Following the series on the noteworthy terms of the office leasing contract, in this article we will discuss more about the payment term, one of the terms has a significant impact on the lessee’s right. Especially in the current context when the fluctuations of the real estate market as well as the operating capacity of the investor, this is raising concerns for the lessee about the stable use of the office during the lease process and the basis for the lessee to negotiate the contract extension when needed.
With the analysis below, an overview of payment issues will be provided to businesses and investors to anticipate the contents to discuss and agree with the lessor when establishing the contract.
Normally, the payment terms will stipulate the payment currency, term, suspension of payment, sanctions for late payment, and other relevant costs. Rents and related issues (such as the payment currency, whether the taxes and management fees are included in rent or not, payment schedules, etc.) are usually stated clearly which will not lead to potential risks for the lessee.
The lessee’s concerns matter is the rent fluctuation when the lease term stated in the contract ends. Currently, to be proactive for rent adjustment, the lease term usually is stipulated in the short term. When it expires, the parties will negotiate the extension of the contract. However, the method to adjust the rent for the next renewal period usually unclear. Therefore, the worst scenario is when the new rent is not agreed upon by both parties, and its unavoidable outcome is when the lessee has to choose another rental location, which is something that the lessee does not want due to the expense related to relocating the office and rearranging in a new location and its effect on their operation.
Therefore, for leases with unclear the lease renewal clause, the lessee should consider discussing with the lessor to control a floating margin of the rent. This is understood that there will be an increase in the rent to suit the market, but this increase is only at the level of the allowable margin recorded in the contract. The parties can also choose to agree on a certain rate of increase, and the rent including/excluding the taxes and management costs is the basis for calculating the increase. The above contents should be specifically documented in the contract so that the lessee can take the initiative in case the lease expires and the lessee wishes to continue the lease.
Most office leasing contracts will allow the lessor to take one of some actions when the lessee breaches its payment obligations, e.t. a delay in the payment of rent (including rent, management fees, and all other costs that the lessee must pay incurred during that lease term). In considering this provision, the lessee should pay attention to the lessor’s permitted actions, accordingly:
– The right of the lessor to stop providing accompanying services when the lessee is late in payment;
– How is late payment interest recognized;
– The right of the lessor to deduct the deposit to pay, and to impose additional contractual sanctions.
In addition, the cases where the suspension of payment is not a breach of contract should be considered. Usually, the said suspension will arise when the lessor or a third party takes any action that disrupts or hinders the continuous use of the leased area by the lessee. However, since not all cases are recognized the contract, when either the violation of the lessor or the actions of third parties or force majeure events arise and disrupts the use of the leased area of the lessee, their payment obligations must be fulfilled performed
The common reason for the interruptions in the use of the leased areas is that the roads in the leased area are constructed and renovated at the request of the competent authority. As a result, the construction process will affect the lessee’s operation, especially for the lessee who is renting the ground floor of the building. Depending on the form and business activities, the level of influence will also vary. The business activities that are considered the most vulnerable are those related to restaurants, food service, industries related to shopping and entertainment activities, etc.
Stability in renting office space is what a company is always looking for, including stable or fluctuating rent but within the expected control of the company. Therefore, during negotiation, the lessee needs to take the time to review or consult with experts to understand fully the terms of the contract. This will help the lessee anticipate the potential risk to agree in detail with the lessor on the methods of handling that the two parties think are most appropriate at the time of establishing the lease.
The article is based on applicable law at the time noted as above and may no longer be appropriate at the time the reader approaches this article as the applicable law has changed and the specific case that the reader wishes to apply. Therefore, the article is only for reference.