A Comprehensive Guide to Understanding Essential Lease Deed Elements

Investing in commercial and real estate properties with the purpose of renting or leasing them can be a smart financial move. As you continue to pay off the EMI, your fiscal outflow is offset by rental income while your property continues to appreciate in value.  

According to a recent news report, rentals on commercial properties in Mumbai clock an annual rise of about 15 per cent. In the first half of 2023, the growth has been almost 20 per cent. Another report suggests that residential rentals have also increased by about 20 per cent over the past year. However, it is crucial to have a legally binding lease agreement in place to ensure its security when leasing or renting your property. Let us look at some of the essential elements to look for in a lease deed before you sign the dotted line.

What is a lease deed?

A lease deed is a legally binding agreement that clearly defines the rights and responsibilities of the landlord and the tenant or lessee, ensuring a transparent experience for both parties. Apart from protecting both the property owner and the renter, it helps create and maintain cordial relationships by working out a mutually beneficial scenario. It outlines the terms and conditions under which the tenant can hold the lease and the payment terms the landlord is entitled to receive.  

Legal terms in a lease deed

Before we get to the elements of a lease agreement that must be agreed upon and understood by both parties, let us look at key terms that may need clarification.

• Lessor - The term lessor refers to the property owner or the landlord who is one of the two parties of the lease agreement.
• Lessee - The term lessee refers to the individual or corporation that rents or leases the property and enjoys the occupation and use of the property in exchange for the rent or payment.
• Rent or premium or consideration - These terms refer to the payment made by the lessee to the lessor in exchange for using the property premises. This could be in the form of a monthly rental or a periodic (quarterly or annual) lease amount.
• Duration - Like any legal agreement, a lease deed has a set duration and may be renewed with mutual agreement.

Essential elements of a lease deed

The following are essential elements of a lease deed. Both parties must agree upon the terms.

• Name and details of the parties - The name, address, and details of the lessor and lessee form the basis of the lease agreement.
• Description of the property - The lease deed should include the property's address, location, size, area, and boundaries. Additionally, the agreement must precisely describe the areas that the lessee can access and use, such as common areas, car park, etc.
• Property use - The lease deed must specify the use of the property. It will clarify if the property can be used for residential, commercial, or mixed use.
• Security deposit - The security deposit to be paid by the lessee and the conditions for refunding this amount must also be mentioned.
• Rent - The lease agreement must specify the lease duration, rent amount, late payment penalty, and periodic rent increases, if any.
• Termination terms - The lease deed should specify the conditions upon which either party may terminate the agreement before the expiration date. Any penalty to be imposed must also be specified.
• Maintenance clause - The type of repairs and maintenance must be mentioned in the agreement. For example, the landlord may be responsible for repairs and maintenance of the electric supply, fixtures, and plumbing, but paying the electricity bills may be the tenant's responsibility.

The Maharashtra Rent Control Act of 1999

The Maharashtra Rent Control Act of 1999 came into effect in March 2020. The legislation is designed to protect the rights of landlords and tenants. It outlines the maximum permissible increase in rent, the requirements for maintenance and repairs, the terms of eviction, and the fines and penalties for violations. The act also covers a wide range of topics, including inspection of premises, supply of essential services, and transfer of tenancy. Every lease deed or agreement in the state must comply with the act to be considered legal.

A lease deed offers essential legal protection to both the landlord and the tenant. To be considered valid, the agreement must be notarised and registered. It is a good idea to seek professional help from a lawyer to understand all the terms of a lease agreement.