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Realty Guide - Leasing Commercial Property

Rental value of the premises is generally a function of capital value of the premises. Generally a lessor expects a return of around 6% to 10% of the capital value of the premises. Thus to ascertain the rental value of premises one needs to find out the market rate in the locality.

Some of these factors that would affect the valuation of a property are mentioned below –
  • Age of the building – As a normal market norm , new buildings would fetch higher rental values in comparison to older properties at a given location.
  • Upkeep & maintenance of building – The upkeep and maintenance of the building would determine the marketability and the prevailing market value of the premises in which the building is situated. Needless to say, better and fairly well maintained buildings would fetch a better rent.
  • Upkeep and condition of the premises – The condition and the internal maintenance of the premises would again play an important role in determining the rentals for the property.
  • Layout of premises – The layout of the premises in terms of optimum space utilisation in an efficient manner help the premises score points. The number of attached toilets, availability of servant's room and toilet, vehicle parking spaces available with the premises would also play an important role in determining the rental value of the premises.
  • It is important for the lessor to know the background and financial capabilities of the prospective lessee. This becomes important as the lessor has to get the possession of the premises back at the end of the lease term. It would always be helpful for the lessor to meet the lessee and ascertain personally the level of comfort in leasing the premises to the lessee.
  • Financial strength of the lessee would be important as the rent is to be paid every month and the lessor should assess whether the prospective lessee would be in a position to make such payments on a regular basis. It would be better for the lessor to ask for post dated cheques for the rent.
  • Real Estate Agents could also be an alternative for identifying a lessee. However, caution needs to be exercised when it comes to selecting an agent.

Permission to lease from the society : The lessor need to take permission from the society or the governing authority of the building. Also the lessee has to understand the terms and conditions under which such permission is granted. Some of the societies may charge non occupancy charges.
On finalisation of the terms the lessee and the lessor enter into a lease agreement. The agreement would list along with other terms, the term of lease, deposit amount and monthly rentals. It is also necessary to specify as to who would bear the monthly outgoings (i.e. society charges). In some of the cases there may be a separate agreement for the deposit amount.

In case of simple rent, the annual rent will be considered as income and the same will be taxed.
  • In case of deposit and rent, in addition to the rent the income generated during a financial year from the investments made by the deposit amount will be taxed.
  • In case the lessor takes rent in advance the entire rent is considered as income during the year and he same is taxed.

The lessor should take the following precautions while taking back the possession :
  • The condition of the premises is proper and no damage has been done to the tiling, plumbing, flooring or electrification
  • No major changes have been made in the premises. In case the lessee has made some changes, which are not acceptable, the lessor may ask him to undo the changes.
  • In case of furnished premises, the condition of the furnishings is acceptable.
  • The lessor should ensure that all the bills for electricity and telephones if provided has been paid up to date by the lessee at the time of re possession.
  • It is only after having satisfied oneself fully in all these aspects should the lessor offer to refund the deposit simultaneously upon the lessee offering vacant and peaceful possession of the premises
By vayaM CS