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Negotiating Key Office Lease Provisions (India)

by Vineet Nalawalla, Nainaaz Irani, and Rhea Redkar, Veritas Legal, with Practical Law Real Estate

Law stated as of 01 Jul 2024 • India

A Practice Note explaining the key provisions typically found in an office lease for a multi-tenant commercial building in India. This Note provides tenants with an overview of commonly negotiated lease provisions including rent, use, tenant rights and options, ongoing lease obligations, and defaults and remedies.

Factors Affecting Lease Negotiations Permitted Uses

Rent and Other Financial Obligations

Base Rent Additional Rent

Tenant’s Negotiated Rights and Options

Fit-Outs and Alterations Lock-in Period Landlord Services

Assignment and Subletting Signage

Extension or Renewal Rights Additional Space Option Purchase Option Termination Option

Tenant’s Ongoing Lease Obligations

Security Deposit Indemnities Force Majeure

Compliance with Laws Repairs and Maintenance Insurance

End of Term Restoration

Tenant Defaults and Landlord Remedies

Tenant Defaults Landlord Remedies

Tenant Remedies for Landlord Defaults

Landlord Defaults Tenant Remedies

Limitation of Liabilities for Landlord and Tenant

A company leasing office space in a foreign jurisdiction must understand the typical lease provisions and local market customs to negotiate the lease effectively. A tenant that can combine this knowledge with a certain amount of negotiating leverage can save money throughout the lease term and achieve the flexibility it needs for its business.

This Practice Note discusses the material clauses generally found in a typical office lease in a multi-tenant office building located in India. This Note also provides tenant guidance for negotiating those clauses effectively. In particular, this Note looks at typical lease provisions concerning a tenant’s:

  • Rent and other financial obligations.
  • Use of the premises.
  • Negotiated rights and options.
  • Ongoing lease obligations.
  • Defaults and the landlord’s remedies.
  • Remedies for the landlord’s defaults.

There are many steps the tenant must take when looking for the right space and before signing its lease. For guidance on the leasing process in India, see Practice Note, Foreign Companies Leasing Office Space in India.

Factors Affecting Lease Negotiations

When negotiating a lease, the tenant should consider several factors that typically impact its ability to effectively negotiate the lease agreement, including:

  • Local laws.
  • Local industry customs.
  • Negotiation leverage.
  • The tenant’s creditworthiness.

The tenant should consult with a local lawyer and a sophisticated tenant broker to understand the applicable laws and customs in India. The tenant’s negotiating leverage depends on a combination of elements, including:

  • The location of the premises.
  • The availability of premises in the building.
  • The state of the rental market.
  • The size of the premises compared to the size of the building.
  • The lease term.
  • The tenant’s financial strength and reputation.

Key provisions of the proposed lease are often negotiated and agreed on at the letter of intent (LOI) stage, including rent, security deposit, lease term, fit-out period (that is, the rent-free period for carrying out interior works), and exclusivity period. Typically, in India, during the exclusivity period, the tenant carries out legal and technical due diligence for the commercial space and the landlord is restricted from negotiating with third parties for the identified space during the LOI stage.

Permitted Uses

In India, commercial leases typically permit the use of the premises for business purposes. A tenant must effectively negotiate the clauses pertaining to use, as those clauses are some of the most important provisions of a lease and tend to have long- term ramifications. Tenants should demand clarity from the landlord regarding the permitted uses of the premises and uses that can be outright restricted to avoid misinterpretation or ambiguity. Usually, the terms “business purpose” or “office purpose” are defined in the LOI or the lease and there is seldom any ability to later negotiate these terms.

Along with the agreed use, it is common for tenants to be permitted certain ancillary uses, such as operating a pantry or kitchen space for the benefit of persons working in the premises. Similarly, a tenant’s access to other parts of the building, such as the roof, basement, storage, or other building areas, is best negotiated in the lease and can be permitted depending on the nature of the business and the need for having access to these common spaces.

