Growing commercial leasing

In keeping with the trend in real estate space, both local and foreign corporates have accepted the norm of leasing spaces to conduct their business activities in India. In metro cities, demand for commercial spaces have led to time renewal of existing lease/license as well as spike in request for additional space. The demand for leasing of residential spaces, in comparison, has been as robust.

What does one keep in mind while leasing a commercial space and how important is the role of a legal advisor and other service providers in relation to such an acquisition? We have tried to sum up some of the key factor contributing to the development of this leasing sector and some of the sector specific services required.

Nowadays, it all starts with getting on board an IPC (international property consultants), preferably a leading one who would play an important role in the entire acquisition process. From identifying the property to working with both, the acquiror and the owners along with their legal is where IPC’s have excelled and help close complex deals.

Upon identifying a property, the parties would move towards execution of the preliminary documents (e.g. most used letter of intent (LOI)) to seal the deal subject to the outcome of legal and technical diligence. Usually properties are offered on lease/license basis, most of the owners in the state of Maharashtra usually prefer the license arrangement,  since it carves out the multinational and private limited companies, with a paid-up share capital of over rupees one crore, from the provisions of the Maharashtra Rent Control Act, 1999. This approach is also cost effective for the acquiror from a stamp duty perspective.

Thereafter, legal experts are needed to draft such preliminary documents by recording the intention of the parties and by drawing the timelines till definitive documents are executed and registered. It is important to legally scrutinize and verify the title of the property that is to be acquired. The entire framework on which the deal stands is subject to the outcome of the legal due diligence and other diligences, depending on a case-to-case basis.

The essence of due diligence is not limited to verification of the property title but to ascertain if the acquirer is eligible and if its use is permitted as per the applicable laws governing such a property (for e.g. use of office spaces in an IT building).

Simultaneously, the legal representative would participate in the negotiations between the parties, recording the commercial understanding between the parties and finalising the same in definitive documents (which would be either a lease deed, sub-lease deed or leave and license agreement).

Depending on the outcome of the due diligence, both the legal and technical representatives, where it is carried out by the appointed representatives of the acquiror, including verifying the admeasurement of the property as disclosed by the owner, parties would decide on the next step. If the outcome of the diligence is positive, parties would obtain necessary approvals for the proposed acquisition from lenders/banks (if the property has been encumbered) and /or prior NOC / permission from relevant statutory authority (if land/building has been leased by any authority such as MMRDA, CIDCO, MIDC, etc.).

In addition to the above, parties may require NOCs from other relevant local/state authorities, such as income tax authorities for no proceeding / dues pending against the owner from municipal authorities with respect to payment of property tax.

The legal representative would have the definitive document to record, inter alia that the parties have reached agreement in terms of the tenure, rent, fees, taxes, deposits, charges (maintenance, parking, common area, etc.), lock-in, insurance, indemnities, sale/transfer/mortgage, right of acquiror to further assign/sub-let, right of first offer or right of first refusal for additional space in the building or on the sale of the property by the owner, termination, etc. based on requirements of the parties and on case to case basis.

Finally, when drafts are approved, all requisite approvals are obtained and conditions are fulfilled as per the preliminary documents, the parties would proceed to execute and register the document post adjudication and payment of requisite stamp duty. The role of the legal representative would end here. However, the IPCs would assist the acquiror with its fit-out and /or warm shell conditions as per the terms of the definitive document with the help of the owner. It is the commencement date of the lease /license that the occupation of the acquiror is finalised and that the property is available for commencing its business activities.

In all the above, it is the IPCs and the legal representative who would take over and manage the transaction till completion, driving both the parties (the owner and the acquiror) to understand and provide viability on the commercial and legal aspects of the transaction.