The transaction of real estate properties includes both selling and leasing. In the Philippines, the market for both sales and leasing continues to be strong. Real estate brokers are paid good commissions for selling but not all are fortunate to close sales all the time. So, brokering rentals is a good way to supplement a broker’s income.
Term “rent” and “lease” are almost synonymous. By usage, “rent” or “rental” refers to a short-term lease. Lease is the more legal term for a property interest of usufruct with a stipulated period and consideration, usually applicable for long-term periods.
|Residential||:||homes, townhouses, condos|
|Commercial||:||restaurants, offices, buildings, mall spaces|
|Agri and Industrial||:||land, warehouses|
Leasing is also applicable to various other chattels – such as vehicles, equipment, tools, etc.
LEASE OR BUY? Lessees of commercial, office or industrial space are also prospective buyers. If you were asked to advise them whether to lease or buy, here are the considerations
Advantages of Leasing:
- Smaller funding outlay, especially for a start-up business;
- Rentals can be charged direct to expenses or costs of production;
- Option to relocate from time to time;
- More flexible for expansion or downsizing.
Advantages of Ownership:
- Rental expenditure is saved, lower costs in the long run;
- Better control. Rental escalation is unpredictable and could be onerous.
- Appreciation of the asset is highly possible.
- Depreciation charges improves liquidity.
Lease or Buy?
If you are liquid, consider ownership. If you need funds for operations, just lease. If you see a high potential for property value appreciation, consider ownership.
If your business location is not very ideal, just lease in the meantime. If your business is experimental, just lease.
The decision to “lease or buy” involves so many factors. It is better to hire a real estate consultant to conduct a detailed study for this purpose.
R.A 9653 – Rent Control Act of 2009 – July 14, 2009.
An Act Establishing Reforms in the Regulation of Rent of Certain Residential Units, Providing Mechanisms therefor and other Purposes.
1) Coverage : Residential units in NCR, other highly urbanized cities, with rent below P10,000.00 and in all other areas, with rent below P5,000.00 as of July 14, 2009.
2) Residential units included: Apartment, house, used as dwelling places, boarding houses, dormitories, rooms and bedspaces; Excluded – motels, motel rooms, hotels, hotel rooms;
3) Limits on rental increases: Until August 2010, ZERO increase. From then until December 31, 20l3, 7% maximum increase (if for same lessee).
- For rentals to students, no increase in rental more than once per year shall be allowed.
- Rent payable within the first 5 days of every month or as agreed.
- Maximum advance 1 month; maximum deposit 2 months. Accrued interest returned to lessee .
- Lessor can forfeit for cause – default, damage, etc.
- Written consent of Lessor needed for assignment, subleasing, accepting boarders
Grounds for ejectment:
- a) Assignment of lease or subleasing without written consent; b) Arrears for 3 months. (But if lessor refuses to accept rent, lessee may consign payment to a court, city or municipal treasurer, barangay chairman, or in a bank in the name of and with notice to the lessor.)
Valid grounds to repossess:
- Needs it for own use or that of immediate family member. Lessee must have 3 months notice. Lessor prohibited from leasing the unit to a third party for 1 year from repossession;
- Need for repairs if unit is condemned appropriate authorities; Provided, after said repair, ejected lessee shall have the first preference.
Can Lessee be ejected if unit is sold or mortgaged? Answer: No
DOCUMENTING A RENTAL/LEASE LISTING
In general, two basic documents should be prepared:
1) The Letter of Authority (Rental Listing Authority)
This document gives the broker authorization to offer the property for rent or lease. It should contain the following important details: Names of Owner and Broker, Brief description of the property listed for rent or lease, Broker’s commission, Type of authority, Duration; other special conditions and a holdover clause if necessary.
2) The Property Information Documents
Depending on the type of property for lease, the broker should assemble a document package or file about the property. A simple property may require just a property information sheet with its brief description. There are three categories of information needed for a complete listing documentation:
1 – Technical Information: Description of the property, land, building, condition, address; existing use of the property; promotional documents: photos, videos
2 – Basic Commercial Terms desired by Lessor: Rental, Security deposit, Advance rental deposit, method of payment; If multi-year lease, escalation rate; utilities, dues
3 – Other Important Legal Information: Liens and encumbrances, restrictions on use, contract form.