Rent and Other Financial Obligations

Negotiating rent is one of the most important factors in commercial leases for both parties. Leasing a commercial space is a substantial financial commitment for any business. Rent for office space typically includes base rent and additional rent.

Base Rent

Rent or license fees are calculated based on the area of the premises. The per square foot rental rate for a premises is typically determined by the landlord depending on the location of the building, demand for the premises, construction costs, and prevalent rate of similar premises in the same locality.

Since the base rent is linked to the area of the premises, the tenant should ascertain the exact area by carrying out a physical survey of the premises.

Additional Rent

In addition to base rent, the tenant usually pays other charges that fall under the broad category of additional rent. Depending on the terms of the negotiated lease, the tenant may pay additional charges for various items, including:

Tenant’s Proportionate Share

A lease for commercial space in India requires a tenant to pay CAM charges and electricity and water expenses for common areas in proportion to the area occupied by the tenant. The landlord maintains a separate book of accounts for these charges. The charges are calculated monthly and a consolidated statement is provided by the landlord to the tenant. Reconciliation of accounts is generally included in leases to adjust for any excess or shortfall in these charges. A tenant can require a landlord to provide supporting evidence for any excess CAM charges.

Common Area Maintenance Charges

CAM charges are payable by the tenants in a commercial building for maintaining common areas, such as the lobby, parking lot, public washrooms, elevators, building security, and any other building common area. These charges are annually calculated for the entire building and shared on a pro rata basis by the tenants in addition to the tenants’ monthly base rent obligations. In certain cases, additional CAM charges are levied when a tenant‘s business operations extend beyond normal business hours.

Specifications related to the CAM charges are usually negotiated and included in the lease and the tenant pays the agreed amounts to the landlord. CAM charges can be assessed on a fixed or variable basis. The lease should clearly state whether the tenant pays fixed or variable CAM charges, including for variable charges the factors and proposed annual increases. Capital improvements to the commercial building are typically excluded from CAM charges.

Property Taxes

Property taxes are statutory levies payable for the entire building. Payment is required on a pro rata basis by the tenant or landlord of an individual unit in the building. Depending on the lease, the levied property taxes are paid by either:

  • The tenant to the landlord.
  • The landlord, who factors property taxes into the rent.

Landlords prefer to factor property taxes into the rent, as the landlord is ultimately liable for paying property taxes. A default in payment by the tenant can result in a lien on the landlord’s property.

Electricity

A tenant is responsible for payment for the electricity consumed in the premises as determined by applicable utility rates. In certain states, one electricity meter measures power consumption for the building. A landlord-provided submeter then determines the electricity consumption for the premises. However, electricity metering changes in India from city to city and the provider in that city.

In most commercial buildings, the landlord typically provides 100% backup power for the premises through a diesel generator. The tenant pays for the consumed diesel fuel costs plus a certain markup in certain cases. The charges are based on the meter reading for the backup power provided for the premises.

Other Utility Charges

A tenant pays heating, ventilation, and air conditioning (HVAC) consumption charges for provided air conditioning based on the chilled water consumption metered through a BTU meter. Typically, one BTU meter measures consumption for the building. A submeter then determines consumption for the individual premises.

The landlord generally makes water available for the exclusive use of the tenant within the premises at all times. The tenant pays for the supplied water on a pro rata basis.

Goods and Services Tax

In India, GST is levied by both the central government under the Central Goods and Services Tax Act, 2017 (Central GST) and the applicable state-level GST act (State GST). Central GST applies to the interstate supply of goods and services. The applicable state government levies State GST on the same supply.

For any supplied goods or services, the receiver or supplier must pay the GST at the applicable rates. Lease rentals and utility charges are subject to GST, which the tenant generally pays in addition to the rent and utility charges.

