Significance of Late Fee Charges and Penalty Clause in a Lease Agreement.

What is late fee in a lease agreement?

A landlord generally has the ability to charge a late fee if rent is not paid on the due date.  However, the landlord must have included a late fee provision in the written lease agreement stating how much the late fee is and when the late fee is due.

How Much Can the Landlord Charge for a Late Fee?

The landlord can charge any reasonable amount that reflects the landlord’s actual losses because of the late rent payment.  Late fees should not be designed to penalize the tenant.Unreasonably high late fees are usually not enforceable.

Liquidated Damages Clause:

It is often very difficult to determine the actual loss the landlord suffers due to late payment of rent.  Both parties may agree in advance, usually in the lease, that a specified amount is due instead of calculating the actual loss after it is suffered.  In India, the normal practice, is to consider a percentage in the range of 18 – 24% of rent as late fee

What if the Late Fee is Excessive?

If the late fee is excessive and unreasonable, a court may declare the clause in the lease containing the late fee provision void.  A tenant may also be awarded money to penalize the landlord if the late fee violates a city or state law.

What is Considered an Excessive Late Fee?

A late fee charge of 18% of the rent can be collected by the landlord for a one month’s delay of rent payment,which will escalate to 24% for a  two months’ delay. The landlord can exercise his right to terminate the lease without refunding the security deposit ,if there is delay in rent payment for three or more months.

Penalty Clause : This is often confused with the late fee charges clause. Penalty clause is a clause found in lease agreements that provides for a penalty in the event of default.The landlord can exercise a penalty clause when

• The tenant fails to renew the lease agreement and continues to occupy the premises after the termination of date of the lease.

• The tenant continues to occupy the premises after the lease termination date
• Unlawful occupation of the premises by the tenant after the notice to vacate has been issued by the landlord.
• Vacation of the premises within the specified lock in period.

In such cases ,the penalty charged can be as high as 500% of the agreed rent amount.

In both the scenario of late fees and penalty, the significance and consequence of the clause has to be agreed by both the Lessor and Lessee

What is the difference between a rental agreement and a lease?

There is no strict legal difference between a rental agreement and a lease agreement, however in some instances a rental agreement, or a periodic tenancy, may refer to a short-term rental contract. The term can be for any amount of time, but month-to-month tenancies are the most common. Each month the tenancy automatically renews for a new term, unless the landlord or the renter ends the tenancy by giving a 30 day written notice. Changes to the terms of the rental agreement can be made by giving the appropriate written notice.

A lease agreement, also known as a fixed term agreement, allows the tenant to rent the property for a set term. The terms are unalterable during the lease unless the tenant agrees to the changes.  Unlike a rental agreement, a lease does not automatically renew upon termination. Instead, a lease becomes a month-to-month tenancy if the landlord allows the tenant to remain in the rental unit and pay rent after the lease ends.

What does it mean to abstract a lease document?

An abstract of a commercial lease, like an abstract of anything else, is a summary of the terms of the lease. Commercial leases are often full of long, wordy paragraphs written in convoluted legal language, and an abstract cuts through all of that language and condenses the lease to its important information. Basically, a commercial lease abstract takes all the important information – all the main terms and the fine print – and makes an easy to read report out of it.

The details of an abstract vary depending on the type of lease, but all commercial lease abstracts contain the following terms: the name of the tenant; the name of the landlord; the term of the lease; the amount of square footage leased; the space number; the base rent; the percentage rent and/or sales reporting; and a list of documents modifying the terms of the lease. If the lease is for retail space, the abstract might also contain the terms pertaining to hours of operation and merchants’ associations. If the lease is for office space, the abstract might contain the terms pertaining to lessee improvements.

Most often, a person needs a lease abstract not for his or her own understanding of the terms of the lease, but for financing purposes. When a person seeks to purchase a commercial property with tenants, that person must perform what is called due diligence. Due diligence requires the potential buyer to inspect all aspects of the property including the status of the leases associated with the property. Sometimes, as in the case of the purchase of a shopping mall or a large office complex, there can be over 100 leases. If the lender, to whom the task of due diligence usually falls, is able to review abstracts of the leases rather than the leases themselves, the task is made that much more cost and time efficient.

