Legal Agreements

What are the Pros and Cons of Commercial Lease Agreement in India?

calendar06 Feb, 2021
timeReading Time: 4 Minutes
Pros and Cons of Commercial Lease Agreement

When you look for a commercial property, you may wonder if it would be worthwhile to lease the space. However, in the beginning, when you think about leasing it, you surprisingly miss the trivial aspects of leasing work, and there it causes errors in all the coming events. Therefore, it is safe and wise as an investor to be careful of qualifications and demerits to avoid any obstacles and enjoy uninterrupted transition, where you can protect your interests. Commercial lease agreement is mandatory to lease a property in India.

Commercial Properties for Leasing

A landlord gives a property to any tenant in a commercial lease agreement, primarily to conduct a business activity. Commercial properties used for lease include office space, retail space, restaurants, industrial buildings and warehouses.

However, it also includes some other properties, such as none of the places for residential purposes such as self-storage facilities, recreational facilities, medical clinics, etc.

What are the Advantages of Leasing with Commercial Lease Agreement?

Advantages of Leasing with Commercial Lease Agreement

Listed below is the advantages commercial lease agreement in India

Preservation of Ownership

In a lease, the lessor transfers all risks and makes a contingent award for ownership to the lessee without transferring ownership of the specified property. Therefore, the asset is owned by the lessor.

Benefit of Tax

As the asset owner lies with the lessor, benefit of the tax-benefit is claimed by the buyer to receive concessions under the Income Tax Act.

Growth Potential

The demand for leasing is constantly increasing as it is one of the cost-efficient forms of financing. Furthermore, by leasing, economic growth[1] can be maintained even during the depression of the same. Thus, given this, leasing may lead to greater growth than other forms of business.

Quicker Returns

By leasing a property, the lessor can get quicker returns in the form of lease rentals than investments in other projects with a more extended period of time to earn returns.

Capital Appreciation

Leasing is beneficial to the property owner because the underlying property appreciates in the price continuously over time. As a result, the lessor may for some time take advantage of the capital appreciation of the support.

Gain of Salvage Value on the Asset

Salvage value is the price of an asset that is after depreciation, at the end of its useful life. The lessor, being the support owner, can realize the settlement value at the end of the tenure of the lease. You can enjoy rental returns during the rental period and later the salvage value.

Disadvantages of Leasing

The points discussed hereby are the demerits of commercial lease agreement, which are as follows:-

Long-Term Investment

Recovering the lower cost of a property by a means of leasing such property for rentals on the capital layout plan will definitely take a long tenure period. Therefore the rent value of such property received by the lessor shall not show the actual gain because of some inherent risks.

Management of Property and Cash Flows

The leasing out of any property can touch the success surely depends on the maximum usage of cash flows, which somehow gets difficult to manage and control due to unexpected fluctuations in markets. Thus, in reality, you must possess the skills and the technique to manage the asset for more and more efficient cash flows.

High-Risk of Obsolescence

In keeping an eye’s on the knowledge of the market   changes on preferences and needs, there have been findings in the drastic shift in infrastructure and outlook of properties. Being an owner of assets, the lessor might bear the risks of obsolescence on wear and tear or on outdated and rapidly changing technologies.

You must be familiar with the market updated trends to get rid of such difficulties and can easily avoid the risks of obsolescence by making investments in updated trending commercial properties which gained traction since times and not let you down.

Price-Level Changes

Generally, agreement once executed, cannot be changed in its tenure. Despite the increase in the property price due to inflation, the lessor receives only fixed rent based on past costs.

Damage of the Asset

On leasing out any property for a while, its ownership cannot be transferred. Its rights of possession could be shared indeed. Thus, it might be a possibility of using such asset with a careless attitude by the lessee which further results in non-reusable of the asset after the expiration of primary lease tenure. 

Commercial Lease Agreement versus Rental Agreement

Both the commercial lease agreement & rental agreements have their inherited merits and demerits.

  • Rental agreements empower the landlords to rent out their properties that not desirable for the long term. Rental agreement has the advantages for the landlords to re-draft or negotiate the terms of an agreement on a quick increase in rent value. It also gives benefits to tenants who stay in a certain place during a transition or they are unsure for duration to stay and uncertain about how long they would live in certain specific areas. 
  • The Commercial lease agreement is advantageous to a landlord by providing the stability and guaranteeing a long-term income. Lease agreement is profitable for a tenant as it locks in the rental amount and length of the lease period which further could not be changed even the property or rent values rise next month.

Both the leasing and monthly rental agreements have their advantages and disadvantages. The rental agreement allows landlords to rent properties that may not be desirable to long-term tenants. Commercial lease agreement is also beneficial when the rental volume can increase quickly, allowing the landlord to re-apply the terms of the month-to-month agreement.

Concluding Remark

There is no doubt, that the renting commercial real estate or retail property is a good investment strategy. However, as a lessor, you need the skills necessary to work extensively with tenants. Therefore, understanding the types of leases, qualities and demerits that you have as an underperformer can increase your chance of success in the real estate sector.

In addition, knowing the benefits and implications becomes an essential part of a commercial lease agreement. You can disclose the facts and avoid any interruption while the property is leased to the lessee. Kindly associate with the Corpbiz expert to know more about the commercial lease agreement in India

Read our article:What are the Important Facts Related To Commercial Lease Agreement?

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