Tenant’s Negotiated Rights and Options

The tenant’s ability to negotiate certain rights and options can provide it with considerable flexibility throughout the lease term. A tenant should consider its business needs when negotiating its rights and options in the lease. If the tenant plans to use

the premises for other than general office use or the business is expected to expand during the lease term, the tenant should negotiate for the rights and options it anticipates needing and include these in the LOI.

Tenant’s rights may include any of the following:

Tenant’s options may include any of the following:

A tenant should be aware of any rights or options that are modified (or rescinded) if the tenant:

  • Assigns its lease.
  • Subleases all (or a portion) of the premises.
  • Defaults (one or more times) during the lease term.

Fit-Outs and Alterations

Initial Fit-Out

Fit-outs or alterations in the premises are generally carried out by the tenant based on the requirements of its business. However, in certain cases, the landlord undertakes the fit-out on the instructions of the tenant. Fit-out-related provisions are captured in the lease and not a separate document.

Before commencing any fit-out work, the tenant is required to submit the proposed plans for interior work for the premises to the landlord for approval. This is to ensure that any fit-out work does not affect the structural stability or elevation of the building and there is no violation of any building laws.

The lease fit-out clause sets out what the tenant can do and what is prohibited. A typical clause prohibits any kind of structural alterations or any work that alters the main façade or standard elevation of the building. At times, the landlord also provides a fit-out guideline or manual that must be adhered to when carrying out the fit-out work. The fit-out guideline or manual sets out detailed provisions on the fit-out work, such as when the work can be performed, safety measures to be followed by the workers in the premises, and similar provisions.

In certain cases, before beginning any fit-out work, the landlord may request an additional security deposit from the tenant that is returned (with or without adjustment) on completion of the fit-out work. The landlord holds the security deposit to secure the property against any violations of the fit-out guidelines or applicable building laws. In case of any violations, the landlord also reserves the right to terminate the lease or receive monetary damages.

Alterations During Lease Term

During the lease term, the tenant must maintain the premises at its cost, which includes day-to-day maintenance and all minor repairs within the premises. Structural changes or required repairs, such as leakages, cracks in the columns, or similar repairs, are carried out by the landlord. The tenant does not need the landlord’s permission for making minor repairs, such as repainting the premises, laying or repairing floors, or similar minor repairs. However, major repairs or renovations do require prior permission from the landlord.

Lock-in Period

A lock-in period is a period where the tenant, the landlord, or both are restricted from terminating the lease. No formal legislation governs lock-in periods. Rather, a lock-in period is a contractual obligation that binds one or both parties.

The lock-in concept comes from the underlying fact that both parties have entered into a lease and neither party should suffer a loss from its early termination solely at the whim or desire of the other party. Usually the landlord is locked-in for the entire lease term, with the only exception being for non-payment of the rent by the tenant or a material breach of the lease. The lock-in period for the tenant can be for the entire lease term or at least a major part of the lease term.

The inclusion of a lock-in clause is negotiable but fairly standard in commercial leases.

Landlord Services

Typically, under lease agreements in India, apart from providing the property on a lease basis, no additional services are provided by the landlord. Recently several co-sharing companies have started operations in India. These companies, in addition to subleasing or licensing the premises to a tenant, provide housekeeping, front desk and concierge services, and similar services. The cost of these additional services is generally included in the service fees or licensee fees payable by the tenants.

Assignment and Subletting

Provisions for assignment and subletting a premises are generally negotiable. A lease assignment transfers the tenant’s rights and obligations to the premises to a third-party assignee that takes the tenant’s position. Lease agreements in India generally do not permit a tenant to assign the lease to a third party unless specific assignment or transfer provisions are negotiated. However, the lease might permit a full or partial assignment of the premises to a subsidiary or a group company of the tenant after giving prior written notice to the landlord.

