreement, it is linked to the market value (MV) of the property. So, for a five- to 10year lease, it would stand at 25 per cent of MV, and for a 10to 29-year lease, it would be as high as 50 per cent. "The difference in the stamp duty is quite large. Tenants prefer the leave and licence option as the duty is borne by them," says Mehta.
Legally, a short-term lease is amore viable option, but a long term lease comes with its own share of benefits. Tenants invest in the furniture and fittings of the place. They want to amortise these costs during the lease tenure. Therefore, a lease of say three years is not preferred.
For you, a long term lease will ensure your property does not stay vacant for even a day and you don't have to search for a new tenant after regular intervals. Also, a property with an ongoing lease is highly liquid. "The longer the lease, the better it is for a buyer. He can recover his/her capital faster," explains Mehta.
However, in such cases, the rent will be slightly lower than the market rate. Also, even after escalation (the revision in rent after a stipulated period), it may be lower than the existing rate.
Therefore, a middle path is advised. A nine-year lease with a lock-in of three years is the best. Just be sure to word it right. A lock-in is a period when the agreement is not revoked by either party. You can make a mention in the agreement that extensions will be effected through separate agreements after the lock-in. And, the stamp duty will be paid on the same. Or, make an agreement for three-five year period and sign a 'side letter' for the extension. The document is not legally binding, but it is a moral agreement between the two parties.
Tenure Advantages Disadvantages
Short-term (3-5 years) If tenant doesn't vacate premises after Process of searching for new tenant leave and licence term expiry, get property back in six can be cumbersome and costly agreement months by approaching authorities Stamp duty relatively lower, capped Can lose revenue if unable to find a at `50,000 tenant for longer durations Can plan to use property after Expensive to maintain vacant tenure ends property Long term Don't have to search for new tenants If tenant doesn't vacate premises (15-20 years) frequently after expiry of term, only option to lease agreement seek legal recourse No loss of revenue due to vacancy Stamp duty can be upto 50 per cent of property's market value Easy to sell off property with Rent lower than market rate ongoing lease