Lease abstractions are usually produced by abstracting agencies. A good lease abstracting agency will use attorneys, accountants and real estate professionals to ensure that the abstract accurately summarizes the essential information described above and additional information such as insurance responsibilities, and maintenance responsibilities for both the landlord and the lessee.

There are also a number of lease management software packages that include a lease abstracting feature. The feature uses reporting software to take a lease that has been created with the software and abstract it. Usually, the abstracting feature allows the user to pull out the exact information needed, allowing a customized lease abstraction to be created each time.

An abstract has uses outside the context of due diligence, too. It’s a good idea to have a lease abstracted each time there is a change in the terms of the lease, even for common changes such as a rent increase. Having it abstracted every time there is a change in terms will make sure that there are no surprises for either the landlord or the lessee.

Advantages of a good lease management software

Lease management can be a difficult task, especially if the lease you’re dealing with commercial / retail / industraial leases. If you want to try your hand at least management, you’d be wise to get your hands on some good lease management software. Good lease management software can help you in many ways.

First, you want lease management software that keeps track of the tenants. With tenants moving in and out it can be a challenge to keep up with which tenant is occupying which unit or which building. Lease management software helps by keeping track of tenant’s name, location of the building or unit, rental rate, dates of lease, and the payment history of the tenant.

Second, you want lease administration software that also keeps track of property maintenance and compliance. Often, particularly with multi-family residential dwellings, the difference between being in the red and being in the black is the difference between a well-maintained property and a poorly-maintained property. Lease management software allows you to keep track of routine repairs, meeting state and local compliance requirements, detailed maintenance records including any work that has already been performed and any work that needs to be scheduled out into the future.

Third, you want software that streamlines the paperwork of lease management by generating standard forms like leases and renewal notices.

Finally, it’ll be really useful to have a software package that handles some routine accounting tasks. Look for software that keeps very detailed transaction information on receivables, payables, and recurring payments, while also monitoring cash flow of each property.

 

Sub-Lease – A Sub-Landlords Perspective

Last week we discussed about the issues that the sub-tenant must be cautious about .This week let us see it from a sub-landlords perspective.

Sub landlords Beware:

Primary Liability:

• Sub-landlords must understand that they will remain primarily liable to the landlord for all lease obligations even if such obligations are “subleased” to a subtenant.
• The sub-landlord will remain as a “middleman” between the landlord and the subtenant, ensuring payment of the rent to the landlord and the provision of building services to the subtenant.
• They must understand that the landlord will review all actions or failures to act of the subtenant to be failures of the sub-landlord. Thus, the sub-landlord confronts a similar loss of control as noted with regard to subtenants.
• For example, under a lease assignment, the original tenant gives up its lease rights for good, but normally continues to remain responsible for lease obligations.
• If a sub-landlord agrees to allow a subtenant to pay its rent directly to the landlord, it may be more difficult for the sub-landlord to protect against defaults due to nonpayment of rent.
• It is often in a sub-landlord’s interest to structure a transaction as a sublease, rather than a lease assignment, and to control rent payments to and all communications with the landlord.
• The prospective sub-landlord should ensure that the sublease document contains a covenant by the subtenant not to cause any default under the prime lease.

Incorporation of Prime Lease:

• It is critical for sub-landlords that the sublease carefully incorporates the applicable terms of the original lease as obligations of each party. The sub-landlord should also take care to avoid agreeing to perform a original lease obligation that only the landlord can perform.
• Sub-landlords have the same interest as subtenants in conditioning the commencement of the sublease on receipt of the landlord’s consent.

A sublease can be a more complex transaction than a “regular” lease due to the interplay between the terms of the original lease and the agreement of the sublease parties. This interplay of the two documents and the legal risks inherent in subleases should be understood by all parties. Sub-landlords and sub-tenants operating in commercial leasing are well advised to consult with a qualified real estate broker and real estate attorney when structuring sublease transactions. Certain risks inherent in the process can be alleviated for both parties provided  proper planning, documentation and organization are considered at the outset of such transaction.

The various features of Lease Info Services’ Lease Management  software tool are as follows ..

