Leasing commercial space Philippines explained

Are you looking to kickstart a new business or perhaps expand a current one? A vital step in this process is deciding on the right location for your operations. In the Philippines, many entrepreneurs prefer to lease commercial spaces instead of purchasing property outright. This article aims to clarify how commercial leasing functions in the Philippines. We will discuss important elements you should consider before signing a lease agreement, including types of leases, common rental terms, as well as your rights and responsibilities as a tenant.

Types of Commercial Leases

When it comes to commercial leases in the Philippines, various options exist based on what your business needs. Here’s an overview of some common lease types:

• Gross Lease: This lease type is the simplest among the options available. In a gross lease, you’ll generally pay a fixed monthly rent, and the landlord handles most property expenses, like property taxes and building insurance. An example of this would be renting space in a shopping mall where your rent covers the maintenance of shared areas.
• Net Lease: In a net lease, the base rent is typically lower, but you’ll also need to cover certain additional costs. One common form of this lease is the triple net lease (NNN), which requires tenants to pay property taxes, building insurance, and maintenance expenses in addition to the base rent. This type of lease is more common if you are leasing an entire building.
• Percentage Lease: This lease style is often found in retail settings. You’ll agree to pay a base rent, then a percentage of your gross sales as your business generates profit. A typical example could be found in a popular shopping area like Divisoria.
• Modified Gross Lease: This lease type combines features of various lease types, where tenants pay certain expenses while the landlord covers others. It is often utilized in office rentals where tenants share common areas and utility expenses.

Key Terms in a Lease Agreement

It is essential to understand the primary terms in your lease agreement. Below are a few key terms you will commonly encounter:

• Lease Term: This indicates how long the lease lasts. Typically, commercial leases have terms ranging from one to five years, sometimes extending beyond that. It’s advisable to discuss renewal options well in advance. For instance, a restaurant may aim to establish itself in a location for a minimum of five years.
• Rent and Payment Terms: This section outlines how much you will need to pay and the due dates. Generally, rent is paid on a monthly basis, and there might be a requirement for a security deposit equivalent to several months of rent and an advance payment.
• Security Deposit: Most landlords will ask for a security deposit, generally amounting to one to three months’ rent. This deposit secures the landlord in case of property damages or unpaid rent. It is mostly refundable after deducting any repair costs at the lease’s conclusion.
• Permitted Use: The lease will specify how you can use the commercial space. For example, the agreement may state that the space is to be exclusively used as a retail store.

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• Improvements and Alterations: Many leases restrict the changes you can make to the space or may require you to remove any modifications made at the end of the lease. Landlords typically prefer to avoid alterations that could reduce property value, unless prior permission has been granted. For a food-related business, permanent installations may need prior approval.
• Renewal Options: This clause will describe how you can renew the lease when it expires and whether there might be a change in rent. It’s prudent to request a stipulated increase in rent rather than leaving it up to subjective discussions months down the line.
• Option to Purchase: Some leases might offer an option to purchase the property at a predetermined price at a later date. However, this clause isn’t always included in every lease.
• Maintenance and Repairs: This section clarifies who is responsible for property maintenance and repairs. In a net lease agreement, you might be accountable for specific repairs like HVAC (heating, ventilation, and air conditioning) systems.

Your Rights and Responsibilities

As a tenant, it’s important to know your legal rights and responsibilities. Below are some key points to keep in mind:

• Right to Quiet Enjoyment: You hold the right to use the property without undue disruptions from the landlord. If the landlord frequently enters the premises without notice, this may violate your right to enjoy the space peacefully.
• Duty to Pay Rent: You are obligated to pay rent in a timely manner according to what was agreed in the lease. Failing to meet this obligation may lead to penalties or legal action against you.
• Duty to Maintain the Property: You are expected to keep the commercial space in a good condition, accountability for damages resulting from neglect or misuse falls on you, with normal wear and tear being excepted.
• Compliance with Laws: You must adhere to all relevant local laws and regulations. For instance, if your business requires specific licenses, it is your responsibility to procure those.
• Right to a Lease Agreement: You are entitled to a written lease specifying the rental amount, duration, and other conditions. A verbal agreement may be difficult to prove and won’t hold up in court.

Negotiating the Lease

Negotiating your lease is a critical part of the leasing process. Always remember that you have the opportunity to enhance the terms before finalizing a lease agreement. Here are some points worthy of negotiation:

• Rent Amount: You can negotiate a lower rental rate, ask for rent-free periods, or propose early renewal rates, especially if you’re willing to commit to a longer term, or if the space requires renovations.

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• Lease Term: Strive for a lease term aligned with your business goals. Aim for renewal options or a break clause in case your business does not perform as expected. Additionally, negotiating an exit strategy if your business experiences difficulties early on could be beneficial.
• Improvements: Discuss your rights regarding property improvements or adjustments and whether you can keep those changes in place or remove them upon lease termination. Consider negotiating reimbursement for valuable installations you leave behind after the lease ends.
• Option to Purchase: If acquiring the property later is your ambition, inquire whether the lease grants you that option.
• Payment Schedules: If you require a different payment structure than what the landlord proposes, don’t hesitate to discuss what works best for you.

Finding Commercial Space

Identifying the right commercial space can present challenges. To facilitate your search, consider the following aspects for different types of businesses:

• Retail: Seek out high-traffic areas such as malls, busy streets, or locations near public transportation. For example, Metro Manila is teeming with opportunity due to its high foot traffic. On the other hand, rural areas may offer cheaper options, though they may depend on specific customer demographics.
• Office: It’s crucial to find a location that is easily accessible for both employees and clients. Business districts in the cities, such as Ortigas or Makati, can be advantageous, though they might come with a higher price tag. Consider areas that are close to major transport hubs or highways.
• Restaurants: Being near residential neighborhoods or entertainment complexes could greatly help your venture. Locations boasting high foot traffic and visibility, such as those close to shopping malls or situated on busy streets, are usually top choices.
• Wholesale/Logistics: For businesses needing extensive storage space, industrial districts or locations with warehouses are suitable. Areas near ports and other transport facilities are ideal, and provincial areas could provide cost-effective solutions.

Frequently Asked Questions (FAQ)

• What is the usual lease term for commercial spaces in the Philippines? Typically, lease terms range from one to five years, although you might find longer terms depending on specific needs.
• What happens if I break the lease early? In most scenarios, you would forfeit your security deposit and likely owe the remaining rent due. It’s essential to review your lease agreement, as it may include negotiated pre-termination clauses.
• Is a verbal agreement for a lease okay? It is highly regarded to have a written lease. Having a written document makes it more manageable and can serve as hard proof in court, while verbal agreements lack legal standing and are subject to dispute.
• What is a security deposit for? A security deposit serves to cover unpaid rent and damages to the property. It is generally refundable at the end of the lease minus any necessary repairs or charges.
• Who pays for the taxes of the property? Typically, the property owner or landlord is responsible for paying property taxes, but this cost often gets factored into your rental amount. In a net lease, tenants may be responsible for part of the property taxes.
• Can the landlord increase the rent during the lease term? Normally, no. Rental costs generally remain fixed for the lease duration, unless your lease agreement contains clauses that allow for a specific increase on designated dates.

Leasing a commercial space in the Philippines can be a strategic move for your business growth. By grasping different lease types, understanding your rights and responsibilities, and skillfully negotiating terms, you can secure a location that meets your business needs. Take your time, conduct thorough research, and feel free to ask questions before committing to a lease. Best of luck with your exciting business journey!

References

• Civil Code of the Philippines
• Republic Act No. 10173 (Data Privacy Act of 2012)
• Local Government Code of the Philippines