The nitty-gritty of a lease agreement

Are you leasing a lot, house, condominium unit, parking space or commercial space? Have you encountered any disagreement or misunderstanding with your lessor? How do you eliminate such conflict and have an amicable relationship? 

It is important that all leases be covered by a Lease Agreement, a contract that binds the lessor/owner and lessee/tenant and codifies the negotiated terms on the property’s use, parties’ rights, obligations and other conditions.

What are the essential elements of a lease agreement?

• Contract information includes the parties’ names, marital status, address, etc.  Should any of the parties opt to assign a third person to represent them, the appropriate letter of authority or special power needs to be appended.

• Property description include property’s address, size, inclusions like parking slot, landlord-furnished furniture and appliance, and a checklist with the conditions of rooms and its floors, wall, ceiling, door, window, closet, electrical/power and other utilities.  The power and water meter readings should be recorded too.

• Rent and other monetary obligations. The agreement should state the rent, when it is due, how it is to be paid and how it is computed, whether lump sum or reckoned on the unit area leased. In commercial leases, rents may be any of the following: fixed amount, percentage of gross or net sales of the business, or combination/variation of minimum rent plus additional rent based on percentage in excess of agreed sales volume.  

Most lessors demand (a) “advance rent” to ensure that the tenant is serious with the lease or will not back-out of the deal. Advance rent may be applied at any point during the lease period based on negotiation; (b) “security deposit” covers unforeseeable unpaid utility bills, charges or damage/s on the property. In case there is no outstanding amount payable, the security deposit should be returned after the lease period ends.

Penalties and late charges. The non-adherence by the tenant may result in late charges, interests, or worse, termination of contract. Tenants who fail to return the premises on time may be imposed a hold-over penalty. 

Taxes and Assessment.  A 12 percent Value-Added Tax (VAT) is imposed on leases. However, units with monthly rental per unit exceeding P15,000 but whose annual aggregate during the year that does not exceed P3 million are VAT-exempt but subject to three percent percentage tax.

 The lease agreement should also state who is responsible for the payment of Property Tax and Association/Condominium Dues, if applicable.  If they are not indicated, these taxes and assessments are for the property owner’s account.

Key contract dates include the effective date of the agreement, start and end dates of the lease, turnover and move-in date, etc. Provisions covering pre-termination, termination or renewal conditions inclusive of required notices should be included too.

Typical covenants cover what are allowed and unallowed uses, occupancy limits if any, sub-letting provision, adherence to housing association or condominium corporation by-laws, rules and regulations, etc.  Statements on whether pets are allowed should be included.

Restrictions may additionally be imposed by the lessor.  What is allowed/not allowed with regards to premises’ modification, renovation or alteration must be indicated. In most instances, the landlord’s pre-approval must be secured.

Repair, maintenance and insurance responsibilities are often overlooked. With potential damage being costly and time consuming to fix, parties must agree on their respective responsibilities for various repairs, maintenance and insurance. 

Special provisions. Despite being diligent, it is still possible to miss some things. Thus, the documentation should provide catch-all clauses to anticipate new laws and regulations, or changes in contract terms and conditions. A separability clause is also recommended to address conflicting provisions that may be declared null and void.

Last words

The Agreement is meant to safeguard and protect both parties’ interests. Unless indicated in the agreement, the Civil Code of the Philippines and existing jurisprudences on leases apply. Thus, writing it in the manner that is clear, simple yet comprehensive is imperative for the parties’ harmonious and long-term relationship. 

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Henry L. Yap is an architect, environmental planner, real estate practitioner and former professorial lecturer.