Lease Administration

Legal Audit

Establishes “What is there” in the Lease and “What is the lease silent” about

Lease Abstraction

Comprehensive summary of the salient facts of the lease with reference

Critical Date Monitoring

Effective system of key lease dates management with automatic notification

Document Bank

Central repository of key real estate document for instant retrieval & use

Lease Document Builder

Creates effective lease document covering stereo &scenario type clauses

Asset Management

Power Reports

• Premises details like contact information of the lessor/lessee,details of paid /unpaid car and two wheeler parking etc.
• Date Details like expiry date of lease,lock-in period and rent free period tenures and the rent commencement dates.
• Option Details such as termination notice,Right of first offer, Right of first refusal,Expansion,Contraction,Relocation , Purchase and Sale clauses.
• Commercial Details like fit outs ,amortization periods,maintenance charges,canteen rents,terrace rents and land rents.
• Rent Review Reports depicting escalation in security deposits and rents for premises,parking ,fit out,canteen,terrace and land.
• Clause Details like liability for insurance,signage,sub-lease,indemnity,dispute,Grounds for termination,alteration type,payment of penalty,major and minor repairs,terrace rights,hold over etc with  reinstatement and force majeure.

Portfolio Reports :A report comparing different portfolios like premises,car parking,two wheeler parking,canteen,fit out and  terrace of various properties.

Market Intelligence Reports :A report comparing the portfolios of the property with the prevailing market rentals.

Big Picture Reports :A report covering every aspect of lease property wise

Clear Vision Reports :A report  comparing every aspect of all leases , within the portfolio wise.

 

Financial Management

Invoice Management :Easy to use system for invoice management & maintenance

Payment Management :Easy to use system for payment record and notice

Cash flow Reports :Report depicting all the cash inflow in case of landlord and cash outflow in case of tenant.

NPV Analysis Reports: The difference between the present value of cash inflows and the present value of cash outflows. NPV is used in capital budgeting to analyze the profitability of an investment

Sub-Lease Clause – A Tenant’s Perspective

What is it?Sublease is the name given to an arrangement in which the lessee in a lease assigns the lease to a third party, thereby making the old lessee the sub-lessor, and the new lessee the sub-lessee, or subtenant. This means they are renting the property and renting it out at the same time.

For example, the owner of an office building may lease the whole building to a management company. This company may then sublease parts of the building to other people. The management company is said to sublet the property to the individual tenants by means of a sublease. In this event, the management company becomes the sub-lessor, and the individual tenants are subtenants or sub-lessees.The sub-lessor remains liable to the original lessor for any damage to the property and for payment of rent.

The landlord is not necessarily a party to a sublease and, therefore, no contractual relationship exists between the landlord and the subtenant.

Other forms of subleasing may be to rent out the entire unit to someone else while you are paying your landlord the rent for the property, which often means pocketing the difference . One example of subleasing an entire unit is when a person is paying low rent for the unit and charges more rent than the principal tenant is paying, such as if the original renter is participating in a rental assistance program, something that is highly illegal.

Sub – tenants Beware:

Original Lease Termination: If the prime lease terminates, the sublease will automatically terminate as well. This is because a subtenant’s rights to the leased premises are purely derivative of the sub-landlord’s rights. This is the fundamental deficiency of a sublease.

Non-Disturbance Agreement :A prospective subtenant can address this fundamental problem by receiving a non-disturbance agreement from the landlord, if the landlord is willing.

Under a non-disturbance agreement, the landlord agrees with the subtenant  that should the prime lease be terminated due to a prime tenant default, the landlord will treat the sublease as a direct lease between the landlord and the subtenant. The granting of such a non-disturbance agreement is almost always at the sole discretion of the landlord.

If not :A subtenant may reduce its risk to some degree by negotiating for the right to pay its sublease rent directly to the landlord. This may be an important right of a subtenant w Note, however, that under the terms of the prime lease, the landlord may have the right to refuse rent payments from any party other than the prime tenant.

Incorporation of Original Lease:  Sublease rights are derivative of the rights granted under the original lease,and hence, well-drafted subleases should address to what extent the provisions of the prime lease are incorporated into the sublease.

Some sublease documents provide that the subtenant take on all the obligations of the prime tenant under the prime lease. Prospective subtenants should understand what those obligations are and if they are unwilling to accept a particular obligation, the sublease should specifically say so.

The sublease should also incorporate responsibilities of the landlord under the prime lease as the obligation of the sub-landlord. For obligations that must, by their nature, be performed directly by the landlord , the sublease should specify that the sub-landlord will take all necessary actions to enforce the landlord’s obligations under the prime lease for the subtenant’s benefit.