OFFERING THE PROPERTY
What tenants look for:
- Good neighborhood, compatible co-tenants;
- Least possible amount of time to obtain the property’s essentials and do an actual tripping
- Good location – very subjective; proximity to work, commuting, grocery, etc..
- Amenities in-house or nearby
- Low rental and low or no escalation first few years
- Fully furnished
- Rent-free fit-out period
- Simple lease contracts
Offering a property for lease is similar to offering properties for sale.
- Promotion – newspaper classified ads, flyers, posters, streamers, internet-based listings, word-of-mouth, email to specific prospects, etc…
- Tripping – before physical visits, pre-qualify the prospect first (who, preferred location, budget, other info ); use the internet to show photos/videos in advance.
- Secure prior permission from the Owner to visit the site, find out who is the contact person..
4. Plan the trip in advance
Closing the lease is often more complex that closing a sale. This is because a lease involves a more extensive contract than a sale. The redeeming factor is that after the parties have signed the lease agreement, you are already entitled to your commission. In a sale of existing real estate, the parties often require the broker to undertake transfer of the title before paying the full commission. The post-contract documentation can take more time. Of course, in a sale involving pre-selling of projects under development, it is much simpler.
The closing of a lease starts with a formal meeting between Lessor and Lessee, presided over by the broker. The agenda for this meeting is –
- Getting to know each other
- Discussing the substantive aspects of the lease, such as rental amount, terms, deposits, etc.
- Reviewing a draft of the standard lease contract to be used.
Brokers should always endeavor to document the minutes of meetings between the parties.
LEASE CONTRACT FUNDAMENTALS
It is always preferable to start with just a standard lease contract form that has already been reviewed by and authorized by the Lessor. Then the Lessee can just suggest revisions thereon if necessary. With due respect to lawyers, try to avoid having both parties employ freshmen lawyers to craft their respective contract drafts. When this happens you will have a situation similar to what happens in congress where two houses introduce their own versions of a similar law. It will literally take forever to get them to agree on the wordings of a contract. In choosing a contract format, select one that is : simple, concise, and written in terms easily understood by laymen. Avoid lengthy, wordy, and fancy legal terminologies. Let’s review some of the important sections in a typical lease contract:
Contracting parties (Lessor and Lessee). This is standard in all contracts. If a juridical entity is involved, affirm the capacity of the signatory by asking for a secretary’s certificate. You can also ask for the latest GIS or business permit to make sure it is still a bona-fide entity.
Description of the property for lease. If land, provide the TCT number. If a building, describe the building in brief.
Lease Period: how long is the lease and when does it start and end? Fit-out rent-free period?
Rental amount and deposits: rental per period, date of payment, inclusive of VAT? Deposits required – security deposit, advance rental deposit; nature of security deposit; advance rentals – when applicable; forfeitable? Method of payment – cash, check, PDC, bank deposit
Utilities and assessments: Water, power, telephone — utilities by lessor/lessee? Billing, due dates..
Delinquent payment provisions: Deadlines, grace period, interest on delayed payments; Provisions for declaring the contract in default, subject to cancellation.
Allowed use and care of the leased premises: Nature of business allowed, prohibited uses; density limits; assignment and sublease of the premises
Insurance of the Premises: Type and liability for Insurance of the basic building and for contents.. Responsibility for loss: Loss due to natural events and calamities, Loss due to theft, accidents, etc. Security matters.
Owner’s right to inspect the premises
Alterations and Improvements introduced by Lessee: Improvements allowed and not allowed; > requirement to obtain Lessor’s approval for improvements; status of improvements at the end of the contract: refundable, removable, retainable?
Repair and maintenance of the premises: By whom, provisions governing disruption.
Contingent provisions – if Lessor sells or otherwise assigns, alienates, encumbers the property.
Provisions for Contract Renewal or Termination – period of notification for intent to renew; provisions to be complied with upon the end of the contract, such as – restoration, clearances, etc.
Provisions governing pre-termination due to default or justifiable pre-termination: grounds for pre-termination, notification requirement, lessee’s contents as bond; extra-judicial recission.
Provisions governing disputes: Mediation, arbitration? Venue for litigation. Legal fees.