A tenant breaching an assignment provision in a lease is a material breach of the lease that can lead to the landlord exercising a termination option. If an assignment is permitted under the lease agreement or by prior consent of the landlord, the outgoing tenant is responsible for all acts or omissions both before and after the assignment. The incoming tenant is responsible for all liabilities after the assignment.

A sublease is essentially a new lease arrangement between the tenant (sublessor) and the third party (sublessee) for either a portion of or the whole premises. Landlords are generally averse to allowing a sublease unless the sublessee is an entity that controls the tenant. The original tenant retains all responsibilities, duties, and obligations as set out in the lease, even if the breach is by a sublessee.

Conditions to Landlord’s Consent

Typically, under Indian leases where a landlord’s written consent is required for a tenant to transfer, assign, or sublease the premises, the landlord has flexibility to grant consent with or without conditions. Lease agreements are generally silent on the conditions on which a landlord may grant its consent. Nonetheless, some leases qualify the term “consent of the landlord” with a statement that “such consent shall not be unreasonably withheld.”

Tenant’s Permitted Assignments and Subleases

Leases in India generally do not permit a tenant to assign or sublease the premises to any third party. However, at times, tenants may assign or sublease the premises to their affiliates, that is, the entity in control of the tenant. This permission can be subject to conditions, such as the assignee or sublessee executing a deed of adherence, the tenant submitting necessary proof of affiliation, and similar conditions.

Landlord Profit Sharing

Neither subleasing nor landlord profit sharing are common in India. If a lease allows the lessee to create a sublease, a landlord can include language regarding profit sharing from the sublease rent amount.

Landlord Rights to Recapture or Reclaim Possession

Landlords generally retain a right in the lease to terminate the lease before the lease term expires and take back possession of the premises when certain events occur (see Tenant Defaults). These provisions are often heavily negotiated by the tenant and landlord.

Signage

A tenant is usually permitted to put its signage on a predesignated area on the outside wall of the leased office space. In certain cases, where the tenant is leasing a large office space in a building, landlords may permit the tenant to put up signage on the exterior façade of the building, subject to obtaining all necessary approval from the local authorities.

Extension or Renewal Rights

A tenant’s right to extend or renew the lease is negotiable. A tenant’s ability to extend or renew the lease depends on the size of the proposed premises. For example, if the tenant is leasing a large office space in the building, that is, an entire floor or two in a building, a tenant is more likely able to negotiate for a right to extend or renew the term for an additional period. A lease permitting the tenant’s extension or renewal is typically subject to the tenant not being in material breach of the lease, there being no outstanding amounts due or disputes between the parties, and the execution of fresh lease for the additional or extended term.

Additional Space Option

Landlords are generally averse to granting a right to the tenant to occupy additional space in the building. Additional space options are rare. However, in certain cases, if the landlord and the tenant can arrive at a formula or method to determine the rent at the time of exercising the option, landlords have granted this right to a tenant to lease additional space. These options are not typically granted, as landlords are not willing to lock themselves on a rental for a future period.

Purchase Option

Tenant’s right of first refusal, right of first offer, and option to purchase are not very common in leases in India, especially for self-contained commercial units. Landlords are generally averse to granting these rights to tenants and creating a restraint on their ownership rights in the premises. The rights are negotiable and depend on the nature of the lease transaction, such as the proposed premises, duration of the lease, nature of the property, that is, whether it is a self-contained commercial unit or land with a structure, and other similar considerations.

Termination Option

Leases grant a termination right to the landlord, or the tenant, or both. The termination right allows a party to terminate the lease before the lease expiration date. Depending on the lease provisions, both the tenant and the landlord can terminate the lease by providing a termination notice, executing a deed of surrender, or any other way mutually agreed by the parties.

Though it is commonplace for a party to only exercise its termination options when the other party breaches its contractual obligations, tenants can negotiate for an option to terminate the lease agreement without cause. The option can occur at specific milestones or be ongoing throughout the lease term.