Landlord Consent: As the starting point for any prospective sublease transaction, the subtenant should be fully cognizant of what the prime lease says about the landlord’s right to approve a sublease.

Generally, the sublease document should provide that the sublease only becomes effective after the landlord’s consent has been obtained. It is also important to understand  whether the prime lease grants the landlord the right to “recapture” the space in the event of a proposed sublease.

We shall discuss the key issues that a sub-landlord have to be careful about in our next post about legal issues.

Why Lease Management Services?

Inconvenient Truths…..

• Think there is nothing to manage once a lease is signed?
• Need a better way to manage your real estate assets?
• Has real estate always raised more questions than answers for you?
• Do you fell you are sitting on a landmine called lease?
• Do you know what your lease is SILENT about?
• Do you fear about the data security of your lease?
• Do you know the current market rentals of your building (s) up for renewal ?
• Do you know which of your lease assets is up for renewal ?
• Is your lease powerful enough to help you make the correct real estate decisions?
• Do you search your lease every time to understand the negotiations agreed upon?
• Do you get a single glance of the cash flow and NPV analysis of your real estate portfolio?

If your answer for the above questions is “yes” then the solution is Lease Management Services. We help you make well informed real estate decisions through our lease management services.If you are still using spread sheets or out dated database to manage your leased assets then you should consider Lease Management Services.Check out the next post for a detailed description on Lease Management Services.

Indemnity Clause

What is it?An indemnity clause is one in which ,an individual takes on the obligation to pay for any loss or damage that has been or might be incurred by another individual.

• A provision in aLease under which one party or both parties commit to compensate the other or each other for any harm, liability, or loss arising out of the lease.
• To indemnify means  guarantee against any loss which another might suffer.
• These clauses are one way people allocate risk in their contracts.
• This is one of the most over looked clauses in a lease document.

Pit Falls :The language of the indemnity clause is very important.For example, when does the obligation arise? Does it cover legal fees or just damages? What happens if more than one party is at fault? In most lease documents only the landlords indemnify the tenant where in the land lord is liable for the damages or losses.This is not in the best interest of land lords.

A typical broad indemnity clause :“Lessee agrees to indemnify and hold harmless lessor of and from any and all claims, demands, losses, causes of action, damage, lawsuits, judgments, including attorneys’ fees and costs, arising out of or relating to the work of Lessee.
This is a very broad indemnity clause saying  “You pay if you hurt me, I hurt myself, or some other guy hurts me.”

A narrower version of this clause might say:“Lessee agrees to indemnify and hold harmless lessor of and from any and all claims, demands, losses, causes of action, damage, lawsuits, judgments, including attorneys’ fees and costs, but only to the extent caused by, arising out of, or relating to the work of Lessee.”

Even Refined the clause might read:“Lessee agrees to indemnify and hold harmless Lessor of and from any and all claims, demands, losses, causes of action, damage, lawsuits, judgments, including attorneys’ fees and costs, only to the extent caused by or arising out of or relating to the work of Lessee.In no event shall the maximum liability hereunder exceed the sum of Rs _________.”

Indemnity clauses should be drafted as clearly as possible. Clearly identify what kinds of potential loss you are trying to protect.

Finally ,A good lease document is one in which both the land lord and the tenant are indemnified by each other and both their interests are well protected.

Lease Management

What is lease management ? Lease management  services assists Landlord(s) holding income generating real estate assets and Tenant (occupying premises on rent) , in managing their Lease agreements, Contracts and Leave & License agreements by abstracting and summarizing key provisions contained in such agreements.

Why Lease management ?The obligations of a lease require constant attention long after the terms are forgotten by the parties who negotiated them. The consequences of missing an obligation in a lease can be costly. Imagine the potential cost of failing to provide timely notice to extend the term or being unaware of a renewal/ termination.

What does it provide?It provides  accurate, ready-to-use, timely information in a consistent format to make an intelligent decision regarding the Lease.

What are its constituents ?

• Lease Abstraction : An accurate and timely comprehensive summary in a consistent and easy to read format.
• Lease Monitoring : Effective key date management  and resulting in timely communication on the way forward in a lease .
• Lease Document Management : Scanning paper leases and documents into PDF format. Once scanned, documents are uploaded into a server space for access.
• Lease Restructuring :  Helps in avoiding the potentially devastating pitfalls of post-deal resentment and retribution bringing a wealth of positive benefits.