For example, the tenant can negotiate a right to terminate the lease agreement following the expiry of the lock-in period without any penalty. However, this termination option depends entirely on negotiations. Therefore, all ancillary procedures, such as a termination fee (if applicable), notice period, and similar procedures are subject to the understanding arrived at between the parties.

Tenant’s Ongoing Lease Obligations

In addition to its rent payments, a tenant’s ongoing obligations under a lease can include:

The tenant should understand all its ongoing obligations when negotiating the lease.

Security Deposit

A security deposit covers unexpected expenses that the landlord pays for the premises at the request of or due to the actions of the tenant during the tenancy. Security deposits are usually interest-free and the residuary amount after repairing any damage caused to the premises is refunded to the tenant on lease expiration and the tenant vacating the premises.

Security deposits under a commercial lease are typically equal to between two to six months’ rent and paid upfront by the tenant in cash. The security deposit amount is a matter of negotiation between the parties. A tenant can negotiate a lower security deposit depending on its financial strength and reputation, the lease term, and the value and size of the premises.

Security deposit amounts also vary across different jurisdictions in India. Higher sums are commonplace in metropolitan cities, such as Mumbai and Bengaluru, due to higher property values.

Indemnities

It is common for the tenant to indemnify the landlord for any loss or damage caused to the property during the lease term. In addition, landlords typically require tenants to provide specific indemnities against using the premises for purposes other than those agreed to in the lease agreement or for unlawful purposes. In large office buildings with several leasehold units, tenants can also be required to indemnify the landlord against a nuisance caused to third parties by the actions or negligence of the tenants.

Tenants can negotiate with the landlord for indemnities in the tenant’s favour. Ensuring and maintaining the tenant’s peaceful possession over the premises and timely payment of statutory and other amounts, such as property tax, maintenance charges, and other expenses, are a few instances where tenants can seek indemnity from the landlord.

A guaranty of the tenant’s obligations is typically not required in India.

Force Majeure

Force majeure is one of the most important components of a lease, defining the scope of what events can be considered as a force majeure event. Like any other contractual obligation, the consequences of force majeure events can be decided between the parties and are subjective. Depending on whether the force majeure event is curable or has continued for an extensive period, the parties can decide on provisions, such as non-payment or suspension of rent or termination, if the force majeure event is non-curable or continues for a longer period.

Compliance with Laws

In addition to the terms of the lease, the tenant and the landlord must comply with the laws and regulations applicable to the premises, commercial building, and jurisdiction in which the property is situated. Non-compliance with laws, such as a tenant undertaking illegal activities in the premises, a landlord failing to offer the tenant peaceful possession of the premises, or other similar situations, usually warrants early termination of the lease. Laws that should be considered include:

  • Laws related to health and safety.
  • State-specific laws.

Repairs and Maintenance

A tenant’s specific obligation of repair and maintenance usually only extends to its fit-outs and minor electrical or plumbing issues that can arise during the lease. Any larger repair works, such as problems arising out of the building electrical system, structural renovations to the building, or HVAC maintenance are the responsibility of the landlord and the building facility management agency.

Tenants must pay monthly maintenance charges that, when pooled together by the multiple tenants of a commercial building, cover the cost of required larger maintenance and repairs. Maintenance charges are typically standard and non-negotiable from tenant to tenant.

Insurance

It is in the joint interests of the parties to insure the premises during the lease term to protect each of their investments. In India, the burden of maintaining insurance can be on the tenant, landlord, or both, as agreed on in the lease. No fixed rule mandates either party to bear the full obligation of maintaining insurance for the premises. It is common in office buildings with multiple tenants to insure the larger property and recover the premium from individual tenants on a pro rata basis. This charge is typically

included in the rent or CAM charges (see Common Area Maintenance Charges). It is key that the tenant remembers it has no unilateral obligation to maintain insurance for the premises and should negotiate insurance obligations with the landlord.

End of Term Restoration

An end of term restoration clause is standard and usually obligates the tenant to restore the premises to its condition at the time of commencement of the lease, except for general wear and tear. Unless the tenant carries out heavy structural alterations that make it impossible for the tenant to restore the premises to its original condition, this clause is generally non-negotiable and a standard part of commercial leases in India.

Tenant Defaults and Landlord Remedies

Lease provisions outlining the tenant’s defaults and the landlord’s remedies should be reviewed. In negotiating default and remedy provisions, the tenant should focus on:

  • The types of situations that could arise during the lease term.
  • How these situations may affect the business conducted within the space.
  • Who has the control to create or alleviate the situation.

Lease agreements can provide for an option of termination if either party breaches a contractual obligation. The lease should mention a period to cure a breach. Failing to cure the breach would terminate the lease agreement.

Tenant Defaults

Standard tenant events of default include:

  • Non-payment of rent and other amounts due under the lease.
  • Making structural alterations in the premises that the landlord prohibited.
  • Materially breaching an important term or condition of the lease.
  • Engaging in unlawful activity on the premises.

Landlord Remedies

The landlord’s remedies against the defaulting tenant are governed by the lease terms and applicable law (see Compliance with Laws). To effectively negotiate a fair landlord remedies provision, the tenant must understand how the relevant provisions in the lease work in conjunction with applicable law.

A landlord’s remedies for a tenant’s breach can include:

  • Predetermined liquidated damages.
  • Early termination of the lease.
  • Forfeiture of tenant’s security deposit.
  • Curing the default at the tenant’s cost.

The landlord should send a notice informing the tenant of the breach and allowing the cure period (if any) to remedy the breach. The tenant is generally given 15 to 30 days to cure the breach or clear the outstanding rent due. The landlord must inform the defaulting tenant of the risk of eviction for non-compliance with the termination notice.

Tenant Remedies for Landlord Defaults

Landlord Defaults

Landlord defaults typically include:

  • Restricting the tenant’s uninterrupted access to the premises despite the tenant making all payments required under the lease.
  • Materially breaching its obligations or the terms and conditions of the lease.
  • Misrepresenting the landlord’s title to the premises.

Tenant Remedies

A tenant’s remedies if a landlord defaults can include:

Predetermined liquidated damages. Early termination of the lease.

Withholding rent payments or other amounts due under the lease until the landlord cures the default.

Curing the default at the landlord’s cost and adjusting the amount payable for curing from the rent for the following month.

Limitation of Liabilities for Landlord and Tenant

Limitation on the liabilities of the landlord is not typical in India. This is because the representations and warranties of the landlord are fundamental to the transaction. Accordingly, any breach of the landlord’s representations and warranties leading to an indemnification are not generally capped. However, the same is subject to commercial negotiations between the parties.The solution to safeguard boardrooms from the tech risks lies in four steps: awareness and education, anticipation of the problems, investment in training and safeguard measures, and liability insulation.Proud of the culture that Veritas has created over the years, Dwarkadas firmly believes that it needs to be preserved. As for plans, he is certain that Veritas Legal will only grow further from here (it is already 100-member strong). “We will grow over time, but incrementally. We want to grow without losing our culture and philosophy,” he says. Interestingly, Joshi and his 14 partners’ visiting cards are not different from a junior lawyer at the firm or even that of the executive assistant. At Veritas Legal, nobody holds specific job titles; instead, everyone shares a unified vision for their work.“The new templates are borrowing from similar deeds in other countries, giving more importance to protection of wealth rather than just management of wealth,” he said. Private trusts in India come under the aegis of the Indian Trust Act and usually cover assets such as houses, shares and financial investments. A DFS is drawn up when a family decides to split its assets and typically includes division of wealth, non-compete clauses and use of the family name. A family charter or constitution is a document outlining the values, principles and rules governing the business. It serves as a guide to clarify roles and expectations but is often not legally binding, the experts.

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